Establishing presence in India by person resident outside India may be achieved either in the form of unincorporated entities i.e., setting up a Branch Office (BO), Liaison Office (LO) or a Project Office (PO), or in the form of an incorporated entity i.e., a joint venture entity (JV) or a wholly owned subsidiary (WOS) or a Limited Liability Partnership (LLP).
Section 6(6) of the Foreign Exchange Management Act, 1999 (“FEMA”) read with notification no. FEMA 22(R)/2016-RB dated March 31, 2016, regulates the establishment of a BO/ PO/ LO in India. A brief about the LO/ BO/ PO is set out hereinbelow:
Liaison Office: A liaison office can be established in India pursuant to a prior approval of the Reserve Bank of India ("RBI"). A liaison office acts as a representative of the parent foreign company in India and promotes technical/ financial collaboration between the parent/ group companies and companies in India. A liaison office cannot undertake any commercial activities. The validity period of a liaison office is generally for three years, except in the case of Non-Banking Finance Companies (NBFCs) and those entities engaged in construction and development sectors, for whom the validity period is two years only. It may be noted that a liaison office cannot undertake any business activity or earn any income in India.
Branch Office: A branch office can be established with a prior approval of the RBI. Generally, a branch office should be engaged in the activity in which the parent company is engaged. In addition, a branch office is also permitted to undertake activities such as import/ export of goods, rendering professional or consultancy services, undertaking research and development activities, acting as a buying/ selling agent in India.
Project Office: A foreign company can establish a project office with prior approval from the RBI. The project office remains valid for the duration of the project. Project offices are generally preferred by companies engaged in one-time turnkey or installation project.
The process for incorporating a LO, BO and PO is divided into two aspects first is to obtain approval from the RBI and the second step is to file charter documents along with other relevant documents in e-form FC-1 with the Ministry of Corporate Affairs (“MCA”) in accordance with the provisions of section 380 of the Companies Act, 2013 (“CA 2013”). Upon approval, all such entities, are required to file annual compliances in e-form FC-3 (Annual accounts with the list of all principal places of business in India established by foreign company) and e-form FC-4 (annual return of a foreign company) with the MCA.
In addition to aforesaid, certain other event-based compliances may also be required to be undertaken by the foreign company such as filing of e-Form FC-2 regarding alteration in charter documents or alteration in the registered office of the foreign company etc.
Now, coming to the aspect of setting up business in India through incorporated entities, it is imperative to note that investment by a person resident outside India in an Indian entity is governed by the provisions of the FEMA, as amended from time to time by the RBI read with the Consolidated Foreign Direct Investment Policy ("FDI Policy") issued by the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry.
Foreign Direct Investment ("FDI") is freely permitted in India in almost all sectors today. Under the existing FDI Policy, non-residents can make investments in Indian entities, through two routes i.e., the automatic route and the Government route. Under the automatic route, no approval from the RBI or Government of India is required by the non-resident investor or the Indian company. An Indian company, not engaged in any activity/sectors where FDI is prohibited, can issue shares or convertible debentures to a person resident outside India, subject to entry routes and sectoral caps prescribed in the FDI Policy. FDI in activities covered under the approval route requires prior approval of the Government of India which are considered by respective Ministry/ department of the Government of India, as the case may be. It is pertinent to note that, there is prohibition on FDI, in few sectors.
In India, the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 ("NDI Rules") (which replaced erstwhile Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2017) is the principal regulation governing foreign investment in an Indian entity by any person resident outside India.
In terms of the NDI Rules, any investment in an Indian entity by a person resident outside India shall always remain subject to the entry routes, sectoral caps and other conditionalities laid down therein. Accordingly, to subscribe, purchase or sell equity instruments (including equity shares) of an Indian company, a person resident outside India is required to adhere to terms and conditions given in Schedule 1 of NDI Rules.
Having briefly discussed regulatory regime relating to foreign investment in India, we now proceed to deal with the provisions related to incorporation of company (which may be in the form of a JV or WOS) by a foreign company.
As per the CA 2013, to incorporate a company in India, the applicant (i.e., the foreign investor) is required to submit an online application (in e-form SPICe+ Part B) for incorporation of a company to the Registrar of Companies (“RoC”) within whose jurisdiction the registered office of the proposed company to be situated along with relevant supporting incorporation documents. It is important to highlight here that for the purposes of incorporating a company in India, there shall be at least 1 (one) resident director on the board of such company.
It may be noted that aforesaid incorporation application inter-alia allows the applicant to apply and obtain (a) Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN), (b) statutory registrations including goods and services tax registration (GSTIN), employees state insurance registration and employees provident fund registration for the proposed company and (c) opening of bank account along with the incorporation certificate.
A brief about the incorporation process is outlined below:
Step 1: Filing of name reservation application in e-form SPICe+ Part A;
Step 2: Drafting of charter documents (i.e., memorandum and articles of association) and other incorporation documents (including consent letters, declarations to be given by the proposed directors and subscribers).
Step 3: Submission of e-Form SPICe+ Part B with RoC (including executed copies of documents mentioned at Step 2 above)
Once the online application is submitted, a certificate of incorporation containing a unique company identification number is issued by the RoC. Thereafter, in terms of the provisions of the CA 2013, a newly incorporated company is required to comply with certain provisions for an instance, filing of e-form INC-20A for obtaining certificate of commencement of business from the RoC. An Indian company cannot undertake any business activity in India, unless such approval is obtained.
Further, within 30 days of incorporation, a company is required to convene first meeting of its board of directors to transact certain businesses including but not limited to issuance of share certificates to the first subscribers, appointment of first auditors, taking note of the registered office of the company, taking note of appointment of first directors etc. It is imperative to note here that upon issuance of share certificates to the foreign investor, the Indian company is required to file form FC-GPR with RBI within 30 days of issuance of shares on the FIRMS Portal of RBI.
Pursuant to the incorporation, every company in India (including subsidiary of a foreign company) is required to undertake certain annual compliances in terms of the provision of CA 2013 & FEMA.
An indicative list of such yearly compliances is listed out herein below:
- Convening minimum 4 board meetings in a calendar year.
- Convening an Annual General Meeting (“AGM”) of the shareholders.
- Appointment of the statutory auditors (in the first AGM and every 5 years thereafter).
- Filing of audited financial statements along with board’s report and auditor’s report with RoC within 30 days of AGM in e-form AOC-4.
- Filing of annual return with RoC within 60 days of AGM in e-form MGT-7 / MGT-7A.
- Filing return on Foreign Liabilities & Assets (FLA) with the RBI on or before 15th of July every year.
- Undertaking annual KYC for all the directors on the board of the Indian company.
- Maintenance of statutory registers and minutes of meetings of the board and shareholders of the company.
In addition to aforesaid, certain other event-based compliances may also be required to be undertaken by the Indian company such as filing of e-form MSME, DPT, CSR etc. Further, in the event of cessation of existing directors or appointment of new directors on the board of the Indian company, e-form DIR-12 is required to be filed with the RoC.
Moving towards the incorporation of Limited Liability Partnership (“LLP”), a foreign entity can also incorporate a LLP, by complying with below mentioned incorporation process:
Step 1: Filing of name reservation application in e-form RUN-LLP;
Step 2: Drafting of subscriber sheet, e-form 9 and other relevant documents;
Step 3: Submission of e-form Fillip along with executed copies of documents mentioned at Step 2 above.
Step 4: Drafting of Limited Liability Partnership Deed (LLP Deed);
Step 5: Submission of e-form 3 along with executed copy of LLP Deed.
It is important to note that, unlike formation of a company, a LLP can commence its business as soon as it receives its Certificate of Incorporation, PAN & TAN. Post incorporation, the LLP required to file few annual compliances in e-form 8 (Statement of Account & Solvency) and e-form 11 (Annual Return) with the MCA.
In addition to aforesaid, certain other event-based compliances may also be required to be undertaken by the LLP such as filing of e-form 5 regarding name change of the LLP, e-form 4 regarding appointment of new partners / designated partners or cessation of existing partners / designated partners etc.
Considering the aforesaid, we can conclude that foreign entities may step up their business presence in India either through incorporated or unincorporated entities. Irrespective of the mode of presence, it may be noted that each mode of presence has its own benefits and limitations. Nevertheless, the foreign entity would be required to undertake certain compliances as briefly discussed above.
This content is originally posted here: https://www.ahlawatassociates.com/blog/what-are-different-mandatory-compliances-as-per-the-ministry-of-corporate-affairs-mca-to-be-done-for-a-foreign-entity-starting-business-in-india
