In this background it becomes imperative to look at the regulatory regime and the process of liberalization in India, which started in the year 1991, and assist foreign companies to quickly decide upon their entry options in India.

I. Prior to 1991 foreign companies were allowed to have ownership in limited to 40% in any Indian industry and approvals were given on case-by-case basis. Under NIP 1991 for the first time foreign investment/ ownership upto 51% was permitted in 34 select industries, along with permission to pay a lumpsum fees of USD 2 million and running royalty of 5% on domestic sales and 8% on exports without any prior approval. The investment and the payment of technology license fees, allowed under what is commonly known as an "automatic route", which means without any prior permission from the Government under the Exchange
Control Regulations. The only requirement was a post facto reporting to the Reserve Bank of India (which is the central bank a monitoring authority in respect of foreign exchange) within 30 days of receipt of inward remittances and file the required documents. The limits on foreign ownership have been gradually expanded and currently foreign investment upto 100% is allowed in most of the sectors, except few specified. For the specific limits please see the Table A .

For industries where foreign investment is allowed upto 100%, please see Table B1. Sectors which are not covered and/or mentioned Press Note 4 of 2006 are allowed to own equity ownership upto 100%. FDI policy is reviewed on continued basis and changes in sectoral policy/ equity cap are notified through Press Notes by the Government from time to time. FDI in activities not covered under the automatic route requires prior approval from the Government. Table C gives the brief overview of fees that can be paid for technical collaborations and use of trademarks .

A proposal in which the foreign collaborator has an existing financial/ technical collaboration in India in the same field requires the prior approval from the existing partner and also from the Government of India .

Investment in existing operating Indian company has to conform to the pricing guidelines issued by the Reserve Bank of India, namely in case of a listed Indian company the price should be in accordance with the Guidelines prescribed by the Securities and Exchange Board of India and in case of unlisted shares at fair valuation of shares done by a chartered accountant. No further permission is required by the non-residents to acquire shares under rights/ bonus after the initial acquisition. The dividend earned from these shares is freely repatriable out of India.

Non-resident shareholder can now freely transfer shares to any non-resident or resident without any prior approval, subject to prescribed pricing guidelines issued by the Reserve Bank of India.

Please see Press Note No. 1 (2005 Series) issued by the Govt. of India (web site www.dipp.nic.in).

The non-resident investor can subscribe to equity shares as well as preference shares (having preference for payment of dividend over equity shares). The maximum dividend that can be paid to any preference share holder is 300 basis point above the prime lending rate of State Bank of India. It is also possible for non-residents to acquire shares against lump-sum fee and royalty payable for technology collaborations and external commercial borrowings in convertible foreign currency, subject to meeting all applicable tax liabilities and sector specific cap on equity as mentioned in Table A above.

Foreign investment in India is mostly done in the form of a limited liability company under the Indian Companies Act, 1956. It is possible for non-residents to appoint the entire board members without any requirement for holding any qualification shares. The board meetings are normally held in India, but there is nothing in the Companies Act which prohibit holding of board meetings outside India. It is mandatory to have atleast 4 board meetings in a year and one annual general shareholders meeting.

II. It is also possible for any foreign company to open; (a) a Liaison/Representative Office; (b) Branch Office, (c) a Project Office. Opening of any liaison/representative office, branch office, project office or a wholly owned subsidiary is regulated by the Foreign Exchange Management Act, 1999 ("FEMA").

The Foreign Company can apply for and obtain license to open a liaison/ representative office to carry on only liaison activities. Such liaison office can act as a channel of communication between its head Office abroad and parties in India. It will not be allowed to undertake any business activity in India and will not be permitted to earn any income in India. Most importantly, all expenses of such offices will have to be met by the Foreign Company entirely through inward remittances of foreign exchange from the head office abroad.

Liaision/ Representative Office.

A liaison/representative office, is not permitted to carry on business in India. Its activities are restricted to representing the parent company/group companies, promoting export from/to India, promoting technical/financial collaborations between parent/group companies and companies in India, gathering information for the parent company and acting as a communication channel between the parent company and Indian companies. The advantage of a liaison office vis-à-vis a branch office is that, unlike a branch office, a liaison office, by virtue of the not being allowed to undertake any business activity in India and consequently not earning any income in India, generally does not constitute a permanent establishment for tax purposes and hence it is not subject to the laws related to Income Tax in India. However, if the liaison/representative office in India performs any significant part of the main activities of the parent Company, then the liaison/representative office of the parent Company in India could be deemed to be a permanent establishment in India and would be subject to tax in India.

The role of such liaison offices is, therefore, limited. Permission to set up such offices is initially granted for a period of 3 years, which is normally extended from time to time by the RBI.

Branch Office

Companies engaged in manufacturing and trading activities abroad are permitted to set up branch offices in India, subject to the prior permission from the RBI, for the following purposes:

i) Export/Import of goods.
ii) Rendering professional or consultancy services.
iii) Carrying out research work, in which the parent company is engaged.
iv) Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
v) Representing the parent company in India and acting as buying/selling agent in India.
vi) Rendering services in Information Technology and development of software in India.
vii) Rendering technical support to the products supplied by parent/group companies.
viii) Foreign airline/shipping company.

Application containing complete information about the Foreign Company, and the proposal for India, including the track record of the Foreign Company, existing trade relations, if any, with India and its current financial position will be required to be submitted to RBI, while seeking permission to set up branch office in India.

A branch office may carry on business activity in India, and after meeting its local expenses is allowed to repatriate profits, subject to payment of taxes in India. The rate of income tax on a branch of a foreign company in India is 41% (approx.). You may want to know that a branch would ordinarily constitute a permanent establishment, however, in cases where its activities are confined to those of a preparatory and auxiliary nature thereby no profit being attributable to the branch, there would be no tax implications.

Project Office

Foreign companies planning to execute specific projects in India can set up project/site offices in India. Specific approval from the RBI is required for setting up a project office. Such approval is generally accorded in respect of projects approved by appropriate authorities or where the projects are financed by Indian bank/Financial Institution or a multilateral/ bilateral international financial institution.