Article posted by Adam Pollard, for UK India Business Council
17 May 2012

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“CDE sought to take part in India’s growth story. The opportunity to establish our India office presented itself following successful initial sales that encouraged us to further investigate the market… Good sales and a successful partnership were the primary reasons for us to establish a company in India.”
Manish Bhartia, Managing Director, CDE Asia

Choosing the best entry strategy into India requires careful consideration of the needs, capacities and format of each particular business. Whether you choose to set up a subsidiary, a liaison office or a joint venture, there are several options available, each with different implications and advantages1. The following flowchart outlines the legal business structures you can set up in India, operating as either a UK company in the country or registered as an Indian company2.

Legal Business Structures in India

Description Advantages Disadvantages Other Comments
Contractual arrangement • Simplest method of establishing a clear relationship between a UK company (UKCo) and an Indian partner (e.g. UKCo appoints Indian partner as a distributor in India). • No separate legal entity so
setting up does not involve
procedural formalities,
which can be lengthy
for separate entities
such as a company.
• Compared to other
structures, requires less
ongoing administration
such as statutory filings.
• Set-up costs will be the
costs for negotiating and
concluding contract.
• Privacy of arrangements.
• UKCo may be exposed
to unlimited claims and
liabilities in India due
to its own actions and
those of Indian partner.
• Taxation is simpler
but there are no tax
advantages to be gained
from corporate structuring.
• Need to ensure no
partnership formed.
• Contractual documents
need to be carefully
drafted to minimise
risks of UKCo
having a permanent
establishment in India.
Sole proprietorship concern / Partnership • Though a contractual
relationship, substantively
different from contractual
relationships described
above. Governed by
Partnership Act 1932.
• Control and privacy for
business partners.
• Simple to set up and no
formal administrative
burdens.
• Potential to gain from
business presence
of Indian partner.
• Practical difficulties
for FDI, sectoral and
banking restrictions
for non-Indians.
• No separate entity and
unlimited joint and several
liability between partners.
• Many businesses/
individuals may already
be doing business
this way without
formal recognition.
Branch office • An extension of UK set
up in India, which can
undertake some but not
all of the same activities
as UKCo. The scope of
its permitted activities
will be determined by
the permission that is
granted by the Reserve
Bank of India (RBI).
• Can perform some
revenue generating
activities in India, unlike a
liaison office (see below).
• It is a separate legal entity
for certain purposes.
• UKCo may be exposed
to unlimited claims and
liabilities in India owing to
branch office operations.
• Restrictions on range
of activities, which are
subject to RBI approvals.
• Formalities and legal
set-up costs are involved.
• Several airline and
shipping companies
have established Indian
branch offices.
• Tax structuring possible
as branch office is
taxed separately in
India. The rate of tax
is higher than the rates
applicable to companies.
Liaison office • Set up primarily to give an
India face to UKCo and
for marketing purposes.
• Fewer ongoing
formalities although
there are set-up costs.
• No separate legal
entity but does provide
a formal presence
for UKCo in India.
• Cannot trade or generate
revenue in India.
• UKCo may be
exposed to claims and
liabilities in India.
• Must be funded
by UKCo only.

 

Description Advantages Disadvantages Other Comments
Joint venture (JV) company • UKCo and an Indian
partner incorporate
Indian company (JVCo)
through which they
carry on business.
• Separate legal entity and
limited liability for UKCo.
• UKCo benefits from Indian
partner’s presence.
• JVCo may raise further
finance through new share
issues or from lenders
and pledge security
using JVCo’s assets.
• Set up can be time
consuming and
involves costs and
ongoing formalities.
• Negotiations with a JV
partner and carrying
out due diligence can
be time-consuming.
• Publicity requirements in
relation to accounts and
shareholdings as with any
other limited company.
• Various UK companies
enter India through JVs.
• FDI is restricted in certain
sectors (e.g. banking,
insurance) and an Indian
shareholder required.
• Tax structuring possible.
Subsidiary • UKCo incorporates an
Indian subsidiary (IndCo)
to carry on business.
• Unlike a JV company,
UKCo controls the
strategic direction
of IndCo.
• UKCo’s liability in
India will be limited to
amounts unpaid on
its shares in IndCo.
• IndCo may raise further
finance through new share
issues or from lenders
and pledge security
using IndCo’s assets.
• Setting up IndCo may
delay the exploitation
of immediate business
opportunities.
• Ongoing administration
can be high.
• Publicity and formalities
as with other limited
companies.
• 100% FDI permitted
in certain sectors, e.g.
manufacturing and
wholesale trading.
Share acquisition of Indian company directly or indirectly • UKCo acquires a
controlling stake in an
Indian company (Target).
• UKCo acquires all of
Target’s assets including
any goodwill, reputation
and licences.
• Corporate structuring
and tax efficiencies
may be possible.
• UKCo is responsible for
any existing obligations
and liabilities of Target.
• Change of control
provisions, e.g. in Target’s
finance documents, may
restrict an acquisition.
• Pre-acquisition due
diligence required on Target.
• Tax issues important.
• Used particularly where
there is existing consent,
client base or asset, which
would be expensive or
difficult to transfer.

 

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1 For information on Indian government incentives and SEZs, refer to this guide on Managing relations with authorities.

2 Engaging the services of legal firms or advisors can assist you in the process of setting up a legal entity.


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Article posted by Adam Pollard, for UK India Business Council
17 May 2012

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to contact this user