Foreign Company

A foreign corporation is a term used in the United States for an existing corporation that is registered to do business in a state or other jurisdiction other than where it was originally incorporated. A foreign corporation is one incorporated as a domestic corporation in one state of the United States, authorized to do business in additional state(s); the term is also applied to a corporation incorporated outside the United States which is authorized to do business in one or more states of the United States.

Source: Wikipedia

A foreign company can commence operations in India in one of the many different legal forms as discussed below:

1. Wholly Owned Subsidiary Company (WOS)

Foreign companies can set up wholly-owned subsidiary in sectors where 100% foreign direct investment is permitted under the FDI policy. A WOS can be formed either as a private or public company, limited by shares or guarantee, or an unlimited liability company.

2. Liaison Office/ Representative Office

Foreign companies are allowed to establish Liaison Office in India after obtaining prior approval from the Reserve Bank of India (RBI), the apex bank India. The RBI grants approval, for one to three years which can be renewed upon expiry. It is a communication bridge between the foreign company and its customers or potential customers in India which can establish business contacts or gather market intelligence to promote the products or services of the parent company but cannot engage in revenue generating activities.

The Liaison Office is permitted to undertake following activities only:

• Representing the parent Company in India
• Promoting export/ import from/ to India
• Promoting technical / financial collaborations between the parent companies and companies in India
• Acting as a communication channel between the parent company and Indian companies

Further a Liaison Office is not permitted to undertake any commercial / trading / industrial activity, directly or indirectly, and is also required to meet its expenses out of inward remittances received from parent company. As a no-income earning entity it is not liable for any tax to be paid to the government of India however the office must file regular returns to the RBI which must include Audited Annual accounts and an activity report for the year.

3. Branch Office

The provisions regarding setting up Branch Office in India are governed by Foreign Exchange Management Regulations, 2000. Foreign companies are allowed to setup branch office in India after obtaining the requisite approval from the Reserve Bank of India (RBI) for which the permission is initially granted for a period of 3 years which may be extended from time to time by the Authorized Dealer in whose jurisdiction the office is set up. The branch office cannot expand its activities or undertake any new trading, commercial or industrial activity other than those approved by RBI.

4. Project Office

A foreign corporation, which has secured a contract from an Indian company to execute a project in India, is allowed to establish a Project Office in India, without obtaining prior permission from RBI. RBI has now granted general permission to foreign entities to establish Project Offices subject to conditions specified below:

• The project is funded directly by inward remittance from abroad; or
• The project is funded by bilateral or multilateral International Financing Agency; or
• The project has been cleared by an appropriate authority; or
• A company or entity in India awarding the contract has been granted Term Loan by a Public Financial Institution or a bank in India for the project

5. Joint Venture Company

In India, no legal definition as such has been given to Joint Venture Company (JVC). JVCs in India typically comprise two or more individuals/companies, one of whom may be non-resident; who come together to form an Indian private/public limited company, holding agreed portions of its share capital. There are no separate laws for incorporation of Joint Venture Company in India and it is incorporated as a private limited company or a public limited company under the Indian Companies Act, 1956.

A Joint Venture Agreement, known as shareholders Agreement prescribes the number of directors on the board, the quorum for board meetings and general meetings, the day to day management of the company, procedure to be followed on the death or bankruptcy of a joint venture partner, etc. Shareholders Agreements and the Articles Of Association (bylaws) of the joint venture company form the basis of the Joint Venture. Usually, JVC partners cannot enter into activities competing with the JVC. Shareholders agreements contain specific provisions in this regard. Non- competition clause can be included in the agreement.

Generally Indian JVCs have a 51%- 49% equity ratio between the foreign and Indian partners, respectively. A majority of share gives voting privilege hence foreign investors by virtue of their investment potential seek an upper hand and secure a majority stake in equity. There are no restrictions on repatriation of earnings from the JVC.

The typical arrangement in a JVC is as below

• Two or more parties subscribe to the shares of the JV Company in agreed proportion, in cash, and start a new business
• Two parties, (individuals or companies), incorporate a company in India. Business of one party is transferred to the company and as consideration for such transfer; shares are issued by the company and subscribed by that party. The other party subscribes for the shares in cash
• Promoter shareholder of an existing Indian company and a third party, who/which may be individual/company, one of them non-resident or both residents, collaborate to jointly carry on the business of that company and its shares are taken by the said third party through payment in cash

A foreign company can invest in an Indian company through a joint venture agreement in the sectors which are open for foreign investments. Some areas are exclusively reserved for public sector and some are excluded for foreign participation such as real estate, agriculture, plantation etc.

Some of the examples of Joint Venture Business is elucidated below:

Insurance Sector

• Bajaj Allianz
• Bharti AXA
• ICICI Prudential

Retail Sector

• Bharti Walmart

Read on GWI Government Insurance Companies in India.