Foreign entities looking to set up their business in India are generally confused regarding the type of business vehicle they should choose to start their operations in India.
There are majorly three alternatives available in the form of:
1) Branch office
2) Liaison office
3) Wholly owned subsidiary.
Given below is a detailed comparison between the different types of business vehicles available in India for foreign entities:
|
|
Branch Office |
Liaison Office |
Private
Limited Company |
|
Applicable Thresholds |
1) Profit Making Track Record during the last five
financial years in the home country; And 2) Net Worth
of not less than USD 100,000 as per or its equivalent.
Note: An applicant
that is not financially sound and is a subsidiary of another company may submit
a Letter of Comfort (“LOC”) from its parent/ group company, subject to the condition that the parent/ group company satisfies the prescribed criteria
for net worth and profit. |
1) Profit Making Track Record during the last three
financial years in the home country; And 2) Net Worth
of not less than USD 50,000 or its equivalent.
Note: An applicant
that is not financially sound and is a subsidiary of another company may submit
a Letter of Comfort (“LOC”) from its parent/ group company, subject to the condition that the parent/ group company satisfies the prescribed criteria
for net worth and profit. |
No such requirement |
|
Ability to generate revenue in India. |
Yes |
No |
Yes |
|
Tenure |
The approval for establishment of a
Branch office is generally given for three (3) years and thereafter needs to
be renewed. |
The approval for establishment of a Liaison office
is generally given for three (3) years and thereafter needs to be renewed. |
No specific duration/Unlimited tenure. |
|
Description and permitted activities |
·
A Branch Office is an alternative to the establishment
of a wholly-owned subsidiary in India.
·
No capital requirement, as the branch office has no separate existence other than that of the Parent Company
established outside India.
·
The following are the permitted
activities for a Branch Office:
a) Export/import of goods. b) Rendering professional or consultancy services (other than practice of the legal profession in any matter). c) Carrying
out research work in which the parent company is engaged. d) Promoting
technical or financial collaborations between Indian companies and the parent or overseas group company. e) Representing the parent company in India and acting as buying/ selling agent in India. f) Rendering
services in Information Technology and development of software in India. g) Rendering
technical support to the products supplied by parent/group companies. h) Representing a foreign airline/shipping company. |
·
If a foreign entity wants to, inter
alia, promote its products in India, it can set up a 100% foreign-owned
Liaison Office.
·
The following are the permitted
activities for a Liaison Office:
a) Representing the parent company / group
companies in India. b) Promoting export / import from / to
India. c) Promoting technical/ financial
collaborations between parent/group companies and companies in India. d) Acting as a communication channel
between the parent company and Indian companies.
|
· A Company is a separate legal entity having a distinct identity in the
eyes of the law. It is not prohibited from
conducting any business or commercial activity in India and thus can
undertake any lawful business activity subject to the applicable FDI
guidelines and approvals. |
|
Features |
· The branch office can only conduct the aforementioned permitted
activities relating to the main business of the Parent Company.
· To set up a Branch Office, (i) approval of the Reserve Bank of India
(“RBI”) through AD Bank in India is required, and (ii) following which the
Branch Office is required to be registered with the Registrar of Companies
(“RoC”).
· Liability of the Parent Company is unlimited. |
· Prohibited from conducting any business or commercial activity in
India.
· To set up a Liaison Office, (i) approval of the BOI is required; and
(ii) following which the Branch Office is required to be registered with the
Registrar of Companies (“RoC”).
· Liability of the Parent Company is unlimited. |
· A Private Limited Company can perform any of the functions mentioned under its Memorandum of Association (“MoA”) including any commercial/trading activities, subject to the applicable FDI guidelines.
· The internal working and management of the Company is governed by the
Articles of Association (”AoA”) of the Company.
· Depending upon the activity/sector, there may be certain
restrictions/licensing requirements for engaging in certain business
activities in India.
· Liability of a shareholder is limited to the initial investment. The shareholder will not be liable for any obligations
of, or liabilities imposed against, the Company (except where under laws of
India, the corporate veil is pierced in exceptional circumstances).
· Directors: a) As per the provisions of Section 149 (1)
of the Companies Act, 2013, a Private Company shall have a minimum of two directors. b) As per Section 149 (3) of the Companies Act, 2013, a Company shall have
one resident director at all times.
· Shareholders: A Private Limited Company must have at least 2
Shareholders.
· Meetings: A Minimum of 4 Board Meetings and an Annual General Meeting
of the shareholders is mandatorily
required to be held during a year.
|
|
Advantages |
· Lower cost of compliance
· Easy to shut down
·
Easy repatriation of funds
·
Foreign entity/parent company has full control of the decision-making
process and management. |
·
Lower cost of compliance
·
Easy to shut down
·
Easy repatriation of funds
·
Foreign entity/parent company has full control of the decision-making
process and management. |
· The Liability of the shareholders is limited to the amount of investment made by them.
·
It is the most trusted form of business and
thus will help the Company in getting the best talent pool from around the
country.
·
The Companies incorporated in India are
taxed at a lower rate as compared to Foreign Companies and their branches
established in India.
·
As the Company shall have a distinct
identity from its members/promoters, the risk posed to the promoter group is
minimal.
·
Helpful in building goodwill in the Indian market.
·
As it is the most trusted form of business
in India, the chances of collaboration with other Indian Companies shall
increase substantially.
·
The chances of getting loans and other
alternative forms of funding are high as compared to the other forms of
business.
·
The Parent Company can exercise control over
it's subsidiary in India by appointment of a professional board of directors who
may be residents outside India, subject to the compliance of the requirement
for appointment of one resident director
·
A Private Limited Company can undertake any
activity mentioned in its Memorandum of Association (“MoA”) subject to reasonable restrictions as per the FDI
guidelines.
·
Lower rate of tax. |
|
Disadvantages |
·
The liability of the Parent Company is
unlimited.
·
Prohibited from undertaking business
activities apart from those mentioned above.
·
Requires reporting of Global Accounts before
Indian authorities.
·
Taxed at a higher rate as compared to Indian
Companies. |
·
The liability of the Parent Company is
unlimited.
·
Prohibited from undertaking business
activities apart from those mentioned above.
·
Requires reporting of Global Accounts before
Indian authorities. |
· The Compliance burden is generally higher as compared to the other forms
of business. |
|
Timelines and Cost |
· Nominal filing fees may be applicable.
· The processing time for registration of a Branch Office is around 3
months. |
·
Nominal filing fees may be applicable.
·
The processing time for registration of a
Branch Office is around 3 months. |
· The fee shall depend upon the initial authorized share capital and the place (state) of incorporation of the Company.
·
The timeline for incorporation is around a month from the receipt of documents from your end. |
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