Foreign Direct Investment in India | Safeguards  For Foreign Companies Entering India

India is one of the fastest-growing economies in the world, with a large consumer base and a favourable business environment. It is now the fifth largest economy in the world and is projected to become the  third  largest by 2030. It is the largest democracy in the world with a young population that provides a massive English-speaking talent pool. Besides, the geopolitical considerations now prompt international companies to follow the “China plus One” policy. All these reasons have converged to make India a favoured destination for the Western world. With the opportunities come some inevitable risks. Foreign companies entering India should be aware of the potential risks and challenges that they may face and take appropriate safeguards to protect their interests and investments.

Some of the safeguards that foreign companies should consider are:

• Choosing the right entry mode and entity structure:

Foreign companies can enter India through various modes, such as joint ventures, wholly owned subsidiaries, branch offices, liaison offices, or project offices. Each mode has its own advantages and disadvantages and requires different levels of compliance and approvals. Foreign companies should choose the entry mode that best suits their business objectives, market strategy, and legal requirements. Professional advice should be sought to understand the tax implications, regulatory framework, and operational feasibility of each mode.

• Regulatory Framework:

The Reserve Bank of India (RBI) and the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India ) are the primary regulatory bodies that oversee foreign direct investments. They have laid down guidelines and norms for foreign companies to follow.

• Complying with the foreign direct investment (FDI) policy:

India has a liberalized FDI policy that allows foreign companies to invest in most sectors, subject to certain sector-specific caps and conditions. In most manufacturing and service sectors,  100% FDI is permitted. Investment caps and pre-approvals on investment apply to more regulated sectors such as banking, insurance, financial companies, retail trading etc. Foreign companies should be aware of the FDI limits and entry routes for their respective sectors and obtain the necessary approvals from the government or the Reserve Bank of India (RBI), as applicable. They should also monitor the changes and updates in the FDI policy, as it is revised from time to time.

• Conducting due diligence and market research:

Foreign companies should conduct thorough due diligence and market research before entering India to assess the opportunities and risks and to identify the potential partners, customers, competitors, and suppliers. They should also conduct a market analysis to understand consumer preferences, demand patterns, pricing strategies, and distribution channels in the Indian market.

• Protecting the intellectual property rights (IPR):

Foreign companies should take adequate measures to protect their IPRs, such as trademarks, patents, designs, and trade secrets, in India. They should register their IPR with the relevant authorities and enforce them against any infringement or misuse. They should also be aware of the IPR laws and regulations in India and seek legal recourse in case of any dispute or violation.

• Adhering to the legal and ethical standards:

Foreign companies should adhere to the legal and ethical standards in India, and comply with the applicable laws and regulations, such as labour laws, environmental laws, consumer protection laws, anti-corruption laws, and data protection laws. They should also respect the local culture, customs, and values and avoid any actions that may offend the sentiments of the local community.

• Dispute Resolution Mechanisms

In case of disputes, foreign companies can resort to dispute resolution mechanisms. India has a well-established judicial system, which however works slowly. Foreign companies can also opt for arbitration.

• Tax framework:

Foreign enterprises should develop an India-specific tax program. The intra-group transactions should be structed around the respective Country’s DTAA, India’s Transfer Pricing provisions and other Organisation for Economic Co-operation and Development (OECD) guidelines . Indian tax authorities are receptive to tax structures, having sound commercial and business rationale, and following the arm’s length principle. They look with disfavour upon arrangements whose primary purpose is tax avoidance.  

• Joint Ventures

Foreign enterprises must evaluate all aspects of a potential joint venture investment in an existing company for legacy or hidden issues in the business. Background checks and a thorough  diligence on investee businesses can avoid  problems at a later stage. They should also verify the credentials, reputation, and financial stability of their prospective partners, and ensure that they have a clear and transparent agreement on the terms and conditions of the partnership. Time should be taken to assess professionalism and compatibility of the potential Indian partner. It often makes sense to make haste slowly. Rushed partnerships often lead to regrets later. Strategic buyers and acquirers are often required to build up internal financial control systems from scratch. This is almost always true of Indian SMEs but could also apply to  some larger companies.

• Human resources  and management  of trade unions:

The extant legislations create a highly regulated and less flexible labour market for blue collar workers.