A foreign company considering India for setting up there business operation has two options;
It can commence business operations in India by incorporating a company under the Companies Act, 2013
It can conduct business operations in India without being incorporated, through different offices, branches or outsourcing.
For better understanding please refer to the diagram below:-
Companies in India are regulated under provisions of the Companies Act. To get a company registered and incorporated, a set of applications have to be filed with the Registrar of Companies (ROC). Once that is done, the company is subject to Indian laws and regulations.
A foreign investor can set up his business in India in partnership with an Indian citizen who is already established in this country. Doing so will be advantageous to the foreign investor in many ways. The investor will get an already set up distribution/market of the Indian partner. The investor will gain access to finances and contracts of his partner.
Foreign companies can also wholly own a subsidiary wherein 100% foreign direct investment is permitted under FDI policy.
Before moving forward it's important to quickly run through a few definitions:-
It is also known as a Representative office and can only undertake liaison activities, i.e it can act as a channel of communication between head office abroad and parties in India. It is not allowed to undertake any business activity in India and cannot earn any income in India. Expenses of such offices are to be met entirely through inward remittances of foreign exchange from the head office outside India. Therefore the role is limited to collecting information about possible market opportunities and providing information about the company and its products to the prospective Indian customers.
Branch offices of the companies which are incorporated outside India and are engaged in manufacturing or trading activities are allowed to set up offices in India with specific approval of the Reserve Bank.
A branch office is not allowed to carry out manufacturing activities on its own directly or indirectly. It should be engaged in the parent company's activities. Retail trading activities of any nature are not allowed for a branch office in India. Profits earned by the branch offices are freely remittable from India, subject to payment of applicable taxes. In order to open a Liaison or branch office in India, the corporate body will have to obtain permission from Reserve Bank under the provisions of Foreign Exchange Management Act (FEMA) 1999.
Under this route the principal business of the foreign entity falls under sectors where 100% Foreign Direct Investment is permissible under the Automatic route.
Here the principal business of the foreign entity falls under the sectors where 100% FDI is not permissible under the Automatic route. Applications under this category are considered by Reserve Bank, in consultation with Ministry of Finance, Government of India. Foreign Investment Promotion Board considers and remits FDI which does not come under the Automatic Rule. It provides single window clearance for proposals on FDI
A general permission has been granted by the Reserve Bank to foreign companies to establish temporary project offices in India, provided they have secured a contract from an Indian company to execute a project in India.