Getting started – entering the Indian market
“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.
| 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.
Countries: India
Topics: Export Planning
Topics: Export Planning