Can a foreign national start a business in India without being a resident?

India is among the top growing economies with a large-scale market and human resources.  Establishing operations in India will give foreign companies a break in India’s emerging market. Global entrepreneurs and companies looking to establish a business in India can start their business in India without being a resident. Foreigners don’t need a residency visa for starting a company in India. Here in this article, we will be discussing how can a foreigner start a business in India without being residents. Further, we will also discuss applicability of FEMA guidelines, and laws regarding this.

Table of Content:

How can a Foreigner start a business in India?

The foreign investments are governed by FDI policies and FEMA, 1999. The Central Government has formulated FEMA (Foreign Exchange Management Act) to encourage foreign direct investments and trade. It was introduced in 1999 to fill the loopholes of the Foreign Exchange Regulation Act (FERA). It was introduced to de-regularize the economy.

Foreigners are allowed investments in LLPs, limited companies, branch or project offices, etc. Foreign promoters can incorporate limited companies if the number of investors in the projects is above 7 and the business is needed to raise equity funds from a no. of stakeholders. Foreign nationals are prohibited to invest in retail trading, lottery business, gambling, chit funds, Nidhi companies, and real estate, etc.

Foreign companies establishing branch offices or liaison offices are termed as a foreign company under section 2(42) of the Companies Act, 2013. These companies are governed by Chapter XXII of the Companies Act, 2013 and  Companies (Registration of Foreign Companies) Rules, 2014.

Method to start business in India

Foreign nationals can start a business in India without being a resident in the following ways-

Method to start business in India

  • Limited Company (Private Limited/Public Limited Company)
  • Limited Liability Partnership (LLP)
  • Branch Office or Liaison/Representative Office, Project Office

Limited Company

Foreign nationals can incorporate a company under the Companies Act, 2013. They can start a private limited, public limited as a wholly-owned subsidiary or joint venture.

Foreign direct investments are permitted in limited companies. Non-residents can make investments in shares or convertible debentures or preference shares which are issued by Indian companies via two routes-

  • Automatic route- under this route, the investment made by foreigners can be completed without the intervention of the government or RBI.
  • Approval route- under this route, the investment shall not be made into the firm until the government gives approval.

Limited Liability Partnership

Limited liability partnership can be incorporated under Limited Liability Partnership, 2008. This partnership has the qualities of both partnership and company. Other types of companies include proprietary, partnership firms, and trusts. Foreigners can’t open some of the companies and are not advised to open others.

LLP is useful for foreign professionals because, in limited liability partnership, the foreign direct investment is permitted. Additionally, LLP is mostly recommended due to its simplicity, ease, and tax advantages as compared to other companies. If there is no compulsion to start a company of small or medium scale of compulsion, then LLP structure is preferred. And as the LLP grows, it can be converted into a company.

Branch/Liaison Office/Project Office

Foreign companies can start their business through a branch, liaison, or project office without creating or registering a limited company or LLP. But the scope of operations in such offices is limited to the projects or activities like sourcing, technical or marketing, etc.

A liaison office can only indulge in liaison activities. It acts as a channel between the foreign office outside India and parties in India. They cannot do business in India and therefore don’t earn any income in India. The expenses of these offices are taken care of through inward remittances of the foreign exchanges from the foreign office. Therefore the main task of these offices is limited to collecting crucial information relating to market opportunities and products for Indian customers. These offices can initially be set up for 3 years which can be extended from time to time.

A liaison office can do the following activities-

  • Representing their parent company in India.
  • Promoting the export or import to India.
  • They promote the technical or financial collaboration between parents and companies in India.
  • They act as a bridge between the parent and Indian companies.

A branch office is engaged in the activities in which the parent company is engaged. But it cannot do retail activities, or manufacturing or processing activities. The profits which are earned by the branch offices are freely remittable subject to payment of taxes.

Foreign Exchange Management (Establishment in India of branch or office or other place of business) Regulations, 2000 under Rule 3 states that the foreign nationals are prohibited from establishing a branch office in India without the prior approval of the RBI. But no approval is necessary for a banking company if they had already acquired approval under Banking Regulation Act, 1949.

The RBI generally grants permission to foreign companies for establishing project offices in India provided that they have a contract with the Indian company for executing a project in India. This project should be funded directly by inward remittance from abroad and by bilateral/multilateral international financial agencies. Additionally, it should be cleared by the appropriate authority. If these criteria are not met, the foreign entity has to get RBI’s approval.

Procedure for Starting Business in India by Foreign National

  • Business plan: Firstly, the foreign national needs to introduce a business plan for India. They need to decide the type of company as per their business needs. They can choose from various options like limited companies, limited liability partnerships, projects, branch, or liaison offices.
  • Documentation: After the foreign entities select the business, depending on the type of business, they need to complete the documentation. Generally, if the documents are executed outside India, it must be attested by the Indian authorities as per the Hague Convention guidelines.
  • Proceed further with the application: The application procedure depends on the type of business the foreign nationals have chosen. In case the company is LLP or a limited company, the foreign entity has to file an application with the ROC. If the foreign nationals want to start a project, branch, or liaison office, they need to file an application with RBI after getting the approval from RBI, they need to get registration with ROC.
  • Proceed with other formalities: After the business registration, they have to open a bank account and proceed to start the business in India.

Procedure to start a Liaison or Branch Office

If the companies incorporated outside India are desirous to open a liaison or branch office, they have to obtain permission from the RBI. The application can be submitted under two routes-

  • Reserve Bank Route- if the principal business falls under 100% FDI, it is permissible under the RBI route.
  • Government Route- when the principal business falls under 100% FDI it is not permissible under the automatic route.

Documents required for foreign nationals for opening liaison/branch office

The required documents for establishing liaison and branch office depend on the chosen business types. Generally, if the document is executed outside India, then it must be notarized by the authorities.  Companies which are incorporated outside India have to make an application under form FNC-1 to the RBI along with the following documents-

  • Copy of passport attested by India Embassy or the foreign public notary.
  • Driving license.
  • Certificate of incorporation.
  • MOA attested by the India Embassy or the foreign public notary.
  • Bank statement, and electricity bill.
  • Attested property tax payment receipt.
  • Latest photograph.
  • Latest Audited Balance Sheet.
  • The current profession, email, mobile number, and education qualifications.

Application for registration

If the company is a limited company or limited liability partnership, then the application is submitted with the ROC.

In case the foreign company wants to start a branch or liaison or project office, them they need to submit the application with RBI. After RBI’s approval, the entity is required to be registered with ROC.

Formalities after registration of business

After the registration, the business can proceed to open bank accounts and appoint people and start its business operations. The businesses have to obtain GST registration, professional tax registrations, and shops and establishments, etc.

What are the other formalities for making the business operational?

Once the registration is complete, the business entity needs to follow the following formalities-

  • They have to get PAN and TAN.
  • Furthermore, the foreign entity has to open a bank account.
  • They have to register under the value-added tax.
  • The foreign companies have to register for service tax, shops, and the establishment and professional tax.

Conclusion

Since India is a developing country it is growing at an unprecedented rate, foreign nationals are getting attracted towards India. They are keen on diving into the fastest-growing economy. Foreign nationals can start their businesses in India without being a resident. Each year the amount of foreign direct investments is increasing. There are many options for foreign nationals to start their business in India, but most commonly, the foreign entities choose LLPs and limited companies.

CS Madhavi Singh Rajawat is a commerce graduate from IIS University, Jaipur and an associate member of Institute of Company Secretaries of India. She is also an LLB aspirant. Her interest lies in the field of corporate and securities laws, general corporate advisory matters and FEMA matters and compliances, litigation services, and also in NCLT related services. She has proficiency in the drafting of documents

Copyright © 2022 Goyal Mangal & Company.