Entry Options in India

The Indian market opened up for foreign investors with the liberalization of the Indian economy in 1991. The industrial sector was among the first sectors to be liberalized leading to the wiping out of industrial licensing regime except in relation to a small number of sectors of strategic importance. Since then, India has steadily made it easier for foreign companies to invest and operate here. Today, foreign investment is allowed in most sectors with minimal restrictions, making India an attractive destination for global businesses. However, India continues to restrict foreign investment in certain sensitive sectors where national interest, public policy, or security concerns are involved.

There are various options available to a foreign enterprise for setting up business operations in India, a brief list of which is set out below:

Liaison Office

These are owned and controlled by the foreign enterprise. Liaison offices are not allowed to earn any income and are primarily opened by foreign companies to liaise with their customers in India and for promoting export and import. No manufacturing, trading or other commercial activity is allowed for a liaison office. All its expenses are paid using money sent from outside India (inward remittances) through normal banking channels. A liaison office in India is permitted to undertake the following activities:

• Representing the parent company/group companies in India;
• Promoting exports/imports from/to India;
• Promoting technical/financial collaborations between parent/group companies and companies in India;
• Acting as a communication channel between the parent company and Indian companies; and
• Any other activity with the specific permission of the Reserve Bank of India (‘RBI’).[1]

The opening and operation of such offices is regulated by the Foreign Exchange Management Act, 1999 read with rules and regulations made thereunder, as amended from time to time (‘FEMA’). Opening a liaison office in India requires an approval from the RBI. The permission for setting up liaison office is initially granted for 3 (three) years extendible for a maximum term of another 3 (three) years through approval (except in the case of Non-Banking Finance Companies (NBFCs) and those entities engaged in construction and development sectors, for whom the validity period is 2 (two) years only). The following criteria are considered by the RBI while approving such applications:

• Principal Business Activity i.e., where the principal business activity of the foreign entity does not fall under the sectors where 100% (one hundred percent) foreign direct investment (‘FDI’) is allowed, the application is considered by RBI in consultation with the (Indian) Ministry of Finance;
• Track Record i.e., a profit making track record of the foreign entity during the immediately preceding 3 (three) financial years in the home country; and
• Net Worth i.e., total of paid-up capital and free reserves, less intangible assets as per the latest audited balance sheet or account statement of the foreign entity, certified by a Certified Public Accountant or any Registered Accounts Practitioner, being not less than USD 50,000 or its equivalent.

Exemption: If the applicant is a subsidiary and does not meet the required financial criteria on its own, it may submit a Letter of Comfort[2] from its parent or group company. Through this letter, the parent or group company agrees to financially support the liaison office and take responsibility for its liabilities in case of any default. The parent or group company must also independently meet the abovementioned net worth and profitability requirements.

Operations of liaison offices in India are subject to the following conditions:

• Such offices should not undertake any trading or commercial activities and their activities should be limited to collecting and transmitting information between the overseas head office and potential Indian customers;
• Such offices should not charge any commission or receive any income from Indian customers for providing liaison services; and
• Liaison offices are also required to file regular annual returns and reports with the RBI in prescribed formats.

Though a liaison office is not taxed in India as it does not earn income in India, a liaison office is required to obtain Permanent Account Number (‘PAN’) from Income Tax Authorities on setting up office in India.

The major disadvantage of this option is that opening a liaison office is a time-consuming process as a prior approval of the RBI is required. Furthermore, closing of a liaison office after the expiry of the permission period is also a cumbersome and time consuming process.

Branch Office

A branch office is basically an extended arm of the foreign company. As per section 2(14) of the Companies Act, 2013 (‘CA 2013’), a branch office, in relation to a company, means any establishment described as such by the company. These branches are treated as permanent establishments of a foreign company in India and are subject to higher Income Tax. The foreign parent company is liable for all activities of the Indian branch.

The opening and operation of such offices is also regulated by FEMA and the setting up of a branch office in India requires prior approval from the RBI. The following criteria are considered by RBI while approving such applications:

• Principal Business Activity i.e., where the principal business activity of the foreign entity does not fall under the sectors where 100% (one hundred percent) FDI is allowed, the application is considered by RBI in consultation with the (Indian) Ministry of Finance;
• Track Record i.e., a profit making track record of the foreign entity during the immediately preceding 5 (five) financial years in the home country; and
• Net Worth i.e., total of paid-up capital and free reserves, less intangible assets as per the latest audited balance sheet or account statement of the foreign entity, certified by a Certified Public Accountant or any Registered Accounts Practitioner, being not less than USD 100,000 or its equivalent.

However, approval from the RBI is not required if a company intends to establish a branch/unit in SEZs to undertake manufacturing and service activities provided that: (i) such units are functioning in those sectors where 100% (one hundred) FDI is permitted; and (ii) such branch offices function on a stand-alone basis. Further, foreign banks do not require a separate approval from RBI under FEMA for setting up a branch office where an approval is already granted under the (Indian) Banking Regulation Act, 1949.

Exemption: If the applicant is a subsidiary and does not meet the required financial criteria on its own, it may submit a Letter of Comfort[3] from its parent or group company. Through this letter, the parent or group company agrees to financially support the branch office and take responsibility for its liabilities in case of any default. The parent or group company must also independently meet the abovementioned net worth and profitability requirements.

Branch offices can undertake following activities in India:

• Export/Import of goods;
• Rendering professional or consultancy services;
• Carrying out research work in areas in which the parent company is engaged;
• Promoting technical or financial collaborations between Indian companies and parent or overseas group companies;
• Representing the parent company in India and acting as a buying/selling agent in India;
• Rendering services in information technology and development of software in India;
• Rendering technical support to the products supplied by parent/group companies;
• Foreign airlines/shipping company; and
• Any other activity with the specific permission of the RBI.

Normally, the branch office should be engaged in the activity in which the parent company is engaged. Retail trading activities of any nature, manufacturing or processing activities are not allowed for a branch office in India, directly or indirectly. Profits earned by the branch offices are freely remittable from India subject to payment of applicable taxes.

The maintenance cost of a branch office is slightly higher than a liaison office. This is mainly because a branch office is taxed in India. In addition, there are certain regular annual filings to be made by the branch office to the Registrar of Companies and the RBI.

The major disadvantage of this option is that opening of a branch office is a time consuming process as prior approval of the RBI is required. Furthermore, closing of a branch office is also a cumbersome and time-consuming process.

Project Office

Project Office as defined under the Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016 means a place of business in India to represent the interests of the foreign company executing a project in India but excludes a liaison office. Foreign companies can set up temporary project/site offices in India to execute specific projects in India secured under a contract from an Indian company agreeing to make payments in foreign currency. An approval from the RBI will be required only if none of the following conditions are met:

• The project is funded by inward remittances from abroad; or
• The project is funded by a bilateral international finance agency; or
• The project has been cleared by the concerned government department; or
• A company or entity in India awarding the contract has been granted a term loan by a public financial institution or a bank for the project.

An approval from RBI is also required for setting up of project offices by NGOs, foreign government bodies/departments in India. Surplus on winding up/completion of projects can be remitted outside India through authorised dealers under the general permission of the RBI. Further, in the case of proposal for opening a project office relating to defence sector, no separate reference or approval of Government of India shall be required if the said non-resident applicant has been awarded a contract by/ entered into an agreement with Ministry of Defence or Service Headquarters or Defence Public Sector Undertakings. The validity period of the project office is for the tenure of the project.

Note: Every foreign entity having a place of business in India whether as a liaison office, branch office or project office is required to be registered under Section 380 of the CA 2013 with the Registrar of Companies and are required to comply with the provisions of Chapter 22 of CA 2013 (i.e. provisions relating to companies incorporated outside India and having a place of business in India).

Wholly Owned Subsidiaries

There are certain sectors where 100% (one hundred percent) FDI is permissible without seeking approval from the RBI. In such cases, the foreign investor can set up its wholly owned subsidiary in India. Investors prefer such a set up as they are able to exercise maximum control over its functioning and obtain maximum gain. A wholly owned subsidiary can be incorporated either as a public or a private company under the CA 2013.

1. Formation of a public limited company is suitable in case the proposed business requires:

• Large capital outlay;
• Raising of equity or debt finance from public;
• Wider distribution of shares and larger number of shareholders; and/or
• Enlistment of the securities of the company on stock exchange(s).

2. Formation of private limited company is more suitable when the following is required:

• Small businesses with lower capital outlay;
• Family business;
• In case the promoter is desirous of retaining shareholding control;
• No intention of raising funds from public;
• Minimum number of shareholders; and/or
• Regulation of admission of new members.

Maintenance cost of this form of entity is high as minimum 2 (two) directors are to be appointed on the board of the company of which at least one should be an Indian resident. A statutory auditor is mandatorily required to be appointed for the company. There are various compliances under CA 2013 and FEMA on an annual basis and quarterly basis. Further, a company in India is a tax resident and thus required to pay taxes in India at the rates applicable to resident companies. The company is mandatorily required to obtain PAN, TAN and various other registrations in India based on the scope of activities to be carried out.

Joint Ventures

In sectors where 100% (one hundred percent) FDI is not permitted or the foreign company is not desirous of setting up a wholly owned subsidiary in India, a foreign investor may enter the Indian market through joint ventures.

A joint venture denotes a contractual arrangement between two or more parties for the purpose of achieving a particular commercial objective. The purpose of a joint venture is not only to reduce risks but also to minimize the costs involved. A joint venture can be of two types, i.e. incorporated and unincorporated joint ventures.

In case of an incorporated joint venture the parties may either set up a new corporate entity for the purpose of investing or invest in an existing corporate entity.  An unincorporated joint venture, on the other hand, is a contractual joint venture that is supported by a legally binding agreement but does not involve creation of a separate legal entity such as a technical collaboration.

Incorporated joint ventures generally provide stronger legal protection, clearer governance mechanisms, and greater operational independence since the venture exists as a separate legal entity distinct from its partners. This structure allows for better allocation of risks, defined management control, and long term scalability.

In contrast, unincorporated joint ventures offer greater contractual flexibility, lower compliance requirements, and relatively easier exit options, making them suitable for short term or project based collaborations. However, such structures may expose parties to higher legal and commercial risks due to the absence of a separate legal personality.

Accordingly, selecting the appropriate joint venture structure is a critical step in India. The choice must carefully balance regulatory compliance, risk allocation, control, tax implications, and exit considerations, while ensuring that the structure aligns with the commercial intent and long term business objectives of the parties involved.

In India, incorporated joint ventures are most common. Forming a joint venture encompasses a number of stages and a number of factors, mentioned below are some of the essential steps to be taken into account by a foreign party to a joint venture in India:

• Choosing an appropriate local partner: A local partner can play a significant role in overcoming various legal complexities. The success of a joint venture project depends largely on choosing the right partner, in addition to having a well-defined agreement. An extensive due diligence must be conducted to evaluate the feasibility of the joint venture project with the prospective Indian associate. If the foreign investment is in an existing company, detailed corporate due diligence should be done to ascertain existing liabilities;
• Identify a location: Choice of location depends on the type of business activity to be undertaken, availability of infrastructural services and financial incentives such as preferential tax treatment and so on;
• Confidentiality/ non-disclosure agreements: Prior to commencing negotiation, confidentiality / non-disclosure agreements may be entered into between the parties for the protection of strategic business information. Such agreements are enforceable in India;
• Execution of a memorandum of understanding/term sheet: This document lays down the basic parameters of the project/business activities to be undertaken by the Indian joint venture company and contains the intention of the parties to enter into the joint venture, but is not generally legally binding; and
• Execution and implementation of a joint venture agreement: The joint venture agreement/ shareholders agreement along with the articles of association constitute the bye-laws of the joint venture company. This document defines the mutual rights of the parties and also prescribes guidelines for the efficient functioning of the company.

Conclusion

India offers a wide range of entry options for foreign companies, each catering to different commercial objectives, regulatory comfort levels, and long-term business strategies. From limited presence models such as liaison, branch, and project offices to more permanent structures like wholly owned subsidiaries and joint ventures, the choice of entry route has significant legal, tax, and operational implications.

While liaison and project offices are suitable for preliminary market presence or execution of specific contracts, they are restrictive in nature and involve regulatory approvals and limited scope of activities. Branch offices allow a wider range of operations but expose the foreign parent to higher tax and liability risks. In contrast, incorporation of an Indian subsidiary or joint venture offers greater operational flexibility, scalability, and legal certainty, though at the cost of higher compliance and ongoing regulatory obligations.

Accordingly, foreign investors must carefully evaluate the nature of their proposed activities, sector specific foreign investment limits, desired level of control, tax exposure, compliance burden, and exit considerations before selecting an entry structure. A well-planned entry strategy, aligned with India’s foreign exchange and corporate laws, not only ensures regulatory compliance but also enables foreign businesses to operate efficiently and achieve their long term commercial objectives in the Indian market.

[1] Master Direction – Establishment of BO / LO / PO in India by foreign entities, 2016, Annex C

[2] Master Direction – Establishment of BO / LO / PO in India by foreign entities, 2016, Annex A

[3] Master Direction – Establishment of BO / LO / PO in India by foreign entities, 2016, Annex A