Investments in India: A structural strategy

By Vinita Bahri Mehra

Investment growthA U.S. company interested in expanding its business operations to India can form an agency, an association of persons, a liaison office, a project office, a joint venture and/or a subsidiary in India.

Agency
An agency gives a U.S. company an indirect presence in India. Under it, the U.S. enterprise appoints an Indian entity as its agent and, depending upon the agency agreement, the agent can buy or sell or provide any other service to the U.S. enterprise.

Association of persons
An association of persons is a collection of different entities (e.g., individuals or companies) that join together for a common purpose. An association of persons is formed by executing an agreement among the participants. The association need not register with authorities in India, but is a recognized entity for tax purposes.
 
Liaison office
The liaison office collects information about possible market opportunities and provides information about the U.S. company to prospective Indian customers. It can promote export/import transactions and facilitate technical collaborations between U.S. companies and Indian companies. The liaison office cannot undertake any commercial activity, and cannot, therefore, earn any income in India. Approval through an application process from the Reserve Bank of India (RBI) is required to open such an office.

Project office
U.S. enterprises planning to execute specific projects can set up temporary offices in India. The RBI grants general permission to foreign entities to establish project offices, subject to specified conditions. Such an office can only execute the project for which it was established.

Joint venture
In a joint venture (the most sought-after option for U.S. companies seeking to establish a presence in India), a U.S. company forms a limited liability company (LLC) in India. This LLC partners with another Indian company for its operations. To establish a joint venture in India, U.S. companies should consider:

1. Choosing a local partner: An appropriate local partner can play a significant role in overcoming various legal complexities and ensuring business synergy.

2. Identifying a location: Important factors to consider when searching for a location are availability of infrastructural services, financial and tax incentives.

3. Negotiating: Before negotiating, the parties should enter into confidentiality/non-disclosure agreements to protect strategic business information to be exchanged for the joint venture operations.

Subsidiary
United States equity in Indian companies can be 100 percent, subject to any equity caps prescribed by RBI for specific sectors (e.g., agricultural). A subsidiary can be incorporated under the Indian Companies Act as a private limited company or a public limited company. Both options offer liability protection and have minimal capitalization requirements.

Structuring issues
United States companies might also consider investing in an Indian company through an intermediate holding company in a tax-favorable jurisdiction. Also, India has favorable tax treaties with these countries: Mauritius, Singapore, Cyprus, Luxembourg and the Netherlands.

Every U.S. company planning to do business in India must develop a legal and tax strategy to support its business plans and objectives. This strategy should include due diligence concerning prospective partners and specific conditions that may affect the company’s market prospects. It is wise to seek experienced counsel before entering the Indian market.

Vinita Bahri Mehra is a director at Kegler Brown Hill & Ritter LPA, and chairs the Asia-Pacific practice.

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