India has a huge market and a thriving economy—and is fast becoming a much more straightforward jurisdiction for foreign investors to navigate.
As the world’s second most populous country[1] and fifth-largest economy,[2] India presents a tremendous opportunity for foreign investors. And over the past decade, the Indian government has been making significant efforts to improve the ease of operating in the country.
Ministers have introduced key reforms in areas ranging from company law and labor codes to foreign direct investment policy, all with the aim of simplifying existing systems and processes.[3]
Most notable, perhaps, has been the switch from a fragmented tax system to a unified Goods and Sales Tax,[4] which substantially cut red tape for businesses in India. Between 2014 and 2019, the country’s ranking in the World Bank’s Ease of Doing Business report improved from number 147 to 63.[5]
India is a leader in digital innovation, with a world-leading fintech adoption rate among the public of 87%, far above the global average of 64%.[6] It also ranked 40th in the Global Innovation Index of 2022[7] and was the top country among all central and southern Asian nations in the same year. Additionally, it has a youthful population—half of India’s inhabitants are aged under 30.[8]
Foreign investment in India: Access options
Foreign investors have two main routes into the Indian market. They can either set up as a domestic company via foreign direct investment, or as a foreign company by setting up a liaison, project, or branch office.
Foreign investment in an Indian company is permitted except in specific prohibited sectors, which include gambling, railways, and tobacco production. If investors come from a country that shares a land border with India or want to invest in certain strategic sectors, such as defense or aviation, they may also require approval from the Reserve Bank of India (RBI).
In terms of domestic company requirements, private limited companies must have at least two shareholders and public limited companies at least seven. Private limited companies are not subject to minimum capital requirements, and any profits they earn can be repatriated as dividends providing the relevant taxes are paid. Additionally, specific identification requirements will apply to directors based overseas.
At the same time, foreign investors can set up a variety of entities in India. A liaison office can act as a channel of communication between the company’s headquarters in its home country and its operations in India. These liaison offices can promote the company’s businesses, but they cannot undertake their own business activities, such as sales or production.
Branch offices, which engage in the same activity as their parent companies, can also be set up with the approval of the RBI. Project offices can also be established temporarily to fulfill contracts from Indian companies, provided the project has secured the necessary regulatory clearances.
Creating a successful market-entry strategy
Deciding the best approach to the Indian market involves many factors. Identifying and establishing a connection with the right local partner is likely to be crucial in many cases, as they can help investors understand market trends or deal with any bureaucratic hurdles that arise.
Advice should also be sought on taxation and legislation, such as labor laws, and company reporting requirements, as this may also dictate which is the most suitable form of market entry.
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[4] Goods and Services Tax Council