Over the last two decades, there has been a steep rise in the number of foreign players in the Indian market, which is still continuing. India has been an enticing hot spot for foreign investments, technological collaborations, etc. due to its opulent human resources, infinitely stretched market and cost efficient infrastructure facility. Google, PepsiCo, IBM, Hewlett Packard, to name a few, are the foreign companies that have not only successfully established themselves in India, but also have gotten themselves deeply rooted in Indian economy.
Regulatory Enforcements and Entry Strategy
Welcoming globalization, India opened its borders for intra country transactions in late 90s. However, there still remain few laws and regulations to be complied by the foreign company. Depending on the type of office to be established approvals from designated authority can be obtained in a matter of few days. The available choices for establishments in India are as follows:
- Branch office- Such offices can’t undertake manufacturing activities on their own but can sub contract them to Indian vendors.
- Liaison/representative office- Such offices act as a medium between head office and Indian counterparts but can’t make earnings. They can undertake export, import, collaborations with local entities, etc.
- Project office- Such offices are established for undertaking specific projects; and, anything, except for project execution, is barred.
This choice is slightly on the expensive side and prior approval from Reserve Bank of India is a must.
There’s lesser risk involved in a joint venture as the risk is shared between the partners. However, without properly framed guidelines, there might be hindrances in smoothly managing the business. Prior approval of central government is required before registration for joint venture.
This is a difficult decision to make but, if managed properly, can be the most advantageous decision for a foreign company resulting in smooth management and control. In the recent past, many successful foreign companies have entered the market alone but built strategic alliances with Indian entities.
Incorporation of Private Limited Company
The bar of Foreign Direct Investment (FDI) limit has been raised to 100% by the Indian government. Hence, there lies no requirement to procure approval from government before registering. The company has to register with Registrar of Companies (RoC) under Indian Companies Act. Before incorporation, approval for the chosen name of company, Director’s Identification Number and digital signatures have to be obtained.
Requirements for Incorporation:
- Directors and Shareholders– For incorporation of foreign private limited company, minimum two directors and two shareholders are required where one of the directors have to be an Indian citizen and shareholders can be both persons and entities.
- Address- Before registration, a proper address is required to be chosen for the office. This address will define the place of jurisdiction for legal matters of the company.
- Documents- Office address proof, Memorandum of Understanding, Articles of Association, etc are required to be submitted to the RoC.
After incorporation, the Indian director can help the company in opening a bank account. The company has to report FDI to Reserve Bank of India which is an easy hassle free process.
Pros and Cons of Undertaking Business in India:
While the cons remain limited to building a core team that understands Indian mindset, cultural and lingual differences and lengthy regulatory laws; the pros circle around the fact that the Indian government understands the contribution of foreign companies and is striving to pave a way for them to thrive. The laws are being simplified and digitized, 4170 registered and active foreign companies (according to Ministry of Corporate Affairs, as on 1st January, 2015) have overcome the cons mentioned and flourished in Indian market, along with tapping of human resource and cheap amenities available.
For a foreign company to be successful in India, following approaches are impetus:
- Commitment is the key. A strong commitment to achieve long term goals is quintessential.
- Competitive pricing for the Indian consumers is inevitable. With a lion’s share of India’s population still struggling economically, the pricing policy has to be chosen wisely.
- Identification of Indian needs and customizing products to fulfill their needs.
- Building a local workforce for responding to market uncertainties immediately.
Foreign companies with local approach, rather than global business model, have expanded leaps and bounds. With an evident boom in startups in the last few years, it has become more crucial for a foreign company to maintain a local touch, along with maintaining the quality of its services and technology.
“Globalization is forcing companies to do things in new ways.” Bill Gates.