Setting Up an Indian Subsidiary or Joint Venture: FDI Route, Share Pricing and FC-GPR

A foreign company that wants to operate in India through its own entity goes through company law and foreign exchange law at the same time. Most delays come from the FEMA side, so here is a walkthrough.

Step 1: Confirm the entry route

The Consolidated FDI Policy and the Non-debt Instruments Rules, 2019 classify sectors as:

Automatic route – no prior approval. This covers most manufacturing, IT and services.
Government route – prior approval through the National Single Window System, for example for certain defence, broadcasting and multi-brand retail activities.
Prohibited – for example lottery, gambling and real estate business in the sense of trading in land.

Under Press Note 3 (2020), any investment from an entity of a country sharing a land border with India needs government approval, whatever the sector. The same applies where the beneficial owner of the investment is situated in or is a citizen of such a country. Check beneficial ownership carefully. This is where many structures are caught.

Step 2: Choose the entity

A private limited company is the usual vehicle. An LLP can receive FDI only in sectors where 100% FDI is allowed under the automatic route without performance-linked conditions. A liaison office or branch office is possible for limited activities, but needs RBI approval through an authorised dealer bank and cannot do all types of business.

A private company needs at least two directors, and at least one must be resident in India, which means staying in India for at least 182 days in the previous calendar year. Foreign directors need DINs. Their identity and address documents must be notarised and apostilled, or consularised where the country is not part of the Hague Convention.

Step 3: Price the shares

Shares issued to a non-resident cannot be priced below fair value. Fair value is determined by a SEBI-registered merchant banker or a Chartered Accountant using an internationally accepted pricing methodology on an arm's length basis. Subscribers to the memorandum at incorporation may subscribe at face value.

Step 4: Receive funds and allot

The money must come through normal banking channels into the company's account with an authorised dealer bank. The bank issues a Foreign Inward Remittance Certificate (FIRC) and a KYC report on the remitter. Shares must be allotted within 60 days of receiving the money. Otherwise the money must be refunded within 15 days.

Step 5: Report on FIRMS

FC-GPR – within 30 days of allotment, through the authorised dealer bank, on RBI's FIRMS portal. It comes with the valuation certificate, FIRC, a company secretary's certificate and the KYC.
FLA return – annually, by 15 July, for every Indian entity that has received FDI or made ODI.
FC-TRS – on transfer of shares between residents and non-residents, within 60 days.

Late reporting can be regularised by paying a late submission fee. Beyond that, compounding before RBI may be needed. Both take time, so it is far simpler to file within the deadline.

Step 6: Ongoing tax points

Payments to the foreign parent for royalty, technical services, cost recharges or interest attract withholding tax, subject to the tax treaty and the parent's Tax Residency Certificate.
Transactions with the parent and group entities are subject to transfer pricing documentation and an accountant's report.
Dividends to the parent are taxed in India at treaty rates, with withholding.

Planning these points at the time of incorporation avoids awkward restructuring later.

The information in this article reflects the law as on the date of publication and is for general guidance only.