Doing Business Internationally: India

Disclaimer: Please be advised that this recorded webinar has been edited from its original format, which may have included a product demo. To set up a live demo or to request more information, please complete the form to the right. Or if you are currently not on CSC Global, there is a link to the website in the description of this video. Thank you.

Christy: Hello, everyone, and welcome to today's webinar, "Doing Business Internationally: India." My name is Christy DeMaio Ziegler, and I will be your moderator.

Now I have the pleasure of introducing our host, Helena Ledic, an associate general counsel for CSC in the Chicago office. Helena?

Helena: Thank you so much, Christy. I have the pleasure today of introducing our subject matter experts for today's webinar on doing business in India.

First, I would like to introduce the audience to Sameer Mittal. He is the Managing Director for CSC in India.

Sameer: Thank you, Helena, for having us. It's great to be here.

Helena: Great. And then the other person who will be speaking today is Sakshi Agarwal. And Sakshi is the Director and Head of Corporate Services for CSC in India.

Sakshi: Thank you so much, Helena, for having us here.

Helena: Very good. So let me walk us through our agenda for today's presentation about doing business in India. We'll start off with About CSC. Then we're going to get into the country profile and why India. Then we'll go into foreign investment in India, and we'll cover the two differences, the domestic or foreign status. Sakshi and Sameer will take us through that. And then, we'll go into some of the technicalities of doing business in India, what to know, and then how CSC can help you.

But first, a little bit about CSC. For more than 120 years CSC has been the partner of choice for companies around the globe. We're trusted to handle everything from incorporating a company through maintaining compliance, corporate transaction work, protecting digital assets from the threats of the online world, and everything in between. We offer the solutions and technology that keep businesses running in the background, allowing our clients to focus on the important work of growing their business.

CSC has offices and capabilities in more than 140 jurisdictions across Europe, the Americas, Asia-Pacific, and the Middle East. We're a global company capable of doing business wherever our clients are, and we accomplish that by employing local experts, such as Sameer and Sakshi, in every business we serve.

Let's get a little bit into the profile of India though. So as of 2022, the services sector has become the main driver behind India's economic growth over the past few years. It's accounted for 53% of gross value-added growth. The India government has worked to improve the ease of doing business in the country and reducing the regulatory compliance burden.

India's ranking in the World Bank's Ease of Doing Business report has improved from 142nd in 2014 to a dramatic 63rd in 2022. And India is, of course, the second most populous country in the world, with a population of 1.4 billion. And that represents a fifth of the world's population.

But Sameer, what I'd like to do is I'd like to go back to one of our bullet points. Can you tell us a little bit more about how the Indian government has reduced the regulatory and compliance burden on businesses?

Sameer: Great question. The government is spearheading the initiative for reducing compliance burden in India. Historically, we used to get up and there used to be a new law, which has been introduced. But over the last few years and an interesting comment, more than 39,000 compliances have been reduced as of January 2023 according to the economic survey published for 2023 across various laws. So the government is taking key reforms under the company law, goods and service tax, reduction in corporate taxes, consolidation of public sector banks, enactment of labor codes while enacting investment policy reforms.

Further, the government launched India's National Single Window System in September 2021, with a focus on helping the foreign investors to have a seamless experience to form entities in India and have a minimum compliance burden. So the National Single Window System launched will provide a single digital platform to investors for approvals and clearances and has generated 4.3 Lakh unique visitors as of January 2023 already.

Does that answer your question?

Helena: Yes, it does. Very good. Thank you. We want to spotlight some of the reasons why India is such an exciting country to invest in. And what we wanted to point out was that India is the fifth largest economy in the world. It ranks only behind the U.S., China, Japan, and Germany. And it's projected to grow at 6.7% between 2022 and 2023. And within the next year or so, there's going to be a target of about a U.S. $5 trillion investment in nine key areas, including IT, healthcare, energy, financial services, and education.

The goods and services tax has been reformed, and it helps pave the way for a common national market by integrating various indirect taxes. There was a Bankruptcy Code, Insolvency and Bankruptcy Code that was introduced, which helps businesses resolve those insolvency issues in a timely manner.

And there's been quite a lot of digital innovation within India. It ranks 46th in the Global Innovation Index in the 2021 rankings, the top country in Central and Southern Asia. And to me, an astounding statistic is that India has the highest fintech adoption rate of 87% compared to the global average rate 64%.

But Sameer, I think our audience will want to know a little bit more about the economic and legal reforms. Could you talk a little bit more about the goods and services tax reform and how that has helped pave the way for a common national market?

Sameer: Sure. So India, you know, if you go back, you know, a couple years ago, when the GST was launched, so India had multiple taxes, like central excise duty for manufacturing, service tax for services, central sales tax for trading that changed from one state to another state, additional duties for customs, luxury tax, purchase tax, entertainment tax, entry tax, and so on and so forth. So with the launch of GST in 2017 July, all these taxes have got subsumed under GST tax regime. And now, India has got one tax, a powerful indirect tax, which called the GST.

And India is a union of states, and there have been different taxes historically, as I said different exemptions, different procedures for different states. With GST coming into the picture, now the whole of India has got one tax rate, one set of exemptions, a similar set of procedures to apply for the exemptions and multiple matters. And it has made the businesses less difficult, or it's much easier to operate on their level. Now there's a uniform tax rate, as I said, throughout the country.

So further, even the tax rates between the states historically were different, and now all of that has been removed. Now there's a single rate of tax and more digitalized position as compared to more physical, that you need to go and apply physically. People can now go and do the digital applications on the government portal, which is uniform all across.

So there's a seamless import tax credit can be claimed for the purchases done by the businesses, and a chain be followed for that.

So all these measures have resulted in quite a lot of ease for the businessmen and have reduced and the reduction of the compliance burden. Obviously, it has taken its own sweet time to get it to this level. But overall, this kind of a major reform has reduced quite a lot burden of dealing with various taxes and various consultings, and various different procedures. And I think, as we progress, the government is making further steps to make more economic and legal reforms more strong and reduce it further. Like as I said, historically, the National Single Window System is one such reform which has helped that.

Helena: Very good. Thank you, Sameer.

There are two types of foreign investment in India. The first one is the domestic Indian company, and that's where you're set up, the Indian company is set up with foreign direct investment, FDI. The second one is a foreign company, and that's where a foreign entity is doing business in India and it involves the opening of a liaison, project, or a branch office. Now, I have a question for Sakshi here for our audience. Do you always have to open a liaison, project, or branch office with a foreign company?

Sakshi: Well, Helena, in most of the cases, we have to because like these are set up as an unincorporated entity into India. Legally, when the investors they want to test waters or they have a very specific time-based role. And in these situations, this requires approval from the Reserve Bank where in they are allowed to function in one of the three categories. And then they get into the system with the Ministry of Corporate Affairs and continue their operation. In most of the cases, you find foreign companies its working into an unincorporated structure. It would be like one of the three categories there. It would either be a liaison office or a branch office or a project office. Does that answer the question?

Helena: Yes, it does. Thank you. So let's now first discuss the Entry Option 1 — the domestic Indian company and some of the particulars and details around that.

So foreign direct investment in the capital of a company is allowed in all sectors outside the Prohibited Sectors list. And those general industries which are banned are gambling, betting, atomic energy, railways, and tobacco. The investment activity can occur through the so-called automatic route, where no approval is needed from the Reserve Bank of India. However, in a few instances, it might be required.

Investments can also be made from countries around the world. If your investors come from a country that share a border with India, namely Bangladesh, China, Pakistan, Nepal, Myanmar, Bhutan, and Afghanistan, those require government approval irregardless of the sector or the types of activities. So always those need approval.

Then foreign companies can also opt to set up wholly-owned subsidiaries, joint ventures, SPVs in the form of public or private companies. So foreign entities can make these investments in equity share capital, compulsory convertible debentures, and then preference shares and convertible notes.

So I do have a couple of questions for Sakshi on this slide. And then when we have over here on the second category, we said that prior approval is sometimes required with the Reserve Bank of India, even if you're not in one of those prohibited sectors. Can you give us examples of when you might need prior approval?

Sakshi: Sure. So what happens is that the government of India, under their ease of doing business norm, has automated the investment in almost all the sectors in India, except a few industries or sectors that are considered to be strategic to the growth of the country. So there are sectors like defense, civil aviation, insurance, then multi brand retail, ecommerce, railway. These certain sectors are considered to be very critical to the growth of the country, and the government has automated it to a certain extent. And it has been that after that exchange you’re requires government approval, for example, if we are talking about banking in the private sector.

But there's up 74% of investment, foreign investment that's permitted. But only 49% of that investment is under the automatic route, and any investment beyond that 49% to 74% would require acquiring government approval.

So in a similar fashion, the government has categorized in different kind of sectors and have provided different thresholds up to which the investment would be allowed under the automatic route for those sectors. Any investment beyond that percentage would go under the government route. So this is how it works. And as Helena had mentioned, there are certain countries that share a land border with India. In those situations, irrespective of the sector you’re working into, they would be required to go to get the government and get the prior approval. And then they will be able to function in India. So this is how it works.

Helena: So Sakshi, that brings up another question for me. If you have those investors that you come from a country that shares a land border with India, does it matter how many investors are involved, how big or what percentage? Or as soon as you have anyone that is an investor in any way, you have to get the approval?

Sakshi: Yeah. So the beneficial ownership structure, there is a bit of ambiguity around that. That is a continuous question that is going on. But yeah, as of now considering the conservative of suit, if the investor happens to be from any of the countries that come into these personal three directions, in those situations, they're required to go to the government and get the approval.

Helena: Okay. Very good. Thank you. So let's now talk a little bit about the domestic company requirements for Indian companies.

So a private limited company is required to have at least two shareholders, while a public limited company is expected to have at least seven shareholders, along with one resident director. Those private limited companies aren't subject to minimum capital requirements. They have limited liability and are separate legal entities governed by the Companies Act.

Those profits earned by that invested company can be repatriated in the form of dividends after the payment of applicable taxes without the permission of the RBI.

Now the foreign directors may be required to obtain a permanent account number in India and must apply for a digital signature certificate to enable them to sign various filings with the tax authorities and the Registrar of Companies.

And then, of course, for the KYC, the notarized and apostilled copies, those documents for the foreign shareholders and the foreign directors also need to be notarized and apostilled at the time of incorporation.

But before we go on, I do have a question over here to ask about those digital signature certificates. So Sameer, can you explain a little bit more about what those are in India?

Sameer: So basically, as we said earlier, like in all the filings for them digitally for incorporation of companies or even for the annual filings, we need to do all the filings digitally. So for when we do the annual filings and when we do the incorporation of any entity, we need the digital signature to sign the forms which gets filed on the website of the Ministry of Corporate Affairs. So the digital certificates are basically the digital equivalent of one signature.

So these are issued by the license certifying authorities in India, which are licensed by the government that when they are to issue such digital signatures. And they are mostly provided in a token, not a pen drive format, in which we can use them to sign the various forms issued by the Ministry of Corporate Affairs for incorporation, for various filings, and even for tax reporting or labor law filing or whatever it is. So these signatures can be used.

The process to use these is like we need to register with the specific authority of the proposed directors' digital signatures. And accordingly, we can do the filing and then sign those forms digitally.

Helena: All right. Sakshi, can you tell us a little bit more about the Know Your Customer supporting information that's needed for foreign directors and shareholders? I know that is very important to our U.S. audiences. Could you explain a little bit more about that?

Sakshi: Sure. So for the foreign directors, the government wants to know like who the directors will be, like who would be on the board of the company. So they typically require an identity proof, that there's the passport of the foreign person. And that is required to be notarized and apostilled.

Along with that other part of addressing the government usually checks was having the people on the driver's license or probably the copy of bank statement. Any of these documents that contain the address of concern and in case like the utility bill or bank statement these are in a language that is not English, in that situation, these are required to be translated. And for the translation, again these documents are required to be notarized and apostilled.

So this is there for the directors' part. And as for the shareholders of the investors are concerned in case the investor is the body corporate. In that situation, they're required to have the notarized and apostilled copy of the incorporation certificate of the company. The types of documents the articles of Association Memorandum of association and the parent company. Then a board resolution that we have certain prescribed parameters, like the amount of investment that will be done, the statement that the company will be incorporated, who will be director, who will be the shareholders.

So these are the basic documents that are required in the KYC point of view, and all of these are required to be notarized and apostilled. And then we are also required to have the basic structure of the body corporate investor where in. We really want to know that who the significant beneficial owner of the company. So this is legally the document that we require on the KYC front for the foreign directors and the shareholders.

Helena: All right. Very good. Thank you, Sakshi. We've talked about the domestic companies. Now let's go to Entry Option 2 — the foreign company.

So instead of incorporating an Indian subsidiary or entering into a specific joint venture, foreign investors may want to set up a foreign company in India after getting the approval from the RBI, the Reserve Bank of India. So registration is required from the Registrar of Companies in the form of a liaison office, a branch office, or a project office. And of course, we'll hear about more of those.

Let's talk a little bit about liaison offices in India. Foreign companies can set up a liaison office in India to act as a channel of communication between their home office abroad and their operations in India, with the aim of promoting and exploring opportunities for the parent company.

Sameer, why don't you tell us a little bit about the permitted activities for the LOs, the liaison offices, and then what they're not allowed to undertake?

Sameer: So a liaison office is actually more like an extension of existing companies with a foreign company outside India. So the liaison offices are being set up primarily to promote the trade or increase the collaboration between the parent or the group companies. So majorly if I talk about the permitted activities for liaison offices, they represent the parent company or the group companies in India. They talk and promote the export and import from India and do the technical collaboration. They act as a communication channel between the parent company and the Indian counterparts and do the collaboration.

So essentially they are more like just a representative office with no active business, no sales purchase, nothing at all. They will only be doing the activities which increases the visibility or increases the collaboration for the foreign company in India. And principally, those activities which are permitted that answers which activities are not permitted for liaison offices are liaison offices cannot take any business activity or they cannot do any business activity at all in India, including purchase and sale of goods or providing services. It will normally maybe only be incurring expenses, which will be entirely funded by the parent company through inward remittances. So that's all about the activities they can do.

Helena: Okay. Thank you for explaining that. There is also the option of branch offices in India. Foreign companies that are engaged in manufacturing or trading activities are allowed to set up branch offices in India with the specific approval of the Reserve Bank of India. Those BOs, the branch offices are permitted to represent the parent company and engage in the export and import of goods, and should be engaged in the same activity as the parent. And they cannot undertake any retail trading activities or manufacturing processes.

Sakshi, can you take us a little bit deeper into what is permitted for those branch offices?

Sakshi: Sure. So, Helena, as you said, they should primarily be engaged in the same activity as the parent company. So the branch offices, once they set up they can be engaged in export and import of goods. They can supply professional or consultancy services. They can carry on research work and promote any technical or financial collaboration. They can buy and sell in India, supply information technology, represent a foreign airline or a shipping company. So like whenever these branch offices they make profits in India, they can remit the profits outside by paying the requisite taxes in India and the profits are allowed to be repatriated. So they only thing that they need to be mindful about is that they are doing the permitted set of activities that are provided to them into other activities and applications.

Helena: All right. Thank you. So let's now talk about project offices in India. Foreign companies that are planning to execute specific projects in India can set up temporary project and site offices in India for this express purpose. The Reserve Bank of India has granted general permission to foreign entities to set up project offices in India, provided they have secured a contract from an Indian company to execute the project in India. And the project has to have secured the necessary regulatory clearances.

I've got a question for Sakshi. How difficult is it to set up a project office in India? And will this be denied by the Reserve Bank of India? Would that happen?

Sakshi: Well, to answer this, Helena, there is a separate eligibility norm that the government has prescribed, and like if they fall into that eligibility norm, they can just make an application and the application is processed. But I think the documentation is different to make that become a bit tedious process for the industry. But like once we have the documentation complete, the government is normally happy to grant you an approval to be able to do it. But like in certain cases, like the government is not satisfied with the bonafides or like we are doing an activity that falls like into the category like defense, telecom, that the government doesn't like cover in the permission , those situations, the application may be denied and the government may ask you to remove the application under their preview. Otherwise, usually, like we satisfy the requisite criteria the application is moves through.

Helena: All right. Very good. Thank you, Sakshi. So now, what do you need to know about doing business in India? And Sameer is going to walk us through four different categories — the investment strategy, finding the right local partner, the taxation, exchange control, corporate and labor laws, and then the nature of activities. Sameer.

Sameer: Sure and thank you, Helena. So when setting up in India, we need to keep in mind that what should be our strategy of investment. The investors need to decide what should be the mode of entry into India, whether they want to do the wholly-owned subsidiary model, whether they want to get into a joint venture, or whether they want to get into a franchise model. So for deciding that, they need to study the market, talk with customers, supply chain, distribution cycle, funding requirements, etc., etc.

So there are a lot of things attached to that because India is a huge consumer-centric economy, a lot of opportunity. But while deciding a strategy of investment, the investor should make an informed decision of understanding the overall market scenario, then the market plan, and how and where it is going.

So finding the right local partner, so if they decide to choose and go to a franchise model or a joint venture model with somebody locally, they need to find out the right local partner, which is extremely important. There may be, you know, before they decide, they can choose to work with one of the firms who can help them to find out the right local partner if they don't know already, because getting the right due diligence done or finding out who should be the partner with whom they can join hands becomes extremely imperative.

So another thing to take care is about the laws pertaining to taxation, laws pertaining to exchange control, corporate laws, and labor laws. So when setting up, it is important that the investor looks into the strategy as to how they want to structure the holding of the entity and how they want to structure the shareholding structure from that perspective. And along with that, look into the direct taxes, which includes income tax, withholding tax in applicability of double tax avoidance agreements transfer pricing, And they are planning to set up as a cost center or maybe in a similar model. And also the applicability of indirect taxes, like GST and import incentive tax link attached to that.

And on the exchange control, it's like most of the companies who set up in India, they need to understand that India is quite regulation based. We need to follow the regulations. One example is one of the major problems which companies come across when they need to exchange control is that they don't have funds in the Indian entity they introduce just under setup, and they start paying the bills directly from the parent company, in the U.S. or any other part of the world, which is not allowed under exchange control. And it becomes a major issue for the directors of the entity and eventually they become non-compliant and they have to go for a compounding, which is a long process.

Similarly, under corporate law, they need to decide on the structure of the entity, what kind of structure, whether it will be private limited company or a public limited company or a limited liability partnership. There are various options available. And eventually, if they're setting up an entity, their options are that they can also list securities of the entity as well.

And labor laws, having the manpower on the ground is very important because employment laws have to be kept in mind. The law favors the people on the ground. So they need to keep track about the number of employees, the nature of work, working hours, male to female split of employee, and the facilities to be provided, display of notices. All these things have to be kept in mind at the time of setup as well.

And the last thing to decide is the nature of activities. There are a lot of activities that are covered under sector specific laws and requires special licenses like non-banking, financial sector, insurance, where sector specific rules are required.

So while deciding to set up in India, all these things becomes a major part for them to understand and take an informed decision before they can plan to set up.

Helena: Now that we've learned about why to invest in India and we've learned about the different types of foreign investments in India and what are some of the details that you need to know, let's now talk about how CSC can help you.

So let's now talk about how CSC can help you in India. Sameer, why don't you take us a little bit through this?

Sameer: You can rely on CSC from an end-to-end perspective and a one-stop shop, helping from the formation of entity to entity management. So when you think of setting up in India, we can help you to take the decision what kind of entity you want to set up, which will then be followed by entity formation, domiciliation, directorship, shareholder, and then doing the maintenance of an entity from an accounting, tax filing, payroll perspective. We have a full suite of services in which we can also provide you the payroll and HR support in hiring employees and doing the documents, along with many other services, that includes tax, asset assuring, fund administration, and risk advisory services. So do look at us as an end-to-end provider for the services you need in India.

Helena: So we've heard about what we can offer you in India. Let's talk about CSC solutions globally. So we are the business behind business. As you can see from our solutions listed here, we're the partner of choice for global companies needing expertise in business administration and compliance, fund solutions, transactions and lending, capital markets, and domain security and brand protection. Whatever your company needs to stay in compliance, transact business, and become secure against threats of the online world, CSC can help.