Doing Business in India

BUSINESS CULTURE IN INDIA

A GOOD UNDERSTANDING OF THE UNDERLYING VALUES, BELIEFS AND ASSUMPTIONS OF INDIAN CULTURE AND HOW THEY MANIFEST THEMSELVES IN THE MARKET AND WORKPLACE IS ESSENTIAL FOR THE SUCCESS OF YOUR BUSINESS.

INDIA’S LEGAL AND REGULATORY FRAMEWORK

An overview of Indian laws and regulations which would be relevant for a foreign investor including Companies Looking to enter India or already operating in India is as follow:

ENTRY OPTIONS

An appropriate entry strategy is a must for every foreign investor seeking to do business in India or with counterparties based in India. Entry strategy would usually vary depending upon the nature of business, the concerned sector, scale of operations and costs and other commercial objectives. Broadly, foreign investors can set up either a company, branch/liaison office or a limited liability partnership (LLP) in India. Indian companies are governed by the Companies Act, 2013. LLPs are governed by a separate legislation, the Limited Liability Partnership Act, 2008. It may be pointed out that the Indian government has launched a series of initiatives aimed at enhancing the ease of doing business in India.

There are two major types of entry: equity and non-equity. The non-equity category includes export and contractual agreements. The equity category includes joint venture and setting up wholly owned subsidiaries.

A foreign company can commence operations in India by incorporating a company under the Companies Act through Joint Ventures (JV) or a subsidiary (including a wholly owned subsidiary). Incorporating a private or public company or One Person Company (OPC) as a subsidiary in India involves paperwork for approvals and other formalities. In addition to the basic procedures, depending upon the sector and nature of business activities, companies may need to register with the relevant sector regulators.

For incorporation and registration, online applications have to be filed with Registrar of Companies (ROC) at WWW: MCA. GOV.IN.

The following flowchart outlines the legal business structures you can set up in India, operating as either a foreign company in India or registered as an Indian company:

FOREIGN INVESTMENT POLICY

Foreign investments into India are governed by a comprehensive foreign direct investment (FDI) policy issued annually by the Department of Industrial Policy and Promotion, which works under the aegis of the Ministry of Commerce and Industry, Government of India. The FDI policy is supplemented by various press notes that are issued throughout the year as and when a policy change is announced. This policy framework is operationalised by rules, regulations and circulars issued by India’s Central Bank, the Reserve Bank of India.

Most investment sectors are under the automatic route (i.e. no prior approval is required for investment); only a few sectors such as insurance, real estate, non-banking financial corporations are regulated. FDI into LLPs is also permitted, subject to certain conditions.

TAXATION

Income tax in India is governed by a Central legislation, the (Indian) Income tax Act, 1961, while indirect taxes are consolidated as Goods and Service Tax (GST) and is applicable to all goods and services thereby reducing complexity and eliminating multiple taxation.

The Indian tax year runs from 1 April of a year to 31 March of the subsequent year. Companies (except those which are required to submit a transfer pricing accountant’s report with respect to international transactions or specified domestic transactions) are required to file their tax return by 30 September following the end of the tax year. Companies which are required to submit a transfer pricing accountant’s report are required to file their tax return by 30 November following the end of the tax year.

A resident company is taxed on worldwide income whereas a non-resident is taxed only on income that is received in India, or that accrues or arises, or is deemed to accrue or arise, in India. Income deemed to accrue or arise in India includes income accruing or arising, whether directly or indirectly, through or from (a) any business connection in India, (b) any property in India, (c) any asset or source of income in India, (d) transfer of a capital asset in India. It also includes income in the nature of interest, royalties and fee for technical services, which are taxed on source rule basis. In computing taxable business income, expenditure incurred wholly and exclusively for the purpose of business is allowed as deduction subject to computational provisions.

The taxation of a non- resident in India would be subject to any favourable provisions under a tax treaty, which India has entered with foreign countries. India has entered into Double Taxation Avoidance Agreements (‘DTAs’) with around 85 countries.

INOLVENCY AND BANKRUPTCY CODE

The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.

OBJECTIVES OF IBC

• To consolidate and amend all existing insolvency laws in India.
• To simplify and expedite the Insolvency and Bankruptcy Proceedings in India.
• To protect the interest of creditors including stakeholders in a company.
• To revive the company in a time-bound manner.
• To promote entrepreneurship.
• To get the necessary relief to the creditors and consequently increase the credit supply in the economy.
• To work out a new and timely recovery procedure to be adopted by the banks, financial institutions or individuals.
• To set up an Insolvency and Bankruptcy Board of India.

Maximization of the value of assets of corporate persons.

IBC – WHAT DOES THE CODE AIM TO DO?

The 2016 Code provides for a time-bound process to resolve insolvency. When a default in repayment occurs, creditors gain control over the debtor’s assets and must make decisions to resolve insolvency within 180 days. To ensure an uninterrupted resolution process, the Code also provides immunity to debtors from resolution claims of creditors during this period. The Code also consolidates provisions of the current legislative framework to form a common forum for debtors and creditors of all classes to resolve insolvency.

EMPLOYMENT LAWS

An investor should familiarise themself with Indian labour laws at the time of commencing operations in India. Though several labour laws are formulated by the Centre, there are State specific rules that the investor should take note of, and these would vary depending on the State where the investor commences operations. The investor should ensure that appropriate registrations are obtained and all HR records, files, documents and correspondences are maintained according to the requirements under Indian labour laws.

It is advisable to seek professional advice in areas such as drafting compliant policies and practice manuals, handling potential labour law issues, structuring of employment contracts and reducing risks of co-employment issues. Half-yearly or yearly audits of internal HR compliance policies may also be conducted to ensure compliance with all necessary statutory requirements.

ANTI-TRUST REGULATION IN INDIA

India’s Competition Act, 2002 is the principal legislation dealing with anti-trust issues. The Act prohibits or regulates (a) anti-competitive agreements (b) abuse of a dominant position and (c) combinations.

Anti-competitive agreements are broadly defined as any agreement in respect of ‘production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India’. Certain agreements such as tie-in arrangements or bid-rigging are presumed to cause an appreciable adverse effect on competition.

Further, the Act prohibits any enterprise or group from abusing its ‘dominant position’; an enterprise will be considered ‘dominant’ in a relevant market, in India, where it is able to operate independently of competitive forces prevailing in the relevant market or can affect competitors, consumers or the relevant market in its favour. Also, in terms of the Act, combinations (mergers, acquisitions, demergers) exceeding certain specified asset/turnover thresholds would require approval of the Competition Commission of India to ensure that they do not cause an appreciable adverse effect on competition within the relevant markets in India.

INTELLECTUAL PROPERTY RIGHTS

India has been a World Trade Organisation (WTO) member since 1995 and if you are doing business with India, you will find similarities between local IP law and enforcement procedures, and those in force in the developed nations. India is also signatory to various international treaties on IP rights. Furthermore, rights such as trademarks, designs, patents and copyright can be protected through registration. These rights are enforceable through the Indian courts, which, in the event of infringement, can provide interim remedies such as injunctions relatively quickly. The courts can also instruct perpetrators to account for profits generated from their infringement.

ANTI BRIBERY LAWS

India does have existing anti-corruption legislation such as the Prevention of Corruption Act (“PC Act”) 1988, the Indian Penal Code (“IPC”) 1960, Prevention of Money Laundering Act, 2002, Right to Information Act, 2005, and the Central Vigilance Act, 2003 to name a few. In an endeavour to promote good governance, India has taken a number of initiatives towards containing corruption including the amendments proposed to the PC Act (Proposed amendments as per PC (Amendment) Bill 2013 and recommendations of Standing Committee and Law Commission on Bill). These amendments, such as a new corporate offence of giving a bribe to a public official to gain a business advantage and a new strict liability offence of management participation in corporate offending, could impact private and public sector alike.

PRIVACY LAWS

Presently, India does not have a law on data privacy, and data protection is primarily governed by the Information Technology Act, 2000 (“IT Act”) along with the Information Technology (Reasonable security practices and procedures and sensitive personal data or information) Rules, 2011 (“SPDI Rules”).

However , India’s Digital Personal Data Protection (DPDP) Bill, 2022, marks a significant milestone in the country’s technology regulatory framework. The DPDP Bill aims to enhance data protection and accountability for internet companies, mobile apps, and businesses handling citizens’ data. It prioritizes the “Right to Privacy” and includes provisions for explicit consent, data fiduciaries’ responsibilities, cross-border data transfers, and individual rights. The DPDP legislation is expected to have a significant impact on India’s trade negotiations with other nations and follows global data protection models like the EU’s GDPR and China’s PIPL.

EXIT STRATEGY AND DISPUTE SETTLEMENT IN INDIA

Since entering a new market is a major commitment for every investor, the exit strategy should also be planned in advance as the cost and barriers to exit can often determine the entry strategy. Maintaining a comprehensive exit strategy is important for the following reasons:

• Changes in business conditions or regulatory environment
• Cashing out on a venture that is successful
• If the goals and objectives of the company/partners involved change with time
• If one of the partners involved in an agreement is acquired or gets into financial trouble
• For settlement of disputes when a partnership isn’t working out

SETTLEMENT OF DISPUTES IN INDIA

India follows the common law and has a single court system to administer both Central and State laws. The court system is broadly three tiered, comprising the lower District courts, the High Courts and the apex court – the Supreme Court of India. Commercial disputes are also being contested under alternative modes of dispute resolution, such as arbitration.

The choice of dispute resolution mechanism can have significant commercial, financial and legal consequences and investors should consider the advantages and disadvantages of each mode of dispute resolution, be it litigation before Indian courts or arbitration.