Foreign Investment Act (Acts related to foreign investment, methods, and procedures for reporting investment) Major investment-related laws faced by investment companies in India include the Industrial Act, the Foreign Exchange Control Act, the Company Act, the Factory Act, the Income Tax Act, and the Central Commodity Tax Act.

Industrial Law

The Industries Development and Regulation Act (1951), administered by the Ministry of Commerce and Industry, encompasses various industry-related regulations.
It must be checked to understand the required licenses and industry incentives in the target investment sector.
The purpose of this law is to reflect the government's willingness to reform the economy and achieve substantial economic growth to promote the harmonious integration of the Indian economy with the global economy.
The industries stipulated in the Industrial Act are largely classified into 38 types, and the main industries include metals, fuels, boilers, electronic equipment, and machinery.

Foreign Exchange Control Act

The Foreign Exchange Management Act (1999), administered by the Foreign Exchange Regulatory Bureau of the Central Bank of India, was enacted to promote India's external trade, and encourage the sound development and maintenance of the Indian foreign exchange market.
It stipulates capital financing transactions, such as the introduction of investment funds, remittances of assets and liquidation funds, and the inflow and outflow of all foreign exchange related to borrowing and repayment of overseas funds.

Company Law

The Companies Act (2013) is governed by the Ministry of Business and was enacted in 1956 and revised in 2013.
It stipulates all procedures for establishing, maintaining, and liquidating companies in India, covering all issues related to the establishment and liquidation of companies, such as capital and the appointment of directors.

The Income Tax Act

The Income Tax Act (1961), governed by the Ministry of Finance, regulates direct taxes such as personal and corporate income taxes and stipulates various overseas payment fees, including services, licenses, and technology usage fees.

Central Commodity Tax Act

The Central Excise Duty Act (1944), governed by the Ministry of Finance, like the Income Tax Act, stipulates overall indirect taxes such as sales tax, commodity tax, service tax, value-added tax, customs duty, and commodity entry tax.

Investment Reporting Methods and Procedures

There are two types of approvals for FDI: automatic approval that does not require prior government approval and FIB approval that requires prior government approval (Foreign Investment Promotion Committee, FIB).
To encourage foreign investment in most manufacturing and service sectors, an automatic approval system that simplifies procedures and saves time is implemented.

1) Automatic Approval

Inform the Regional Office of the Reserve Bank of India within 30 days of payment for the investment → Report to the Central Bank of India within 30 days of the issuance of shares (stake).

2) Government approval (for general investors):

Submission to the Department of Economic Affairs (DEA) → Review by government agencies by industry → Overcome the above automatic approval process.

According to Invest India, India's central government's major incentives include Special Economic Zones, Export Promotion Capital Goods Scheme, Merchandise Exports from India Scheme, Industrial R&D Promotion Program, and Free Tax-Free Scheme for five or more years.
Typically, the Indian government established a special economic zone in June 2005 and is implementing a policy to provide various incentives to tenant companies and ease occupancy requirements.
Manufacturing Linked Incentive Scheme (PLI) The Modi government announced the first production-linked incentive system (PLI) in March 2020 to foster Indian manufacturing and strengthen exports, plans to provide selected companies with incentives worth 4-6% of sales growth over the next five years, and is currently implementing a PLI system for 15 key sectors.
The items subject to PLI are as follows:

According to Invest India, state incentives in India include Customized Package Incentive Scheme, Interest Subsidy, Tax Incentives, Stamp Duty Exemption, Capital Subsidy, and Electricity Exemption.
Among them, the Electricity Duty Exemption grants electricity tax reductions and exemptions and is applied differently by region, and Tax Incents supports tax reductions.

Major state-specific incentives can be found in the 'India Major State Incentive Guide': https://url.kr/un2sip

Investment Restrictions and Prohibited Industries

The maximum investment allowance and sector-specific restrictions for foreign investors in Indian companies vary depending on the industry sector.
Foreign direct investment is permitted under the conditions of automatic approval or approval of the participation of shares in an Indian company by non-residents, in which case within certain limits as stipulated in the FDI policy.
Investment is allowed up to 100% in most industrial sectors, except in areas where investment is limited, such as pensions, insurance, and civil aviation.

Prohibited Industries

Government-approved and automatically approved industries:

Special Economic Zone (SEZ)

In June 2005, the Indian government announced the Special Economic Zone Act (2005) and the Special Economic Zone Rules (2006.2), which mainly provide various incentives and ease occupancy requirements for SEZ installation and tenant companies, giving effectiveness to the establishment of SEZ

SEZ designation status

India's government has formally approved a total of 425 SEZs as of July 21, 2022, with 35 principle approvals allowed.
Of these, 376 cases of 45,592 hectares have been notified and 268 SEZs are operated.
Of the 367 SEZs announced, seven are operated by the central government: Kandla SEZ, SEEPZ SEZ, Noida SEZ, MEPZ SEZ, Cochin SEZ, Palta SEZ, and Visakhapatnam SEZ.
Other SEZs are under the jurisdiction of the state.
The Indian government analyzes that the designation of a special economic zone has an employment effect of about 2.8 million people and an investment creation effect of about $86.7 billion.

Central Government Operations SEZ

Kandla SEZ's regions are Kandla and Gujarat, and chemical and steel are representative industries. SE SEEPZ The areas of SEEPZ are Mumbai and Maharashtra, and the corresponding industries are electronics and jewelry. The area of Noida SEZ is the Uttar Pradesh area, and the corresponding industries include mainly electronics. The regions of SE MEPZ SEZ are Chennai and Tamil Nadu, and the corresponding industries include automobiles and shipbuilding. The regions of Cochin SEZ are Cochin and Kerala, and the corresponding industries include agri-food and IT. F The areas of Palta SEZ are Palta and West Bengal, and representative industries include chemicals and electronics. V Visakhapatnam SEZ's regions are Visakhapatnam and Andhra Pradesh's regions, with engineering, construction, and chemistry being representative.

Number of SEZ operations and specialized industries by state

T 50 SEZs in operation in Tamil Nadu: IT, ITES (29), Engineering (8), Textile (4), Pharmaceuticals (1), Others (8)
h 37 SEZs operating in Maharashtra state: IT, ITES (21), Pharmaceuticals (3), Engineering (3), Solar (1), Others (11)
T 35 SEZs operating in Telangana State: IT, ITES (24), Pharmaceuticals (5), Jewelry (1), Aviation (1), Others (4)
K 34 SEZs operating in Karnataka State: IT, ITES (27), Engineering (2), Pharmaceuticals (2), Aviation (1), Textiles (1), Others (1)
And 24 SEZs operating in Andhra Pradesh: IT, ITES (5), Pharmaceuticals (6), Textiles (4), Agricultural Products (2), Others (7)
Gu 21 SEZs in operation in Gujarat: IT, ITES (6), Textiles (2), Engineering (3), Pharmaceuticals (1), Chemistry (1), Others (8)
K 20 SEZs in operation in Kerala State: IT, ITES (14), Agriculture (1), Solar (1), Electronics (1), Others (3)

14 SEZs operating in Uttar Pradesh: IT, ITES (10), Engineering (1), Others (3)
Seven SEZs operating in Haryana: IT, ITES (7)
Seven SEZs operating in West Bengal: IT, ITES (5), jewelry (1), and others (1)
Five SEZs in operation in Madhya Pradesh: IT, ITES (4), and others (1)
Five SEZs in operation in Odisha State: IT, ITES (2), Aluminum (1), Mineral (1), Others (1)
Three SEZs operating in Punjab: IT, ITES (2), pharmaceuticals (1)
Three SEZs under operation in Rajasthan State: Jewelry (2)
Two SEZs operating in Chandigarh state: IT, ITES (2)
One SEZ in operation in Chhattisgarh: Solar (1)
Delhi, Goa, Jharkhand, Manipur, Nagaland, Puducherry and Tripura do not have SEZs currently in operation

Key incentives in the SEZ region

Under the provisions of the Income Tax Act 10AA, 100% income tax exemption is available for export profits in the SEZ region for the first five years, 50% income tax exemption for the next five years, and 50% of increased export profits for the next five years. In accordance with the 115JB clause of the Income Tax Act, the minimum tax exemption is possible. Central Central Sales Tax, Service Tax, and State sales tax are exempted. h In accordance with the IGST provisions of 2017, the above three taxes in the SEZ region are integrated into GST, and a 0% tax is levied.

Details such as the Indian government's SEZ list and incentives can be found on the SEZ in India website (http://sezindia.nic.in/ #).

Gujarat

• Area: 196,063 ㎢

• Population: 60.4 million

• Commercial Capital: Ahmedabad

• Key industries: chemical and petrochemicals, aerospace and defense, pharmaceuticals, agriculture and food processing

• Major Areas: The Dahej Petrochemical Investment Area was created in the 453 km2 redevelopment area of the Kambat Bay Coast Belt in the Bharuch district.

• Note: There is the world's largest refinery Jamnagar and the world's largest ship dismantling yard Bhavnagar, with India's only liquid chemical port terminal.
  Gujarat is one of India's remaining states of electricity, and its main industrial products include cement and petrochemical products.

Haryana

• Area: 44,212 ㎢

• Population: 25.3 million

• Provincial capital: Chandigarh

• Main facilities: two international airports in New Delhi and Chandigarh

• Key industries: automotive and auto parts (50% of India's automobile production, 33% of motorcycles, 11% of tractors), agricultural base (India's second-largest grain producer and more than 60% of the nation's Basmati rice exports), food processing, textile and clothing industries, electronics and IT/ITeS (India's third software export area), renewable energy and solar complexes

• Note: 80% of India's escalators, 52% of cranes and 33% of motorcycles are produced, with approximately 1,670 large and medium-sized enterprises and more than 90,000 small and medium-sized enterprises with international airports.

Karnataka

• Area: 191,791 ㎢

• Population: 61.1 million

• Provincial capital: Bengaluru

• Major facilities: 3,250 km of rail network for smooth logistics movement.
  It has 11 ports, and New Mangalore Port is India's ninth largest port.

• Key industries: food processing, electronic system design and manufacturing, textiles (which account for 20% of India's total clothing production, with large clothing companies entering the market).
  144 R&D centers and 168 human resource development centers), automotive and auto parts, IT and BPM (Bengaluru is the world's fourth largest technology cluster and India's largest software export base)

• Note: India's state known for its technological innovation, R&D capital.
  It is the largest biotechnology hub in India, where Indian medical institutions and medical industry development institutions are concentrated, and software industrial complexes are also concentrated.

Maharashtra

• Area: 307,713 ㎢

• Population: 112 million

• State: Mumbai

• Major regions: 8 specialized food complexes (Butibori, Shandra, Nebasa, Latur, Osmanabad, Nanded, Chiplun), major automotive industrial complexes (Pune, Nashik, Aurangabad, Mumbai, Nagpur)

• Key industries: automobiles (global automotive and parts production facilities in the Pune Pimpely Chinchwad area; Skoda, Bajaj Auto, Audi AG) in Aurangabad; defense manufacturing (Punee Mahindra, Tata Motors, Bharat Forge), food processing, textiles

• Note: There are four international airports and seven domestic airports separately, two major ports and 53 small and medium-sized ports.
  In particular, Jawalhalal Nehru Port is the largest container port in India.

Rajasthan

• Area: 342,239 ㎢

• Population: 68.5 million

• Provincial capital: Jaipur

• Major Areas: Automotive Cluster Bhiwadi covers 8,000 acres.

• Key Industries: 138 major mineral mines, 15,136 small mineral mines, 74 exploration permits and 18,249 quarry permits have been granted for mining and mining, providing 800,000 direct and 2.5 million indirect employment.
  For construction, it aims to build 1 million affordable homes by 2022, and Jaipur, Udaipur, Ajimer and Koda have been selected as major smart city business sites.

Tamil Nadu

• Area: 130,058 ㎢

• Population: 72.5 million

• State: Chennai

• MAJOR REGIONS: Chennai's three ports and one port in Tuticorin are India's most convenient ports, while Chennai container terminals show the highest efficiency in India.

• Key industries: automotive industry, hardware and software (50% reduction in land, building purchases for IT and ITeS industries)

• Note: Global pharmaceutical firm Pfizer, global chemical firm Dow Chemical, and Shasun Chemicals are actively investing in biotechnology policies.

Uttar Pradesh

• Area: 240,928 ㎢

• Population: 199.8 million

• Leadership: Lucknow

• Major regions: Noida, Greater Noida, where manufacturing plants of mobile and consumer electronics companies are concentrated.

• Major Industries: The most famous Taj Mahal in Indian tourism is located, and the tourism industry has recently developed by opening the Yamuna Expressway (165 km) on the Noida-Greater Noida-Agra route.
  In particular, Noida and Great Noida are the largest manufacturing plant concentrations in northern India, where there are many headquarters and branches of Indian IT companies and factories of agricultural and raw material manufacturing companies.
  Typically, factories of TATA, IBM, and Indian sugar manufacturers are located.

Local subsidiaries are established through the Registrar Of Companies in accordance with India's Companies Act and are Indian domestic companies with the same legal status as Indian companies after prior approval.
The establishment takes about two to three months.

Currently, to attract foreign investment for establishing a local subsidiary in India, most manufacturing industries are expanding the scope of investment, including the Molon and infrastructure service sectors.
In principle, almost all industries, except those with investment restrictions, allow for 100% foreign ownership.

Even if an industry allows for 100% direct investment when establishing a local corporation, joint ventures might need consideration in certain cases, depending on the business conditions of each company contemplating investment.
Generally, it's known that single investments carry higher risks in overseas expansion compared to joint ventures.
However, in the context of India, the situation is often perceived differently.
Countries frequently encounter issues upon entering India, even when collaboration is based on the assurance of smooth relationships with partners.
Consequently, even when a stake of 51% or more is secured, decisions are frequently delayed or canceled due to conflicts with partners during actual decision-making processes.
This is especially true for general investment entry, not in cases involving the sale of capital goods, plants, technologies, etc., under favorable conditions.
These challenges associated with joint ventures should be reconsidered thoroughly.
Even if individual investment is preferred, regulatory requirements, such as those limiting investment shares to protect India's domestic industry, might necessitate mandatory joint ventures, particularly when entering specific industries.

The branch represents the Indian presence of a foreign company and is essentially treated as a foreign entity.
India imposes a high tax rate on foreign companies, subjecting the branch office to the same 40% corporate tax rate applied to foreign companies.
In India, the branch office is considered a foreign entity, not a corporation.
The activities of foreign companies in India are regulated by the central bank, limiting them to functions such as purchasing and selling, research activities, import and export operations, technical and capital cooperation with Indian companies, professional consulting services, software development, information technology services, as well as technical support for products supplied by the headquarters.
Branch offices can engage in practical business in India and are obligated to pay taxes, but they cannot participate in the manufacturing process of goods.

To establish a branch in India, approval from the Central Bank of India is required.
Non-resident companies seeking to establish a branch must demonstrate a profit-generating performance over the previous five years in their home country, and their net assets must exceed USD 100,000 or its equivalent.
Profits generated, after taxes, can be remitted through the Bank of India, subject to prior approval from the central bank's foreign exchange management department.
Moreover, specific documents mandated by the Indian Business Act must be submitted to the state's Business Registration Office (ROC) and the Business Registration Office in New Delhi.
Additionally, accounting documents must be submitted to the Business Registration Office annually after the branch is registered.

In the case of foreign companies, it is common to open a liaison office in the beginning to initiate business with India.
However, conducting direct commerce in India is not permitted for liaison offices.
They are established to explore business opportunities or promote products, and sales should not be generated, as liaison offices cannot engage in any commercial activities in India.
Consequently, liaison offices are not obligated to pay taxes, receive commissions, or charge for services.
All expenses incurred by the office must be remitted from the overseas headquarters, and withdrawing funds from India is prohibited, even when the liaison office is closed.
The Foreign Exchange Management Act (FEMA), which governs the establishment and operation of liaison offices in India, allows the central bank of India to approve their establishment.
The approval period can be extended to three years after the initial establishment.

To differentiate between a contact office and a branch office, it's important to note that a branch office can conduct business activities, whereas a contact office can only perform basic tasks such as market research or simple contact work.
A local corporation typically refers to a company registered as a domestic entity in the host country.
Hence, they share the same rights and obligations as domestic corporations.
Establishing a local corporation is necessary for local production.
Even if it is a 100% foreign direct investment company, it is considered a domestic entity in India.
Although differences exist between countries, in India, there is no significant disparity between branches and local corporations regarding business operations, tax obligations, and the application of domestic laws and systems.
However, when registered as a local corporation, various restrictions are imposed compared to branch offices to safeguard the interests of stakeholders, such as creditors and workers involved in the activities of the local corporation.
Due to these restrictions, corporations have a superior position in transactions and financing compared to branches.
Moreover, the Indian government prohibits branches from engaging in manufacturing activities, making the establishment of a local subsidiary the sole option for entering the manufacturing industry.

A public company refers to a company that has made an initial public offering for stocks or a company established with the intention of making a public offering in the future.
With the 2013 amendment to the Companies Act, the minimum capital requirement was abolished.
A public company must have at least seven shareholders and a minimum of three directors.
Additionally, at least one of the directors must have resided in India for at least 182 days in the fiscal year, which applies to both Indians and foreigners.
There is no maximum limit on the number of shareholders.
Public companies are categorized into listed and unlisted companies.
Moreover, at least one-third of the board of directors must consist of outside directors, and female outside directors must be included on the board of directors of a public company.
Even if a subsidiary of a public company is a private company, the standards of the public company are applied.

With the revision of the Companies Act in 2013, the minimum capital requirement was abolished.
During establishment, there must be two or more shareholders and two or more directors.
Additionally, at least one person, whether Indian or foreigner, must have resided in India for at least 182 days in the fiscal year.
The maximum number of shareholders cannot exceed 200.
Furthermore, at least one director must be either an Indian citizen or a foreigner who has stayed in India for at least 182 days within the current fiscal year.
Private companies have relatively more operational freedom compared to public companies.

Partnerships in India are governed by the Partnership Act.
Partners shall jointly enjoy all revenue as agreed upon in the Partnership Agreement and shall be jointly and severally responsible for all obligations arising from the business and for actions made through the Partnership as their respective partners.
Foreigners and non-residents cannot invest in India in the form of partnerships without prior approval from the Central Bank of India.

Limited Liability Partnership (LLP) is considered an Indian company that combines the characteristics of both a company and a partnership.
Unlike companies, LLPs do not issue stocks and do not have a board of directors or general shareholders' meetings.
Ownership and management are concentrated, as each partner owns a stake and participates in the governance structure of the corporation.
LLPs are governed by the Limited Liability Partnership Act (LLP Act) in India, not the Indian Company Act.
To establish an LLP, a minimum of two partners is required, one of whom must be a resident of India.

LLPs in India are a unique blend of limited liability companies and partnership characteristics, defined by the LLP Act.
One defining feature of LLPs is their permanence as legal entities, separating partners from the organization itself.
To establish an LLP, partners need to submit a document similar to articles of incorporation.
Upon submission, the Business Registration Office (RoC) issues a Certificate of Incorporation.
Notably, in industrial sectors where 100% foreign investment is permitted according to the foreign investment policy, foreign investment through an LLP is allowed.

In the form of a single-person company, even if there is only one shareholder, the company can be established.
However, the shareholder must be an Indian who has stayed in India for at least 182 days during the fiscal year.
Alternatively, if a foreigner has stayed in India for at least 182 days in the fiscal year, they may become a registered director of a one-person company.