Note on entry strategies in India

1. Evaluation on the Entry
Strategies in India
CA.SUDHA G.
This report deals with the provisions relating to Liaison
BHUSHAN office, Branch Office and Company incorporation with
foreign Capital
Page 1

2. LIAISON OFFICE
Introduction
A ‘Liaison Office’ is a representative office set up primarily to explore and understand
the business and investment climate. Such office is not permitted to undertake any
commercial / trading / industrial activity, directly or indirectly, and is required to maintain
itself out of inward remittances received from parent company through normal banking
channels.
As defined under clause 2(e) of Foreign Exchange Management (Establishment in India
of Branch or Office or other Place of Business) Regulations, 2000.
'Liaison Office' means a place of business to act as a channel of communication
between the Principal place of business or Head Office by whatever name called and
entities in India but which does not undertake any commercial /trading/ industrial
activity, directly or indirectly, and maintains itself out of inward remittances received
from abroad through normal banking channel;
The liaison office can do only permitted activities in India these are:-
(i) Representing the parent company/group companies in India.
(ii) Promoting export import from/to India.
(iii) Promoting technical/financial collaborations between parent/group companies
and companies in India.
(iv) Acting as a communication channel between the parent company and Indian
companies.
Suitability of Liaison office in India
The Liaison Office generally acts as a communication channel between the parent
company overseas and its present or prospective customers in India. The Liaison Office
can also be set up to establish business contacts or gather market intelligence to
promote the products or services of the overseas parent company. The cost involved in
Liaison Office is very low and also the statutory compliances are very less as compared
to company. It is best to start have the understanding of Indian customer and business
BY CA. Sudha Page 2

3. environment to open a Liaison office rather than incorporating a company and blocking
the capital .
Legal Framework for Liasion Office
The following pictorial presentation depicts the legal frame work for liaison office in
India.
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4. Foreign Exchange Management Act
Foreign Exchange Management Act is an act to consolidate and amend the law relating
to foreign exchange with the objective of facilitating external trade and payments and for
promoting the orderly development and maintenance of foreign exchange market in
India.
The Act has given general power to the Reserve Bank of India under section 47 to
make notifications to regulate various provisions of the Act. Also the specific power has
been given under Section 6(6) to make the regulations to regulate the liaison office of
the companies incorporated outside India.
As per sub-section (6) of Section 6 of the Foreign Exchange Management Act, 1999
the Reserve Bank may, by regulation, prohibit, restrict, or regulate establishment in
India of a branch, office or other place of business by a person resident outside India,
for carrying on any activity relating to such branch, office or other place of business.
Reserve Bank of India (RBI)
In exercise of the powers given under sub section 6 of section 6 of the Foreign
Exchange Management Act, 1999.RBI has framed the regulation by way of notification
to regulate the provisions relating the Liaison office in India. These regulations are
Foreign Exchange Management (Establishment in India of branch or office or
other place of business) Regulations, 2000 framed by way of Notification No.
FEMA 22 /2000-RB dated 3rd May 2000.
Liaison office Registration
For opening the Liaison office in India, the person resident outside India has to take
prior permission of Reserve bank of India. As per the notification mentioned above no
person resident outside India shall, without prior approval of the Reserve Bank,
establish in India a branch or a liaison office or a project office or any other place of
business by whatever name called.
The permission for Liaison office is required to be taken in the form of application to the
RBI. Such an application is required to be made in the prescribed form i.e. Form FNC 1.
The FNC1 is the form which serves as the purpose for RBI for getting the required
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5. information to arrive at the decision whether the permission is to be granted to Liaison
office in India or not.
The application form duly completed and submitted to the Chief General Manager,
Exchange Control Department (Foreign Investment Division), Reserve Bank of India,
Central Office, and Mumbai-400001.
The information required to be given in form:
Full name and address of the applicant company/firm [whether the applicant is a
proprietary concern or partnership firm or limited company or public sector
undertaking or any other organisation].
Date and Place of incorporation / registration of the applicant company.
Details of capital of the applicant company.
Brief description of activities of the applicant company.
Value of goods imported from and / or exported to India by the applicant during
each of the last three years.
Particulars of existing arrangements if any, for representing the company in India.
Particulars of the proposed Branch/ Liaison Office like activities to be undertaken
and place of establishment
Documents required to be submitted along with Form:
Translated English version of the Company’s Certificate of
Incorporation/Registration, Memorandum & Articles of Association attested by
the Indian Embassy/Notary public in the country of registration (Two original
copies)
Copies of last three years audited Balance Sheet, Profit & Loss Account of the
applicant company/firm.
Undertaking that the Liaison office will not carry out any trading and commercial
activity in India.
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6. Copy of the Board resolution for opening office in India.
The permission granted to Liaison office shall be for the period of three years. The
liaison office is required to approach the office of Reserve bank of India before the
expiry of three years for seeking extension/ renewal of permission otherwise it will be
considered that the liaison office is functioning without a valid permission in violation of
regulation 3 of Notification No. FEMA 22 /2000-RB dated 3rd May 2000.
Permitted Activities
The liaison office can do only those activities in India that are permitted as per Schedule
II of the said notification. As per the Schedule II, activities that can be done by the
liaison office are:-
Representing in India the parent company/group companies.
Promoting export import from/to India.
Promoting technical/financial collaborations between parent/group companies
and companies in India.
Acting as a communication channel between the parent company and Indian
companies.
Prohibited/Restricted Activities
The liaison office in India is not allowed to carry on any business activity in India .
it shall not take any activity Trading, commercial or industrial activity. There shall
be no generation of revenue by Liaison office in India.
It shall not enter into any contracts with Indian residents;
No commission /fees shall be charged or any other remuneration received
/income earned by the office in India for the liaison office activities/services
rendered by it or otherwise in India.
All the expenses for the set-up, operation and maintenance of the Liaison office
have to be met out of foreign exchange remittances from the Foreign company
through normal banking channels.
The Liaison office shall not borrow/lend any money from/to any person in India
without RBI prior permission.
It shall not acquire, hold, and transfer any immovable property in India without
RBI prior approval.
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7. Prior approval of RBI required before shifting of Liaison office
Acquisition of Immovable property in India
As per Foreign Exchange Management (Acquisition and transfer of immovable property
in India) Regulations, 2000 FEMA 21/2000-RB, dated 3-5-2000, [the regulations to
provide for provision for acquisition and transfer of immovable property in India] the
Liaison office is not allowed to own/acquire any immovable property in India however,
the same can take on lease the immovable for carrying on the permitted activities in
India.
Closure of Business operations
The Reserve Bank of India is required to be intimated with the documents
Copy of the letter of approval of Reserve Bank of India for establishment of
Liaison in India.
Board resolution from foreign/parent company duly notarised/consularized
Power of attorney from foreign/parent company duly notarised/counslarized in
favour of person signing documents for closure.
Certificate by Liaison office on pending legal proceedings in Indian courts or
enquiries from Enforcement Directorate.
Certificate by Liaison office that it does not own any immovable property in India.
Certificate by Liaison office that it does not own any deposits, loans and
advances.
An undertaking by Liaison office for remittance of surplus to head office.
Remittance of Funds outside India
In case the Liaison office wants to remit funds/assets out of India then it is required to
the regulations as mentioned in the Foreign Exchange Management (Remittance of
Assets) Regulations, 2000.The Regulation Foreign Exchange Management (Remittance
of Assets) Regulations, 2000 provides for remittance of assets outside India. Regulation
6 of the said notification deals with the Liaison office. It provides that in case of
remittance of winding up proceeds of a branch/office in India of a person resident
outside India, the application is required to be made to the RBI together with following
documents namely:
(A) Copy of the Reserve Bank's permission for establishing the branch/office in India;
(B) Auditor's certificate
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8. (i) indicating the manner in which the remittable amount has been arrived and
supported by a statement of assets and liabilities of the applicant, and indicating
the manner of disposal of assets;
(ii) confirming that all liabilities in India including arrears of gratuity and other
benefits to employees etc. of the Liaison office have been either fully met or
adequately provided for;
(iii) confirming that no income accruing from sources outside India (including
proceeds of exports) has remained unrepatriated to India;
(C) No-objection or Tax clearance certificate from Income-Tax authority for the
remittance; and
(D) Confirmation from the applicant that no legal proceedings in any Court in India are
pending and there is no legal impediment to the remittance.
The Companies Act, 1956
Companies Act is an act to regulate the Companies incorporated in India and also the
companies functioning in India.
Section 591 to 602 of the said act, both inclusive shall apply to all foreign companies,
companies incorporated outside India which, have established a place of business
within India.
Registration when required
As per section 592 of the Companies Act, 1956 the registration is required within 30
days of the establishment of place in Business in India. The intimation is filed with the
Registrar of Companies within 30 days in Form 44 with the Ministry of Corporate affairs.
The documents which are required to be filed with Form 44 are as follows:
1. Certified copy of Memorandum and Articles of Association / Charter of the foreign
company with certified English translation thereof, where necessary.
2. Full address of registered/principal office of foreign company.
3. Name and address of the person resident in India authorized u/s 592(1)(d) to
accept on behalf of the foreign company, any notice or other documents required
to be served on the foreign company.
4. Full Address of the principal place of business in India.
5. List of Director and Secretary of the foreign company
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9. 6. POA in favour of Authorized person/Country Manager
Alteration to be intimated to the office of Registrar of Companies
As per section 593 of the said Act, If any alteration is made or occurs in:-
(a) the charter, statutes, or memorandum and articles of a foreign company or
other instrument constituting or defining the constitution of a foreign company; or
(b) the registered or principal office of a foreign company ; or
(c) the directors or secretary of a foreign company ; or
(d) the name or address of any of the persons authorised to accept service on
behalf of a foreign company; or
(e) the principal place of business of the company in India;
the company shall, within the prescribed time, deliver to the Registrar for registration a
return containing the prescribed particulars of the alteration
Accounts and Audit
The Liaison office is required to submit its accounts to the office of Registrar of
Companies in Form 52.The provisions of sections 209, 209A, 233A and 233B and
sections 234 to 246 (both inclusive) shall, so far as may be, apply only to the Indian
business of a foreign company having an established place of business in India, as they
apply to a company incorporated in India. All documents relating to Liaison office shall
be submitted to Registrar of Companies, New Delhi.
The Income Tax Act, 1961
Registrations under the Act
The Liaison office is required to take the permanent account number (PAN) and
tax Deduction number (TAN) from the Income tax department.
Application for PAN is made in Form 49A and application for TAN is made in 49B
to the NSDL.
Copy of any one of the following documents is required to se sent with an
application
Copy of registration certificate of the respective country duly attested by
Indian Embassy/ Consulate/ High Commission/ Apostille in the country
where applicant is located.
Copy of certificate of registration with the competent authority in India
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10. Copy of approval issued by the competent authority in India
Copy of the accompanying documents alongwith the approval issued by
competent authority in India
Copy of the application (duly acknowledged) made by the applicant before
the competent authority in India Registration certificate issued by ROC
(Form No. 44)
Applicability of the Indian Income Tax Act, 1961
On the basis of Permitted business activities as per the RBI regulation the Liaison office
is not allowed to carry on any BUSINESS ACTIVITY [trading, commercial or industrial]
in India. Therefore one might say since there is no business activity allowed to be
carried on Liaison office there is generation of income hence there is no income to be
chargeable in the hands of Liaison office. But this is required to be further analyzed from
the Income Tax perspective.
Section 2(13) Income Tax Act defines business as “business includes any trade,
commerce or manufacture or any adventure or concern in the nature of trade,
commerce or manufacture”.
Although the Liaison office is not doing any business activity in India but the activity of
the parent company is purely commercial in nature. One may argue that Liaison office is
not earning profit but it is assisting in earning profit for commercial activity but at the
same time it is not necessary that every activity should result in earning revenue.
The Income of the foreign company may be taxable in India.
As per section 5 of the Income Tax Act, 1961Subject to the provisions of this Act, the
total income of any previous year of a person who is a non-resident includes all income
from whatever source derived which—
(a) is received or is deemed to be received in India in such year by or on
behalf of such person ; or
(b) accrues or arises or is deemed to accrue or arise to him in India during
such year.
Keeping in mind the provisions of section 5 of the Income Tax Act, 1961 it can be
said that if the income is said to be received or is deemed to be received in India
or it accrues or arises or is deemed to accrue or arise to the foreign company the
same shall be taxable in India.
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11. To determine whether the sum is deemed to accrue or arise in India Section 9 of
the Income Tax Act, 1961 is to be read. The section 9, in various clauses of sub-
section (1), enumerates certain incomes which shall be deemed to accrue or
arise in India, if the conditions mentioned in the respective clauses are fulfilled.
As per Section 9(1)(i) of the Act, a Liaison office would be deemed to be liable to
tax on its income in India in case it constitutes a ‘business connection’ of its
foreign parent in India.
“Business connection” shall include any business activity carried out through a
person who, acting on behalf of the non-resident,—
has and habitually exercises in India, an authority to conclude contracts on
behalf of the non-resident, unless his activities are limited to the purchase of
goods or merchandise for the non-resident; or
has no such authority, but habitually maintains in India a stock of goods or
merchandise from which he regularly delivers goods or merchandise on
behalf of the non-resident; or
habitually secures orders in India, mainly or wholly for the non-resident or for
that non-resident and other non-residents controlling, controlled by, or subject
to the same common control, as that non-resident.
Therefore it can be inferred that if the Liaison office is taken to be Business connection
of the parent company in India in that case the Liaison office shall be taxable under the
Income tax Act,1961.
In the present context, it is also relevant to mention section 90(2) of the Income Tax
Act, 1961, which provides that where the Central Government has entered into an
agreement with the Government of any country outside India for granting relief of tax, or
as the case may be, avoidance of double taxation, then, in relation to the assessee to
whom such agreement applies, the provisions of this Act shall apply to the extent they
are more beneficial to that assessee.
Therefore, for determining the taxability, if any, of LOs in India the Income Tax Act,
1961 is to be read with the double taxation avoidance agreement.
It could be said that the taxability of Liaison office in India is broadly governed by
Section 9(1)(i) of the Income Tax Act, 1961 (Act), and, Article 5 (on permanent
establishment [PE]) read with Article 7 (on business profits) of the relevant Double Tax
Avoidance Agreement (DTAA) (if any).
As said earlier, as per Section 9(1)(i) of the Act, an LO would be deemed to be liable to
tax on its income in India in case it constitutes a ‘business connection’ of its foreign
parent in India. As per Article 5 read with Article 7 of the relevant DTAA, an LO would
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12. be taxable in India, in case it constitutes a Permanent Establishment of its foreign
parent in India.
It may be clarified that where the liaison office creates a PE or establishes a business
connection, the foreign company would become liable to pay tax on the profits, which
can be attributed to the liaison office. And if liaison office doesn’t create any of the
aforesaid relationship, liaison office will not attract any income tax in India.
But even if the Liaison office is held to be a ‘business connection’/ PE of its foreign
parent in India, only so much of the profits as are attributable to the operations carried
out by the Liaison office in India, would be liable to tax in India. Also, as per the Income
Act, no income shall be deemed to accrue or arise in India to the foreign parent through
or from ‘operations which are confined to the purchase of goods’ in India for the purpose
of export.
To avoid the tax liability of Liaison office in India it is important the Liaison office should
be engaged only in preparatory and auxiliary work and should not be construed as
carrying out any part of business operations of the foreign company in India. But there is
no set of guidelines that can be laid down to decide existence of a PE; this would
depend on the facts of each case and the gamut of activities carried out by the Liaison
office vis-a-vis global business operations of the foreign company.
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13. BRANCH OFFICE
Introduction
One of the other entry strategies for the companies incorporated outside India to
establish their business in India is by way of opening the Branch office in India. As per
Indian laws companies incorporated outside India engaged in manufacturing or trading
activities are allowed to set up Branch Offices in India with specific approval of the
Reserve Bank.
The branch office is defined as per Regulation of Notification No. FEMA 22 /2000-RB
dated 3rd May 2000 clause 2(c) as “'Branch' shall have the meaning assigned to it in
sub-section (9) of Section 2 of the Companies Act, 1956 (1 of 1956),
and as per the companies Act, 1956 “branch office” in relation to a company means—
any establishment described as a branch by the company; or
any establishment carrying on either the same or substantially the same
activity as that carried on by the head office of the company; or
any establishment engaged in any production, processing or manufacture
Such Branch Offices are permitted to represent the parent/group companies and
undertake the activities in India like export/Import of goods from or to India, rendering
professional or consultancy services, carrying on the research, in areas in which the
parent company is engaged ,promoting technical or financial collaborations between
Indian companies and parent or overseas group company. representing the parent
company in India and acting as buying/selling agent in India, rendering services in
Information Technology and development of software in India, rendering technical
support to the products supplied by parent/group companies.
Foreign Exchange Management Act, 1999
As per Sub-section (6) of Section 6 of the Foreign Exchange Management Act, 1999
the Reserve Bank may, by regulation, prohibit, restrict, or regulate establishment in
India of a branch, office or other place of business by a person resident outside India,
for carrying on any activity relating to such branch, office or other place of business.
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14. Reserve Bank of India
The Branch office is governed by following regulation framed by Reserve Bank of India
“Foreign Exchange Management (Establishment in India of branch or office or
other place of business) Regulations, 2000 framed by way of Notification No.
FEMA 22 /2000-RB dated 3rd May 2000”.
Branch office Registration – Reserve Bank of India
The Branch office is required to take prior permission of Reserve bank of India. As per
the notification mentioned above no person resident outside India shall, without prior
approval of the Reserve Bank of India, establish in India a branch or a liaison office or a
project office or any other place of business by whatever name called.
An application is required to be made to the Reserve Bank of India in Form FNC 1. The
application form should be duly completed and submitted to the Chief General Manager,
Exchange Control Department (Foreign Investment Division), Reserve Bank of India,
Central Office, and Mumbai-400001.
The information required to be given in form
1. Full name and address of the applicant company/firm [State whether the
applicant is a proprietary concern or partnership firm or limited company or public
sector undertaking or any other organisation
2. Date and Place of incorporation / registration of the applicant company.
3. Details of capital of the applicant company
4. Brief description of the activities of the applicant company
5. Value of goods imported from and / or exported to India by the applicant during
each of the last three years:
6. Particulars of existing arrangements if any, for representing the company in India.
7. Particulars of the proposed Branch/ Liaison Office like activities to be undertaken
and place of establishment
Following Documents are required to be submitted along with the Form:
Translated English version of the Company’s Certificate of
Incorporation/Registration, Memorandum & Articles of Association attested by
the Indian Embassy/Notary public in the country of registration (Two original
copies)
Copies of last Five years audited Balance Sheet, Profit & Loss Account of the
applicant company/firm
Copy of the Board resolution for opening office in India.
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15. Permitted activities for a branch in India of a person resident outside India
As per Schedule I of the Foreign Exchange Management (Establishment in India of
branch or office or other place of business) Regulations, 2000 framed by way of
Notification No. FEMA 22 /2000-RB dated 3rd May 2000 the following are the activities
which can be performed by the Branch office in India:
Export/Import of goods
Rendering professional or consultancy services.
Carrying out research work, in which the parent company is engaged.
Promoting technical or financial collaborations between Indian companies
and parent or overseas group company.
Representing the parent company in India and acting as buying/selling
agent in India.
Rendering services in Information Technology and development of
software in India.
Rendering technical support to the products supplied by parent/group
companies.
Restricted Activities
The Branch office is prohibited from expanding its activities or undertake
any new trading, commercial or industrial activity other than that expressly
approved by RBI.
It is restricted from accepting deposits in India
Retail trading activities of any nature is not allowed for a Branch Office in
India.
Acquisition of Immovable property in India
As per Foreign Exchange Management (Acquisition and transfer of immovable
property in India) Regulations, 2000 FEMA 21/2000-RB, dated 3-5-2000, the
regulations to provide for provision for acquisition and transfer of immovable
property in India a branch, office in India of a foreign company established with
requisite approvals wherever necessary, is eligible to acquire immovable
property in India which is necessary for or incidental to carrying on such activity
provided that all applicable laws ,rules, regulations or directions in force are duly
complied with. The entity/concerned person is required to file a declaration in
Form IPI with the Reserve Bank, within ninety days from the date of such
acquisition.
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16. Remittance of Profits
A person resident outside India permitted by the Reserve Bank, to establish a branch in
India may remit outside India the profit of the branch or surplus of the Project on its
completion, net of applicable Indian taxes, on production of the following documents,
and establishing the net profit or surplus, as the case may be, to the satisfaction of the
authorised dealer through whom the remittance is affected.
The Regulation Foreign Exchange Management (Remittance of Assets)
Regulations, 2000 provides for remittance of assets outside India. Regulation 6 of the
said notification deals with the branch office.
It provides that in case of remittance of winding up proceeds of a branch/office in India
of a person resident outside India, the application is required to be made to the RBI
together with following documents namely:
(A) Copy of the Reserve Bank's permission for establishing the branch/office in India;
(B) Auditor's certificate
(i) indicating the manner in which the remittable amount has been arrived and
supported by a statement of assets and liabilities of the applicant, and indicating
the manner of disposal of assets;
(ii) confirming that all liabilities in India including arrears of gratuity and other
benefits to employees etc. of the Liaison office have been either fully met or
adequately provided for;
(iii) confirming that no income accruing from sources outside India (including
proceeds of exports) has remained unrepatriated to India;
(C) No-objection or Tax clearance certificate from Income-Tax authority for the
remittance; and
(D) Confirmation from the applicant that no legal proceedings in any Court in India are
pending and there is no legal impediment to the remittance.
The Income Tax Act,1961
Registrations under the Act
The Branch office is required to take the permanent account number (PAN) and
tax Deduction number (TAN) from the Income tax department.
Application for PAN is made in Form 49A and application for TAN is made in 49B
to the NSDL.
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17. Copy of any one of the following documents is required to se sent with an
application
Copy of registration certificate of the respective country duly attested by
Indian Embassy/ Consulate/ High Commission/ Apostille in the country
where applicant is located.
Copy of certificate of registration with the competent authority in India
Copy of approval issued by the competent authority in India
Copy of the accompanying documents alongwith the approval issued by
competent authority in India
Copy of the application (duly acknowledged) made by the applicant before
the competent authority in India Registration certificate issued by ROC
(Form No. 44)
Applicability of the Act
Will be taxable as the foreign company at the rate of 42.23% including surcharge
and Cess.
Quarterly payment of Advance tax and Fringe Benefit Tax
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18. COMPANY
Introduction
One of the other options of method of establishing the presence in India is to open the
full fledged company in India with Foreign capital and foreign subscribers. The company
is incorporated with foreign capital will not be allowed to repatriate the capital yet it can
repatriate the dividends to the Foreign shareholders after payment of necessary taxes.
A Company once incorporated in India shall be an Indian company. Foreign Direct
Investment coming from abroad shall be regulated by the Foreign Exchange
management Act, Reserve Bank of India and the policy of Foreign Direct Investment in
India as formulated by Reserve Bank of India from time to time.
As per the current Foreign Direct investment policy the investment can be made in India
through two routes being Automatic route or approval route.
Under the automatic route the investment can be made without prior approval of central
government but in the case of approval route the prior approval of Central government
is required. India has among the most liberal and transparent policies on FDI among the
emerging economies. FDI up to 100% is allowed under the automatic route in all
activities/sectors except the following, which require prior approval of the Government:-
1. Sectors prohibited for FDI
2. Activities/items that require an industrial license
3. Proposals in which the foreign collaborator has an existing financial/technical
collaboration in India in the same field
4. Proposals for acquisitions of shares in an existing Indian company in financial
service sector and where Securities and Exchange Board of India (substantial
acquisition of shares and takeovers) regulations, 1997 is attracted)
5. All proposals falling outside notified sectoral policy/CAPS under sectors in which
FDI is not permitted
Most of the sectors fall under the automatic route for FDI. In these sectors, investment
could be made without approval of the central government. The sectors that are not in
the automatic route, investment requires prior approval of the Central Government. The
approval in granted by Foreign Investment Promotion Board (FIPB). In few sectors, FDI
is not allowed.
After the grant of approval for FDI by FIPB or for the sectors falling under automatic
route, FDI could take place after taking necessary regulatory approvals form the state
governments and local authorities for construction of building, water, environmental
clearance, etc.
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19. Foreign Exchange Management Act, 1999
The Act has given general power to the Reserve Bank of India under section 47 to
make notifications to regulate various provisions of the Act. Also the specific power has
been given under Section 6(3)(b) to make the regulations to regulate the transfer or
issue of any security by a person resident outside India;
Reserve Bank of India
The Issue/ transfer of shares of any security by a person resident outside India is
regulated by Foreign Exchange Management (Transfer or issue of security by a person
resident outside India) Regulations, 2000, Notification No. FEMA 20 /2000-rb dated 3rd
May 2000, RBI.
As per the regulation 5 of the said regulation “A person resident outside India (other
than a citizen of Bangladesh or Pakistan or Sri Lanka) or an entity outside India,
whether incorporated or not, (other than an entity in Bangladesh or Pakistan) , may
purchase shares or convertible debentures of an Indian company under Foreign Direct
Investment Scheme, subject to the terms and conditions specified in Schedule 1of the
said notification”
Procedure under automatic route
FDI in sectors/activities to the extent permitted under automatic route does not
require any prior approval either by the Government or RBI. There is only two way
intimation to the Reserve Bank of India through the Authorised dealer category I.
An Indian company receiving investment from outside India for issuing
shares/convertible debentures/preference shares under the FDI Scheme, should
report the details of the amount of consideration to the Reserve Bank not later than
30 days from the date of receipt in the prescribed form along with the KYC report.
Once the Annexure II along with the KYC report is submitted the regional office of
Reserve Bank of India shall acknowledged the receipt by way of allowing the
Unique Identification Number (UIN) for the amount reported.
Time frame within which shares have to be issued
The equity instruments should be issued within 180 days from the date of receipt of
the inward remittance or by debit to the NRE/FCNR (B) account of the non-resident
investor. After issue of shares/ convertible debentures/ preference shares, the
Indian company has to file Form FC-GPR, not later than 30 days from the date of
BY CA. Sudha Page 19

20. issue. Price of shares issued to persons resident outside India under the FDI
Scheme, shall be on the basis of SEBI guidelines in case of listed companies. In
case of unlisted companies, valuation of shares has to be done by a Chartered
Accountant in accordance with the guidelines issued by the erstwhile Controller of
Capital Issues.
Part A of Form FC-GPR has to be duly filled up and signed by Managing
Director/Director/Secretary of the Company and submitted to the Authorised
Dealer of the company, who will forward it to the Reserve Bank. The following
documents have to be submitted along with Part A :
(i) A certificate from the Company Secretary of the company certifying that
(a) all the requirements of the Companies Act, 1956 have been complied
with;
(b) terms and conditions of the Government’s approval, if any, have been
complied with;
(c) the company is eligible to issue shares under these regulations; and
(d) the company has all original certificates issued by authorised dealers
in India evidencing receipt of amount of consideration.
(ii) A certificate from Statutory Auditors or Chartered Accountant indicating
the manner of arriving at the price of the shares issued to the persons
resident outside India.
The report of receipt of consideration as well as FC-GPR have to be submitted
to the concerned Regional Office of the Reserve Bank under whose jurisdiction
the registered office of the company is situated. Part B of FC-GPR should be
filed on an annual basis by the Indian company, directly with the Reserve
Bank. This is an annual return to be submitted by 31st of July every year,
pertaining to all investments by way of direct/portfolio investments/re-invested
earnings/others in the Indian company made during the previous years (i.e. the
information in Part B submitted by 31st July, 2008 will pertain to all the
investments made in the previous year’s up to March 31, 2008). The details of
the investments to be reported would include all foreign investments made into
the company which is outstanding as on the balance sheet date. The details of
overseas investments in the company both under Direct/portfolio investment
may be separately indicated.
Procedure under Government Approval
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21. FDI in activities not covered under the automatic route require prior government
approval. Approvals of all such proposals including composite proposals involving
foreign investment/foreign technical collaboration are granted on the recommendations
of Foreign Investment Promotion Board (FIPB). Application for all FDI cases, except
Non-Resident Indian (NRI) investments and 100% Export Oriented Units (EOUs),
should be submitted to the FIPB Unit, Department of Economic Affairs (DEA), Ministry
of Finance. Application for NRI and 100% EOU cases should be presented to SIA in
Department of Industrial Policy and Promotion .Application can be made in Form FC-IL.
Plain paper applications carrying all relevant details are also accepted. No fee is
payable.
Prohibited Sectors
The extant policy does not permit FDI in the following cases:
1. Gambling and betting
2. Lottery Business
3. Atomic Energy
4. Retail Trading
5. Agricultural or plantation activities of Agriculture
General permission of RBI under FEMA
Indian companies having foreign investment approval through FIPB route do not require
any further clearance from RBI for receiving inward remittance and issue of shares to
the foreign investors. The companies are required to notify the concerned Regional
Office of the RBI of receipt of inward remittances within 30 days of such receipt and
within 30 days of issue of shares to the foreign investors or NRIs.
The Companies Act,1956
Once the company is incorporated in India, it shall be governed by the Indian
Companies Act, 1956 which means all the provisions enumerated in Indian companies
Act shall be applicable. Also all the acts/provisions/rules/notifications which are
applicable to companies in India shall be applicable in the same manner as are
applicable to the company with Indian capital. The Companies Act of 1956 sets down
rules for the establishment of both public and private companies. The most commonly
used corporate form is the limited company, unlimited companies being relatively
uncommon. A company is formed by registering the Memorandum and Articles of
Association with the State Registrar of Companies of the state in which the main office
is to be located.
The Income Tax Act
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22. Since the company is incorporated all the provisions of Indian Income Tax, 1961 as are
applicable to company incorporated in India shall be applicable. As per the Income Tax
Act the income of company is taxable at the rate of 33.99%.
Advance Tax payment of Income Tax
As per section 211 of the income tax the total tax payable by the company is required
to be made in four installments. Following are the specified proportions and
scheduled dates for payment of Advance Tax to Govt.:-
Due date of Installments Amount Payable
On or before the 15th June Not less than 15% of Advance Tax Liability
Not less than 45% of Advance Tax Liability, as
On or before the 15th September reduced by the amount paid in earlier
installment.
Not less than 75% of Advance Tax Liability, as
On or before the 15th December reduced by the amount paid in earlier
installment(s).
The whole amount of Advance Tax Liability, as
On or before the 15th March reduced by the amount paid in earlier
installment(s).
Consequences of non deposit of Advance Tax: There shall be charged an interest
under Section 234B and Section 234 C of the Income Tax Act for the nonpayment ,
short payment of taxes and deferment in payment of Advance Tax.
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23. Advance Tax payment of Fringe Benefit Tax
Due date of Installments Amount Payable
On or before the 15th June Not less than 15% of Advance Tax Liability
Not less than 45% of Advance Tax Liability,as reduced
On or before the 15th September
by the amount paid in earlier installment.
Not less than 75% of Advance Tax Liability, as reduced
On or before the 15th December
by the amount paid in earlier installment(s)
The whole amount of Advance Tax Liability, as reduced by
On or before the 15th March the amount paid in earlier installment(s)
Consequences of Fringe Benefit Tax: There shall be charged an interest under
Section 115WJ of the Income Tax Act.
Tax audit if gross receipts exceed INR 40,00,000
Annual corporate tax return, wealth tax return and fringe benefit tax return
Annual and quarterly withholding tax returns
Compliance with transfer pricing regulations
*FBT is abolished from Budget 2009-2010.
In case of further discussion on the above matter mail me at sudhag999@gmail.com.
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