India has one of the most transparent and liberal foreign direct investment regimes among the emerging and developing economies. Any foreign investment proposed to be brought into an Indian entity, either by way of subscription or purchase of securities, is governed by the Foreign Exchange Management Act 1999, Foreign Exchange Management (Non-Debt Instrument) Rules 2019, and the Consolidated Foreign Direct Investment Policy issued by the Department for Promotion of Industry and Internal Trade (FDI Policy).
Foreign direct investment (FDI) is permitted in all sectors except certain prohibited sectors/activities (such as, inter alia gambling, tobacco or real estate). FDI in most sectors is permitted either under the ‘automatic route’ (ie without the requirement of prior governmental approval, such as in the single brand retail sector, wholesale trading sector, etc) or the ‘government/approval route’ (ie with the requirement of prior governmental approval, such as in the multi-brand retail trade sector). In certain sectors, such as the defence sector, FDI up to a certain threshold is permitted under the automatic route and any FDI above the specified level requires prior government approval.
While the on-going Covid-19 pandemic has affected the global macroeconomic outlook for the current financial year 2020-21, the government is leaving no stone unturned to revive the economy and roll out the red carpet for global investors to continue to choose India as their preferred destination for investments, as well as providing incentives to the domestic companies to get back on their feet.
Business structures for doing business in India
Company (private or public set up as a wholly owned subsidiary or by way of a joint venture)
A company can be a private limited company or a public company. The most common entity in India is a private limited company. A private limited company can also be set up as a subsidiary or a joint venture between two companies.
Limited Liability Partnership (LLP)
An LLP is a corporate body and a legal person separate from its partners. FDI is permitted in LLPs operating in sectors/activities where 100% FDI is allowed through automatic route and there are no FDI-linked performance conditions.
Offices (branch office, project office, liaison office)
A foreign company can open a branch office, liaison office or project office in India. The scope of operations of such offices is typically limited to activities and functions such as being a country representative office, sourcing, technical and/or marketing support, import and export, executing a specific project, etc.
The establishment of a branch office or liaison office or project office is a two-pronged process and involves seeking Reserve Bank of India (RBI) approval (through an Authorised Dealer of a Category I Bank), and registration of the branch/liaison/project office with the Registrar of Companies.
Franchise agreement/distribution agreement/agency
In the event a foreign company is not keen on having a physical presence in India, it can proceed with doing business in India through an unincorporated presence by either (i) appointing a distributor/ agent in India or (ii) adopting the franchise model.
Measures adopted by the government on account of the Covid-19 outbreak
In order to mitigate the loss caused on account of the outbreak of Covid-19, the government has taken proactive steps and measures to ease the pressure on companies and instil confidence in the minds of foreign investors, which inter alia include:
- Various central government ministries (such as the Finance Ministry and the Ministry of New and Renewable Energy (MNRE)) have issued office memorandums pursuant to which Covid-19 has been declared as a force majeure, and any delays caused on account of Covid-19 will be treated as delays on account of a force majeure event.
- The government has announced a special economic relief package, which as per reports is equivalent to 10% of India’s GDP, for ‘Aatmanirbhar Bharat’ or ‘Self-Reliant India’
- The Ministry of Corporate Affairs (MCA) has permitted matters which require physical presence of directors at a board meeting to be approved at a board meeting held through video conferencing (VC) or other audio visual means (OAVM). Further, companies have now been permitted to conduct extraordinary general meetings (EGMs) and annual general meetings (AGMs) via VC or OAVM, during the calendar year 2020, which was not previously permitted. Further, the due date for convening the AGMs has been extended by three months from the date on which it was required to be held.
- MCA has introduced the ‘Companies Fresh Start Scheme, 2020’ and revised the ‘LLP Settlement Scheme, 2020’. The unique factor of both the schemes is that it offers a one-time waiver of additional filing fees for delayed filings by the companies or LLPs with the Registrar of Companies during the currency of the schemes, ie during the period starting from 1 April 2020 and ending on 31 December 2020.
- MCA has amended the Companies (Corporate Social Responsibility Policy) Rules 2014, thereby allowing companies engaged in research and development activity of new vaccine, drugs and medical devices in their normal course of business to undertake and include research and development activity of new vaccine, drugs and medical devices related to Covid-19 for the financial years 2020-21, 2021-22 and 2022-23, under their corporate social responsibility (CSR) policy, subject to certain conditions.
- The Securities and Exchange Board of India (SEBI) has granted extension for making certain filings under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 for listed companies.
- The government has relaxed rules relating to withdrawal from the employees provident fund (a social security scheme in India) for facilitating a non-refundable advance to employees in order to ease finances during this outbreak. Accordingly, an employee (eligible for provident fund) is now permitted to withdraw the basic wages and dearness allowances for three months’ or up to 75% of the amount standing to his/her credit in the fund, whichever is less.
- RBI has introduced many relief measures with a view to counter the financial impact of Covid-19 and to ensure sufficient liquidity.
- Many taxation related relief measures have been introduced such as the last date for filing goods and service tax (GST) returns and income tax returns have been extended.
- The government has raised the threshold for invoking insolvency under the Insolvency and Bankruptcy Code, 2016 from INR100,000 to INR10m with a view to prevent triggering of such proceedings against small and medium enterprises that are facing the heat of the Covid-19 pandemic.
- Spending of funds by companies for assistance in relation to Covid-19 shall now be eligible as CSR in terms of the Companies Act 2013.
- In order to combat hostile acquisitions by neighbouring countries, the government has recently revised the FDI Policy to inter alia provide that prior government approval will be required in case of any foreign investment in an Indian company (irrespective of the sector in which such Indian company is engaged) if the investing foreign entity is resident in a country sharing a land border with India.
Reflections on overall business sentiment in India
Keeping the outbreak of Covid-19 in mind and the manner in which it has affected several countries and the global economy, it is safe to say that the business sentiment in India (as well as the world over) is to take each day as it comes and recalibrate and have measures in place to counter these extraordinary times. While the government has taken numerous steps to revive the economy, it is yet to be seen how long the economy will take to get back to a pre-Covid state of affairs.
The contents of this article have been updated as of 30 September 2020. It is neither a legal opinion nor does it set out a comprehensive review of all developments in the law and practice or to cover all aspects of the matters referred to. Clasis Law assumes no responsibility or obligation to update this article. This article intends to give the reader an overview of the various aspects of doing business in India including but not limited to the applicable legislations, compliances and processes. It is not intended and cannot be construed as a comprehensive and detailed analysis of Indian Law or, under any circumstances, as legal advice from Clasis Law.