FDI regulations and setting up a subsidiary company in India

Foreign Direct Investment Regulations

India has two routes for foreign investment: the 100% automatic route and the government route. The former only needs approval of the Reserve Bank of India, the latter needs prior government approval from the Foreign Investment Promotion Board. Many activities related to seafood processing and production fall under the 100% automatic route. The specific conditions explained in the FDI circular 2015 indicate that 100% foreign investment is allowed in seafood processing as well as in aquaculture production that takes place under controlled conditions. The definition of controlled conditions limits aquaculture activities to those in hatcheries that are operated in an enclosed environment with artificial climate control. However, as of the 19th of June 2016 the Indian government decided to drop the ‘under controlled conditions’ requirement. Therefore, since 20th June, also foreign investment in aquaculture operations in uncontrolled conditions (such as grow out in earthen ponds or cage culture in rivers) fall under the 100% automatic route. Investments in marine fishing may be allowed, but are still not under the 100% automatic route and need approval from the Foreign Investment Promotion Board (FIPB) and the relevant ministries.

Setting up a subsidiary company

There are several options for setting up a subsidiary company in India:

Wholly owned subsidiary: A wholly owned or a subsidiary company has the maximum flexibility to conduct business in India and has the following advantages:

    • Funding can be done via equity, debt and internal accruals
    • Indian transfer pricing regulations apply
    • Repatriation of dividends is allowed without approvals

Joint Venture: It is also possible to set up a joint venture with Indian or other foreign companies in India. There are no separate laws for joint ventures in India.

Types of companies

For the registration and incorporation, an application has to be filed with Registrar of Companies. There are three well known types of companies which can be incorporated by foreign investors: 1. Private company A private company has a minimum of two members and a minimum paid up capital of Rs. 100,000 or a higher paid up capital as may be prescribed. According to chambers and partners, a private company has to:
  • Restrict rights to transfer its shares, if any
  • Limit its shareholders to a number of fifty
  • Prohibit any invitation to public to subscribe any of its shares or debentures of the company
  • Prohibit any invitation to acceptance of deposits from any person other than its members, directors or their relatives
2. Public company A public company is required to have a minimum paid up capital of Rs. 500,000 with a minimum of seven shareholders three directors. The maximum number of directors is 12 but can be increased subject to government approval. 3. Limited Liability Partnership (LLP) In an LLP members are provided with the benefits of a limited liability company, and at the same time allow its members the flexibility of organising their internal management on the basis of a mutual agreement. The liability of at least one member is unlimited whereas the other members have limited liability, limited to the extent of their contribution in the LLP. Unlike other partnership type of companies ,an LLP does not get terminated by the death or insolvency of the limited partners. LLP’s are governed by Limited Liability Partnership Act of 2008. Foreign Investment is allowed in LLP’s when the investments are under the 100% automatic route. Foreign investors are not allowed to make downward investments from an LLP without prior approval from the Indian government. Foreign corporate entities need to nominate an individual to act as a designated partner but this is not allowed for foreign corporates so in reality LLP’s are not often used by corporate foreign investors. Be aware that foreign investment in LLPs is not allowed in the farming and plantation, and aquaculture sector. In India in the aquaculture farming sector and seafood processing most companies are registered as private limited. However, some big public traded companies have diversified into the seafood sector as well. Some of the feed companies are public limited companies as well. In India, public limited companies have to comply with strict regulations with regard to corporate social responsibility (CSR) for example.

Incorporation procedure

The following steps are required to incorporate a company:
  • Obtaining DIN (Director Identification Number)
  • Applying for name availability
  • Drafting Memorandum of Understanding (MOU) and Articles of Association (AOA)
  • Court stamping of MOU and AOA
  • Signing of MOU and AOA by first subscribers
  • Filing with Registrar of Companies (ROC)
  • Vetting of MOU and AOA by ROC
  • Obtaining certificate of incorporation
Immediate Business compliances: According to Chambers and partners after company registration is completed, the following registrations are required:
  • Permanent Account Number (PAN): all income tax payers are required to obtain an income tax registration number
  • Tax Deduction Account Number (TAN): while running a business, certain payments will require the payee to withhold tax
  • Service tax: registration is required within 30 days of providing the services
  • Value Added Tax (VAT): any business proposing to trade in goods or to carry out contracts needs to register for VAT
  • Excise registration: excise is an indirect tax levy on manufacture of goods
  • Foreigners Regional registration Office (FRRO): foreigners coming to India on employment need to register within 14 days of their arrival
  • Import Export Code: prior to carrying out any export or import activities, it is mandatory to obtain an IEC from the Directorate General of Foreign Trade (DGFT)
  • For the exports of seafood, a registration with MPEDA is compulsory
For the set up of e.g. processing establishments it is also required to get the following licenses:
  • Locational Restrictions: industrial undertakings are free to select the location of their projects. Industrial License is required if the proposed location is within 25 km of the Standard Urban Area limits of 23 cities having population of 1 million as per 1991 census.
  • Environmental Clearances: entrepreneurs are required to obtain statutory clearances relating to pollution control and environment as necessary for setting up an industrial project for 31 categories of industries from the Ministry of Environment & Forests.