Can foreigners set up a company in India?

Market entry strategies

Market entry strategies and investment law

Since the 1990s, the Indian market has gradually opened up to foreign investors. In particular, membership of the World Trade Organization (WTO) has resulted in many import restrictions being abolished. In addition, India has ratified various regional trade agreements. Negotiations on a free trade agreement between India and the EU have been going on for years.

Those who want to gain a foothold in the Indian market are welcome numerous opportunities to enter the market and market cultivation. Companies can, among other things, export, issue licenses, set up franchising systems, enter into joint ventures, acquire company shares or establish their own subsidiaries. The following is a brief description of the most common forms of market entry and market cultivation:

1. Approval process

Regardless of the type of market entry, it must first be checked whether the planned foreign direct investment (FDI) in India is even permissible. This is determined in particular after Foreign Exchange Management Act, 1999 (FEMA) in conjunction with the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000 (Notification No. FEMA 20/2000-RB of May 3, 2000) (FEMR). Depending on the type and scope of the direct investment, different approval procedures have to be passed through with different authorities. While in many industrial sectors holdings in the amount of 100% approval-free (Automatic Route) is one in other economic sectors formal individual approval (Approval Route) to apply. Individual approval may also be required if shares are transferred to a foreigner. This is particularly the case if the foreign investor acquires ownership or control of or over Indian companies through the transfer of the shares and the business area is in an industrial sector that provides for a cap. Meanwhile, however, the market in India largely liberalizedso that there are only very few sectors (so-called prohibited category) in which foreign investment is prohibited.

2. Direct and indirect export

The first step in entering the Indian market is often export. Because about the export of goods can be a low risk market test. If the market proves to be promising, long-term partnerships can be concluded with sales partners or branches can be founded. The market entry and market cultivation strategy of indirect export is understood to mean the sale of one's own assets and services abroad with the involvement of an intermediary in Germany. There is therefore only an indirect business relationship between the domestic exporter and the foreign business partner via the trade intermediary (export company). The exporter does not go abroad himself, but only through the commissioned domestic foreign trade company.

  • lower investment and organizational requirements (no export department necessary)
  • Due to their specialization, export houses have the necessary proximity to the market and customers
  • Exchange rate risks are usually borne by the export company
  • not all products / services are suitable for indirect export
  • high margin between purchase and sales price (trade profits), which remains with the foreign trade company
  • no relation to the market or customers
  • no influence on sales development
  • own image building impossible

At the direct export there is a direct business relationship between the domestic exporter and his trading partner abroad. End users as well as trading companies and commercial agents can be considered as trading partners abroad.

  • lower investment and organizational requirements
  • Control options over market cultivation strategies
  • Immediate market observation
  • Less reduction in profit potential
  • Acquisition of country market know-how
  • flexibility
  • not all products / services are suitable for indirect export
  • Exchange rate risks
  • Increase in capital commitment period and credit risk
  • Costs for own export department
  • Risk of wrongly assessing sales opportunities
  • foreign-specific risks

An importer must submit the following documents, among others:
- Invoice with all customary information
- insurance policy
- Certificate of origin
- Packing list (including brand, number, type, weight and content)
- Bill of Lading /
- Delivery note ("Delivery Order")
- Declaration of the value of the goods
- Declaration on the correctness of the information provided
- import license (if required)

The export of goods to India finds its legal basis in Foreign Trade (Development and Regulation) Act, 1992, in the Customs Act, 1962 and in the Foreign Trade Policy as Export Import Policy and Procedures. Although India's entry into the World Trade Organization (WTO) resulted in many import restrictions being abolished, foreign exporters still have to numerous customs regulations take into account and in part high import duties Afford. This is responsible for the determination and collection of import duties Central Board of Excise and Customes with the local Customs Authorities.

For the contracts between the importer and the exporter are the Contract Act and the Sale of Goods Act as well as the (international) transport regulations to be observed. Due to the long duration of legal proceedings usually the party has the disadvantage that in Advance payment is possible and thus if necessary sue for the counter-performance of the contractual partner. To minimize this risk, the Securing the payment of the purchase price or the delivery of goods plays a not insignificant role in German-Indian trade, which is why documentary letters of credit, export credit insurance and guarantees are customary and recommended in practice. If you would like to find out more about Indian contract law, click on our "Contract Law" section. If you would like to know more about claiming outstanding debts, click on "Claim enforcement" or "Litigation and dispute settlement".

Even with the pure export of the Protection of intellectual property rights not to be neglected. At least the German trademarks should be protected in India, as otherwise the Indian importer can possibly acquire a right to the foreign trademarks solely through the distribution in India (see "Trademark and Design Law")

3. License Agreement

With the license agreement, a contractually secured right of use is assigned Patents, utility models, know-how, trademarks, designs or copyrights granted. The licensor can grant the licensee the permission to use in full or in part (subject, spatially or temporally limited) as well as simply or exclusively. In return for the license, a flat-rate basic fee and an additional license fee based on sales are usually agreed. With this form of market entry, the choice is one reliable Indian licensee as well as the licensing protection of vital importance. Otherwise the foreign investor runs the risk of losing his industrial property rights to the Indian licensee. In the worst case, the Indian market "forever" lost be. Once a secure legal legal basis has been found with the Indian licensee, license agreements are an interesting form of market entry. This is because they enable foreign investors to tap into the Indian market with limited resources while avoiding investment costs at the same time. For example, by granting brand licenses, a whole Franchise or (exclusive) distribution system in India being constructed. The small impact on sales and the difficult quality control can of course prove to be a disadvantage compared to other forms of market entry.

  • lower investment and organizational requirements
  • Opening up markets with limited resources
  • sequential utilization abroad possible
  • regular income
  • Avoidance of transport costs and exchange rate risks
  • Complementary use of resources when acquiring a counter license from the partner
  • not all products / services are suitable for indirect export
  • little impact on sales
  • Quality control difficult
  • The licensee can become a competitor in the target market or in third markets
  • License fees can be lower than profits from personal contributions

The following objects are regularly the subject of license agreements:
- patents
- designs
- utility model
- Brands
- copyrights
- Technical and / or commercial know-how

The legal framework of a License agreement result in particular from the Indian contract law (Indian Contract Act, 1872) and from the respective intellectual property law (e.g. the Trade Marks Act, 1999 for trademark licenses, the Patents Act, 1970 for patent licenses, the Design Act, 2000 for design licenses, or the Copyright Act, 1957 for copyright licenses). In addition, antitrust aspects must increasingly be taken into account when drafting license agreements (Competition Act, 2002). Since December 16, 2009, license agreements are basically free of approval and only require registration with the Reserve Bank of India (RBI). You can find more about contract law in the "Contract law" section. If you want to know more about the protection of intellectual property rights in India, click on "Patent, Know-How, Trademark and Design Law" or on "Copyright, IT and Media Law". In the event of a dispute with a license partner, click on "Litigation and Dispute Settlement".

4. Franchising

With franchising as a market entry and market cultivation strategy, a domestic franchisor leaves you legally self-employed franchisee abroad a comprehensive procurement, sales, organization and management concept. The legal basis of franchising is a franchise contract that establishes a continuing obligation. You can find more on this topic in the "Contract Law" section.

  • rapid expansion opportunities
  • low capital investment
  • small risk
  • regular income
  • (limited) instruction and control rights
  • Establishing your own branch system is avoided
  • Acceptance by host country governments
  • Success or failure largely depends on the franchisee
  • limited profit potential
  • Management and control of the franchise network can be complex

The essential part of a franchise contract is the granting of rights of use to certain commercial property rights (in particular to the brands of the franchisor). If you want to know more about the protection of intellectual property rights in India, click on "Patent, Know-How Law, Trademark and Design Law" or on "Copyright, IT and Media Law". In the event of a dispute with a franchise partner, click on "Litigation and Dispute Resolution".

5. Distributors

Sales abroad are often organized via so-called sales partners who, as commercial agents or authorized dealers, are entrusted with mediating or concluding transactions between the exporter and a foreign buyer. In addition to their main task of brokering or executing business deals for the manufacturer, sales partners are usually obliged by contract to provide a range of other services, such as collecting market information, preparing and holding exhibitions or checking the creditworthiness of buyers.

  • rapid expansion opportunities
  • low economic risk
  • low capital investment
  • (limited) instruction and control rights
  • Establishing your own branch system is avoided
  • Success or failure essentially depends on the sales partner
  • Sales partner can become a competitor in the target market

You can find more about the legal basis of this form of market entry in the section under "Contract law". In the event of a dispute with a sales partner, click on "Litigation and Dispute Resolution".

6. Strategic alliance / cooperation

A strategic alliance is understood to be the strategic cooperation or partnership between two or more companies. The partner companies set goals and work together to achieve them. Most of the time, however, they remain legally independent.

  • Use of synergy and economies of scale
  • Risk sharing
  • Accelerating market entry
  • no equity participation
  • relatively great flexibility
  • Supplementation of missing know-how
  • Rivalry is "taken out of the game"
  • Restrictions or prohibitions under competition and antitrust law must be observed
  • Significant restriction in the area of ​​cooperation; high need for coordination
  • wrong choice of partner can lead to difficulties
  • Risk of know-how drain
  • Balance between cooperation and competition is difficult
  • possibly instability
  • cultural conflicts

You can find more about the legal basis of this form of market entry in the "Contract Law" section. In the event of a dispute with a cooperation partner, click on "Litigation and Dispute Settlement".

7. Joint venture

A joint venture is a joint venture of at least two legally and economically independent partners. In international joint ventures, at least one partner company or the joint venture itself is located abroad. The amount of equity participation can be different, with one in each case half participation common in share capital - but not recommended - is. In addition, property rights, technologies, commercial or technical know-how or operating systems are often brought into the joint venture.

  • Alternative to export; especially when there are import bans
  • Alternative to direct investment going it alone
  • Use of synergy and economies of scale
  • Participation in the market knowledge and know-how of the local partner
  • Risk reduction through partial capital participation
  • greater political acceptance by host governments
  • Restriction of individual entrepreneurial freedom of action
  • Risk of know-how drain
  • wrong choice of partner can lead to difficulties
  • possibly instability
  • human resources (e.g. expatriates)
  • cultural conflicts

You can find more about the legal basis of this form of market entry in the "Contract Law" section. In the event of a dispute with a joint venture partner, click on Litigation and Dispute Resolution.

8. Liaison Office

If you intend to have your own permanent representative office in India, the liaison office is the simplest and cheapest form of market entry. The disadvantage, however, is that a liaison office no "business contracts" to lock (neither in one's own name nor in someone else's name), no own income generate and not issue invoices. Essentially, only measures by information gathering, the Market research and the initiation and maintenance of contacts. Violations of the regulations can be sanctioned with the withdrawal of the operating license and subsequent taxation.

  • Market presence
  • low cost risk
  • easy foundation
  • Conversion into a dependent branch office possible
  • no trading or manufacturing activities

Before opening a liaison office, the approval of the Exchange Control Department the Reserve Bank of India (RBI) according to the Notification No. FEMA 22/2000-RB of May 3, 2000. Since February 1, 2010, the approval process has been carried out via so-called Authorized Dealer - Category I Banks (AD-Cat. I Bank). Although the applicant is free to choose the Indian bank that will handle the approval process for him, it is advisable to choose the bank with which business relationships already exist or through which future banking transactions are to be carried out. The bank accepts the applications, subjects them to a liquidity and general corporate background check and, after a positive check, forwards the documents to RBI. The approval is usually granted for three years and can be extended upon request. In addition, the liaison office will be with you within 30 days Registrar of Companies (RoC).

9. Branch Office

Another form of market entry is the branch office.It is legally not a domestic company, but the Establishment of a foreign company on Indian territory. In contrast to the liaison office, a branch can conclude contracts in its own name and thus develop business activities independently. As with the liaison office, the establishment of a branch requires permission from RBI and registration with Registrar of Companies (RoC) required. The following business activities are permitted for a branch in accordance with the RBI guidelines:
- Export / import of goods
- Provision of services and advisory services in the business field of the parent company
- Research activities in the parent company's business area
- Promote technical and financial cooperation between Indian companies and the parent company abroad
- Representation of the parent company in India and assumption of the function as purchasing and sales agency in India
- Providing services in information technology and software development in India
- Provision of technical services for the products offered by the foreign parent company in India.

  • Market presence
  • low cost risk
  • easy foundation
  • restricted business activities
  • human resources (e.g. expatriates)

The branch in India is generally allowed to generate its own income. However, it is restricted to the extent that it is only allowed to carry out the same or almost the same activities as the parent company abroad. Branches are allowed to conduct trading activities, however do not manufacture products or process. Because of this, the branch is likely to be in the field of innovation and expansion rather unsuitable be. In addition, it must be taken into account that the establishment of a branch can be disadvantageous compared to other forms of market entry, especially from a tax point of view. Although it is not an Indian company, as a permanent establishment within the meaning of the Indo-German Double Taxation Agreement (DBA) it is subject to accounting and taxation in India. In addition, the Tax burden much higher compared to an Indian subsidiary.

10. Project office

If the business commitment only affects a single, time-limited job, one is also set up Project offices as a suitable form of market entry. Especially companies of the Construction and plant construction industry use this opportunity of temporary market entry. Because the approval process for setting up a project office is much easier compared to the other forms of market entry. If a corresponding project contract with an Indian business partner is proven and one of the following requirements is also met, the project office only needs to be reported to the RBI; prior approval from the RBI is not required. The admissibility requirements include:
- direct funding from abroad;
- direct funding from a bilateral or multilateral body;
- the project has been approved by the competent authority or
- The Indian counterparty was granted a temporary loan from a public finance institution or bank in India.

A commercial register entry at Registrar of Companies (RoC) is still required. However, if it is foreseeable for the foreign direct investor that the business commitment will last longer, another form of market entry should be considered.

11. Company acquisition

A company acquisition as a market entry instrument occurs when a domestic company takes over another company abroad completely or at least for the most part.

  • faster market entry
  • Use of synergy and economies of scale
  • Existing business relationships can continue to be used
  • existing staff in the host country
  • high resource requirements
  • potential employee dissatisfaction
  • potential cultural conflicts

You can find more about the legal basis of this form of market entry in the "Company Law" section or under "Contract Law". In the event of a dispute when purchasing a company, click on "Litigation and Dispute Resolution".

12. Establishing a subsidiary

A subsidiary abroad is a legally independent company. Both majority holdings and fully controlled companies come into consideration here. The activities of a subsidiary can also be limited to certain functional areas, such as sales, production and financing.

  • high degree of control over foreign market exposure through direct market cultivation;
  • Proximity to the customer: crucial for a better flow of information in both directions, to and from the customer;
  • lower production costs and tax incentives to invest;
  • Treatment as a "national"
  • often higher competitiveness due to lower production and transport costs.
  • high capital investment
  • high investment risk
  • foreign legal system
  • human resources (e.g. expatriates)
  • possibly missing contacts in the host country

A foreign company can invest up to 100% in its subsidiary under the so-called “Automatic Approval Route”. The “Automatic Approval Route” approval procedure applies to the majority of all industries, including the service sector. The average formation period is 30 days.

You can find more about the legal basis of this form of market entry in the "Corporate Law" section. In the event of a dispute with a partner, click on "Litigation and Dispute Settlement".

13. Specific Economic Zones (SEZ)

Like China, India has created the possibility of establishing special economic zones (SEZ) in order to attract companies from home and abroad. This must also be taken into account when entering the market, as settling in such a special economic zone can bring a number of legal advantages.

The following figure shows an overview of the most important special economic zones: