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The Corporate world in India has undergone a significant transformation in the past few years and with changing times Indian corporates are also growing manifold and establishing their notable presence worldwide. Earlier Companies were content selling their products and providing their services within India, however, with the opening of global markets for one and all Indian companies have also created their presence in different countries of the world.
Corporates in India have initiated business in other countries through various modes like opening their own subsidiaries, opening a branch office, entering a joint venture with a local partner, appointing distributors for their products or services in that country, acquiring an existing company in that country and other similar methods. Nevertheless, forming and controlling any business entity or structure in a foreign country is no easy task as it involves two-fold compliance of both Indian and foreign laws. Mostly the pharmaceutical companies in India have been known to incorporate their branches or subsidiaries abroad to cater to local markets in such countries thereby adding to their sources of income.
Compliances at Indian level
Any business envisaging to have their presence abroad needs to first comply with Indian laws in this regard. Reserve Bank of India (RBI) is the primary nodal agency in India that governs all Overseas Direct Investment by individuals and businesses. Corporates need to either obtain prior approval from RBI for incorporating or acquiring entities abroad or they can make investment under Automatic Route, depending on their compliance with guidelines provided by RBI for both these routes. Also, Corporates need to comply with Companies Law, Foreign Exchange Management Act (FEMA), Income Tax Act and other multitude of acts for any investment that they make abroad.
Compliances at Indian level is a continuous procedure as throughout the lifetime of the entity abroad there are various filings that businesses need to file with RBI and other nodal agencies on annual basis and for every single investment made by them in their overseas entities. Even winding up of such entities requires compliance to be filed at Indian level.
Compliances at foreign level
The challenging part of having an entity abroad is complying with all the laws of the relevant country where such entity is located. Though businesses hire lawyers and other professionals to carry out all the activities in foreign jurisdiction but the decision-making process for all such activities generally take place in India.
Every country has its own set of laws and rules, and Indian businesses need to understand all the local compliances of the country they want to setup and operate in. It is a tedious procedure to understand and comply with all laws ranging from labour and employment laws to taxation laws in a foreign land, yet Indian businesses and corporate houses have excellently succeeded in making their presence known worldwide in countries like USA, Maldives, Dubai, etc.
Control from India
Overseas entities are normally controlled at Indian level as most decisions for such entities are taken by the parent office in India. At the time of incorporation parent organization decides on the name, address, shareholders, board of directors or management of the foreign companies and representatives of the parent Companies are appointed as the management for foreign entities. The financial year of a foreign company, wherever allowed, is decided by the parent company as the accounts of wholly owned subsidiaries and joint ventures are consolidated with parent companies annual accounts every year. The pricing at which the products are sold abroad and the pricing at which products are transferred from parent to subsidiary or branch office abroad are decided by the Indian corporates.
Indian parent companies also prefer to have and hold in India the economic ownership of all intellectual properties acquired or created by them abroad thereby establishing substantial control on their foreign entities.
However, under the Income Tax Act a concept of “Place of Effective Management” concept have been introduced which clubs the income of subsidiaries with the holding company in India in the event their key management and commercial decisions, that are necessary for the conduct of the business of an entity as a whole, are in substance taken in India.
Nevertheless, the investment of Indian corporates in establishing their presence abroad through various entities have continued to rise by leaps and bounds every year which has tremendously helped India as a country to create their foothold on the worldwide market.
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