23: How can French companies navigate India’s complex regulatory environement? Léa Parmantier French Desk ASA
Driving Growth and Overcoming Challenges in the Indian Market!
Hi Kula Readers,
This week we bring you the story of Léa Parmentier, a young professional who is leading the French desk of an international consulting firm in India - ASA.
With Léa we dug deep into the intricacies of doing busines in India for French companies, we discussed the change of the MFN clause rule and we delved into the legal aspects of setting up a company in India with a particular eye on French companies.
Key Takeways
Opportunities for French companies in India: Despite India and France enduring a 25 years bilateral agreement, French companies still lag behind other European nations when it comes to development in India. For reference more than 1800 German firms are operating in India vs 600 French companies. For this reason Macron and Modi have pledged to increase the collaboration between the two nations and double down on commercial trade efforts.
Navigating Challenges: Supreme Court Ruling on MFN Clause: The Supreme Court of India has recently issued a ruling on the Most Favored Nation (MFN) clause in the India-France tax treaty, significantly impacting tax rates for French companies repatriating funds from India and those establishing business in India. As a result, French companies are now subject to higher tax rates on repatriated funds from India and have been advised to add a 10% tax on their invoices until the issue is resolved.
Production Linked Incentives (PLI) to stimulate economic growth: The Indian government has launched several incentives to attract foreign investments and boost economic growth. The Production Linked Incentives (PLI) schemes offer additional sales incentives of 4-6% depending on the sector.
ASA Corporate Catlyst India
ASA Corporate Catalyst India is a leading business advisory firm playing a pivotal role in fostering stronger ties between the French and Indian tech ecosystems. With over 32 years of experience in assisting international companies in India, and a strong regional presence, ASA is the preferred choice for SMEs and Fortune 500 companies looking to set up operations in the country.
Lea, a key member of the ASA team, has been at the forefront of this collaboration. She started her journey in India six years ago, working to expand French companies into the Indian market. Today, she is responsible for business development, scouting and then assisting French companies interested in India. She also represent ASA at Indo-French events, and recently she had the pleasure of attending the networking lunch during Macron official visit in India earlier this year.
Changing Landscape: French Companies Catching Up in India
The landscape for French companies in India has significantly evolved in the past 10 years. While Japanese manufacturers have been present in India for over 25 years, and German companies having a strong foothold with around 1,800 firms, French companies are now catching up.
Our major clients are Japanese companies, which have been heavily investing in India for the past 20 years - Léa Parmentier
There are currently around 600-700 French companies in India, up from just a handful a decade ago. This growth is driven by the Make in India policy, which has attracted companies looking to set up manufacturing bases in the country. Additionally, the large domestic market and the potential to serve the wider Asian region have made India an attractive destination for French firms.
Many companies are setting up business in India and selling in all of Asia (China +1) due to India strategic positioning and more favourable political conditions - Léa Parmentier
Here you can find a list of top French companies in India: https://it.scribd.com/document/516053979/List-of-Top-French-Companies-in-India
Navigating Challenges: Supreme Court Ruling on MFN Clause
One recent challenge faced by French companies in India has been the Supreme Court ruling on the Most Favored Nation (MFN) clause in the India-France tax treaty in October 2023. The ruling has significantly impacted the tax rates applicable to French companies repatriating funds from India and companies setting to establish business there.
We are seeing many French companies struggling to understand this new regulation and feeling stuck - Lea Parmentier
The MFN clause in the India-France tax treaty, signed in the 1990s, allows France to benefit from more favorable tax rates if India signs a bilateral tax agreement with another country. This clause applies to the tax rates on dividends, royalties, management fees, and fees for technical services (FTS) that French companies repatriate from India.
With the new Supreme Court ruling the applicability of the MFN clause is shaking. Here are the key points from the ruling:
The MFN clause needs to be notified separately by the Indian tax authorities for it to be applicable
The third country that has a better tax treaty with India must be an OECD member when the treaty was signed with India. This led to issues for France, as it was using the lower tax rates from Slovenia, which is not an OECD member
As a result of the ruling, French companies are now subject to higher tax rates on repatriated funds from India. They have been advised to add a 10% tax on their invoices until the issue is resolve
The ruling has led to significant lobbying between the Indian and French governments to find a solution. In the meantime, French companies are facing increased tax burdens, which could impact their competitiveness in the Indian market
The MFN clause issue highlights the importance of carefully structuring tax treaties and staying up-to-date with changes in tax laws when doing business in India - Léa Parmentier
As stated by ASA in their recent publication, this new ruling also have a significant impact when it comes to fund repatriations While dividends and share buybacks are primarily intended to distribute surplus funds of a business, other funds such as royalties, fees for technical services (FTS), and interest represent expenses for the Indian entity. Consequently, these expenses are closely scrutinized for substantive commercial considerations and must be supported by robust documentation.
To deep dive into the MFN ruling you can read these studies:
India: Notification required for taxpayer to claim benefit under income tax treaty most favored nations clause - KPMG
Tax alert: Apex Court interprets MFN clause in certain tax treaties - Deloitte
Indian Supreme Court Ruling on MFN Clause - PWC
FEMA regime and FDI - Key acts and regulations
Investing in a foreign country, especially India, without having a clear understanding of the regulatory environement it’s a death sentence. That’s why we have decided to create a small guide to lead you.
Knowing this key regulations is vital for French companies to operate and thrive in India- Léa Parmentier
The first Act, is the Foreign Exchange Management Act, 1999 (FEMA), a pivotal legislation continually updated to reflect evolving economic landscapes. Complementing FEMA are its subsidiary regulations like the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules), and the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019.
Moreover, the regulatory landscape is enriched by the Consolidated **Foreign Direct Investment Policy,** 2020, a document overseen by the Department of Promotion of Industry and Internal Trade (DPIIT). This policy, subject to periodic revisions through DPIIT's press notes, plays a crucial role in shaping foreign investment strategies. Collectively known as 'the FEMA Regime,' these legislative pillars form the backbone of India's foreign exchange governance.
Foreign direct investment in India (FDI) - opportunities and limitations for the 11th biggest investor in India
France is the 11th largest investor in India, with cumulative FDI inflows of $10.94 Bn between Apr 2000 to Mar 2023. To deep dive into the economic relationships between India and France you can read this study by the Indian Governement
Foreign direct investment inflow from France to India from financial year 2013 to 2022, with an estimate for 2023 - Statista
Despite the obvious challenges, there are significant opportunities for French businesses in India especially in key sectors like manufacturing, renewable energy, and digital technologies. However adopting a long-term approach when entering the Indian market is the backbone of companies success - Léa Parmentier
However, ASA emphasizes the importance of a long-term approach when entering the Indian market.
FDI is freely authorised in all sectors, with the exception of atomic energy, railways, lotteries, tobacco, trade in development rights and the defence sector. In addition, there are certain sectors where sectoral ceilings apply to investments, namely the retail trade, telecommunications, media, insurance, etc.
Subject to FDI policy, foreign investors may invest in:
shares in listed or unlisted, public or private companies. Limited Liability Partnerships (‘LLPs’)
units in Alternative Investment Funds (‘AIFs’), Real Estate Investment Trusts (‘REITs’) and (REITs) and Infrastructure Investment Funds (‘InvIt’).
Acquisition, trading of real estate.
While authorising FDI applications, regulators specifically verify the beneficial ownership of the proposed investment in India. Any beneficial owner from a country sharing a land border with India or in which the beneficial owner of the proposed investment is located or is a citizen of such a country, requires specific specific governmental approval.
Establishing a reliable partnership is crucial, as is defining all the details of a joint venture agreement from the outset. It's also important to have a resident director in India for at least 182 days per year to ensure compliance with local regulations.
When doing a Joint venture make sure to define all the little details and make sure to include a call or put option in the contract - Léa Parmentier
Léa suggest companies to partner with family businesses in india which are often more reliable and more stable given the Indian business environement.
According to a Credit Suisse report, India has the third-largest number of family-run businesses globally, following the US and China. The report indicates that India is home to 111 family-owned businesses with a combined market capitalization of $839 billion. These family businesses play a significant role in the Indian economy, contributing approximately 79% of the country's GDP and employing around 60% of the Indian workforce.
Family businesses in India often exhibit strong stakeholder relationships, community embeddedness, and a commitment to family values, which contribute to their stability and consistent performance - Léa Parmentier
Exploring Foreign investments in India - three possible routes (FDI - FVCI - FPI)
During our interview Léa put a special emphasis on the different possibilities for foreign companies wanting to invest in India. There are mainly three different modes in which foreign companies can make an investment in India: FDI, FVCI, and FPI
Foreign Direct Investment (FDI): Foreign Direct Investment (FDI) governed by the Consolidated FDI Policy, refers to the investment by a foreign entity in a domestic company in India. This can include investments in the form of equity, loans, or other forms of financial assistance.
Foreign Venture Capital Investment (FVCI): Foreign Venture Capital Investment (FVCI) governed by the Foreign Venture Capital Investment Scheme, refers to investments by foreign venture capital firms in Indian startups and small businesses, that meet specific criteria, such as being less than 10 years old and having a turnover of less than ₹100 crore. The investment limit for FVCI is ₹100 crore per startup, and the total investment by a foreign venture capital firm in all Indian startups cannot exceed ₹500 crore
Foreign Portfolio Investment (FPI): Foreign Portfolio Investment (FPI) governed by the Foreign Portfolio Investment Scheme, refers to investments by foreign entities in Indian securities, such as stocks and bonds. FPI is governed by the Foreign Portfolio Investment Scheme, which outlines the rules and regulations for foreign entities to invest in Indian securities. The investment limit for FPI is ₹100 crore per entity, and the total investment by a foreign entity in all Indian securities cannot exceed ₹500 crore
What are the different possibilities for a foriegn company to Invest directly in India or establish a subsidiary
When we asked Léa this, she told us that the first questions that every company needs to understand before investing in india is:
What is our aim in India? - Léa Parmentier
Hence, what are their objectives in India, what is their committment, how much can they invest, what is their idea of the Indian market, what is their current knowledge etc
Once understood their objective, they can start to think which type of entity to create
In India there are 6 type of entities that can be created by a foreign company
Here is a comprehensive table summarizing the pros and cons, along with the suitable use cases for each type of entity for foreign companies establishing a presence in India:
Before establishing a presence in India, it is essential for foreign companies to determine the appropriate structure based on their specific needs and goals. They should also ensure compliance with relevant laws and regulations, such as obtaining necessary approvals and licenses from the RBI and other government agencie
Here you can find a comprehensive guide in French by ASA on how to do business in India https://www.asa.in/insight/guide-faire-du-business-en-inde/
Production Linked Incentive Schemes for 14 key sectors aim to enhance India’s manufacturing capabilities and exports
The Indian governement in an effort to attract investments in key sectors and cutting edge technology in the country has defined a budget of Rs. 1.97 lakh crore (over US$26 billion) to enhance India's Manufacturing capabilities and Exports launching the so called “Production linked incentives”.
These schemes offer an incentive of 4-6% on incremental sales (over base year) of goods manufactured in India of specific segments, to eligible companies, for a period of five (5) years subsequent to the base year as defined.
You can learn about the specific sectors and regulations on the governement website page
The purpose of the PLI Schemes is to attract investments in key sectors and cutting-edge technology, ensure efficiency and bring economies of size and scale in the manufacturing sector and make Indian companies and manufacturers globally competitive
What’s next for France and India relationship? How can you contribute and profit from it?
This article can serve as a blue print for French companies wanting to operate in India, providing the basic principles and norms to thrive in a continuosly chaniging environement both in political terms but also in socio economic. Doing business in India requires attentive study of the market, as it is with other developing countries, requires chosing the right local partners and advisors, but most importantly it requires you to adapt to the local norms and culture.
On a closing note, India and France are on the road to a prosperous growth and commercial relationship, witht 2023 marking as the 25th anniversary of the bilateral trade. The willingness from both sides to nurture and grow this promis has been shown during the recent visits of president Macron in India earlier this year, and the pledges that have been done on both sides.
Here you can find a joint statement of the visit highliting the key elements that have been discussed and agreed
With the political elections taking a different turn than expected, should we expect a change in the political approach toward France and Europe?
What do you think are the elements slowing down the economic relationship between India and France?
How can Kula Connect help you?
As Kula Connect we aim to help European companies to expand in India and establish their business there through our network of partners and expertise.
If you you need assistance in setting up your business in India or you have specifc queries, reach out to us!
Our team will give you assistance in any matter or connect you with the right person! kulaconnect.ineu@gmail.com