The art of investing in India

BTG Legal on challenges and mitigation measures for technology firms entering India

“While India is now a leading global destination for foreign investment, doing business in India can be an operationally challenging and culturally bewildering experience for overseas investors. To aid your decision-making process when commencing and conducting operations in India, we have provided in this article a general overview of the legal regime governing doing business in India.”

Our assessment of potential challenges, and suggested mitigation measures, are intended to act as a broad legal guide, and should not be construed as specific legal advice. The Indian regulatory environment is constantly evolving, and we recommend that you contact us for specific advice on investments/expansion.

India entry: Strategic alliances

Setting up operations in India by non-resident/foreign entities requires compliance with Indian laws. The primary legislations that a non-resident must comply with include:

  • Foreign exchange laws: Any investments made into India by non-residents, and any funds sent thereafter for the business of the Indian entity, must comply with the Consolidated Foreign Direct Investment Policy issued each year by the Government of India as well as the Foreign Exchange Management Act, 1999 and regulations and notifications issued under this Act.
  • Company law: The Companies Act, 2013 regulates the incorporation and manner of conducting the affairs of a company.
  • Sector specific laws: In addition to the above-mentioned general legislations, there are specific laws regulating various sectors, such as laws applicable to financial services, defence, pharmaceuticals, telecom, etc. entities.

Strategic alliances offer the opportunity to navigate local complexities with greater ease and to better manage regulatory issues. Therefore, strategic alliances in India have typically taken the form of joint ventures and mergers and acquisitions (“M&A”). The success and sustainability of an alliance in achieving strategic and operational objectives may depend on how effectively the foreign partner can adapt to “doing business the Indian way”.

Set timelines, but be flexible

Incorporating legal entities in India can take time, and negotiating investments can be a time-consuming process, especially in regulated sectors. An Indian party unfamiliar with strategic investors will need time to get used to new structures and work paradigms. Agreed timelines may also slip on account of business and personal exigencies.

Plan schedules and business timelines with the extended process in mind.

Know if you are eligible to invest in the sector

While most business sectors are now open to 100% foreign investment, a few are still closed (like gambling), only partly open (like telecom and banking) or place conditions on foreign investment (like defence, multi-brand retail and e-commerce).

Before agreeing commercials, deep dive into the business to confirm that you can invest in the contemplated activities. Don’t just take the Indian party/promoter’s word for it.

Get exclusivity, but don’t commit to price

Termsheets and LoIs provide comfort that the Indian party/target is negotiating exclusively with you. However, only a handful of terms like exclusivity, dispute resolution and confidentiality are intended to be binding in these documents. Ask legal counsel for a termsheet draft that has terms customary for the Indian market.

If you need to commit to an investment/purchase price upfront, make sure to indicate that it is subject to legal/financial due diligence and tax structuring.

Due diligence and antecedents checks

Public information about Indian companies and promoters is often not readily available. Request a legal and financial due diligence before you invest. Consider an antecedents check particularly if the Indian party/target or its management is engaged in high visibility sectors like defence, real estate or government procurement.

Legal counsel and accountants will help with due diligence, but antecedents checks (in sensitive sectors) are usually done by specialised agencies.

Structuring the deal

In addition to tax, foreign exchange restrictions will most impact your investment structure. A foreign investor is restricted from investing below ‘fair market value’, and holdbacks and earn-outs are restricted in time period and value. If due diligence has thrown up requirements for any regulatory, lender or third party consents or approvals, build these into your structure.

Ask legal counsel for a funding/structuring note and discuss this with your tax advisors as well at the start of the project.

Licenses and permits

India has a federal system of governance, with separate (but not contradictory) legislations at the central and state levels. In the absence of a single window approval process, clearances are needed from multiple authorities.

It is important to carefully determine what central and state licences are applicable to the business. Meticulous planning and dedicated (in house or third party) resources are required specifically to make this determination and obtain these permits.


Be prepared for cultural differences when negotiating with Indian partners/promoters. As with every country, attitudes and negotiating tactics will differ from what you are used to.

Be respectful, but do not give up a commercial position only because the Indian partner ‘reacts badly’ to it. You need to be prepared to bargain hard.

Tech Transfer

If the ownership of technology and associated usage rights are not clearly detailed in an agreement, technology transfer and violation of the initial understanding on such rights could become critical issues later on.

Robust agreements and intellectual property (“IP”) policy must be put in place to prevent future conflicts.


Real estate in India is valued very highly. In case of termination of a JV, if land is integral to the business but does not transfer with the business, costs can rise to unforeseen levels.

Ideally, the JV company must either own the land or be entitled to occupy and use it, irrespective of the relationship between the partners.

Plan for closing

Prepare to have funds ready at closing and know how to route these to India. See if you need to pay stamp duty and make arrangements for this before closing. Ask your counsel if any pre- or post-closing approvals are required from the competition authorities, foreign exchange regulator, tax regulator, etc. Address specific issues like if you need the shares to be dematerialised to save stamp duty, etc.

Ask counsel to give you a typical ‘closing checklist’ for Indian transactions and build in redundancies (in timelines and procedures) for closing formalities.

Plan for post-closing too

Assess what you will need to run the business and have a transition plan in place, particularly if you have acquired 100% controlling interest. If you need to station directors in India, you will require to have them registered with the Indian regulators. You should have agreed employment agreements with key employees along with the investment agreements. Have the promoters introduce you to major customers and suppliers.

Retain key employees and agree on a business plan for the next 2-3 years at the time of the investment.

Funding routes

The procedure for foreign investors to fund and invest in an Indian company is regulated. Direct transfer of funds from overseas to bank accounts in India of an Indian subsidiary or JV partner, or for the purposes of an Indian acquisition, is not permitted. Foreign investors can only send money to India through a permissible route of investment, and the primary routes for funding strategic investments are set out below.

As such, business plans must consider not only the initial investment but also future funding requirements. In a JV, conduct comprehensive due diligence on the solvency and creditworthiness of the partner to ensure there are no surprises when it comes to funding capital contributions. In an M&A, choose your investment instrument as per your investment goal – for instance, is your priority control or would you prefer guaranteed returns.

Equity capital

Equity shares represent ownership in a company and entitle the holder to voting rights and a share in the success of the company (via dividends or capital appreciation or both). Equity share issuances to a foreign resident must comply with certain foreign investment restrictions particularly: (i) sectoral caps and entry routes, and (ii) pricing norms.


Compulsorily convertible debentures and compulsorily convertible preference shares are mandatorily convertible into equity shares within a specified period of time. Their price/conversion formula should be determined at the time of issue and must not be lower than the fair market value of the shares as on the date of conversion.

External Commercial Borrowings

Indian companies can raise commercial loans from recognised foreign lenders subject to regulatory guidelines. These include bank loans, buyers’ and suppliers’ credit, securitised instruments, preference shares/debentures which are not fully and mandatorily convertible etc. Regulations prescribe eligible borrowers/lenders, end-use restrictions, minimum maturity etc.

Doing business: Compliance risks and mitigation measures

It is important to understand key compliance risks in India and to obtain comfort that these are being appropriately addressed.

Leave specific compliance processes to capable Indian qualified professionals and work with your Indian partners and employees to integrate governance models that achieve required standards of compliance and transparency.

However, this does not mean compromising on compliance. Don’t impose your models en masse, but don’t accept existing compliance models at face value either.

Corporate compliance

Company law sets out extensive operational requirements and non-compliances can lead to fines, the company being struck off and liability attaching to directors and management of the Indian company.

It is important to bear in mind that there are various complex and paper-heavy compliance requirements of share issuances, board/shareholder meetings, auditor appointments, maintenance of various registers etc.

  • Appoint qualified Indian professionals (internal/external) for all compliance matters and maintain an annual audit checklist.
  • Ensure directors of the Indian company are aware of all operations (lack of awareness of non-compliance is no defence).
  • In a JV, ensure you are closely involved with operations and management to reduce over-dependence on the Indian partner.

Bribery and corruption

Corruption risks in India are generally perceived to be high due to the administrative and bureaucratic environment, particularly in the government procurement process. An offence will attract corporate criminal liability as well as personal liability of the directors and “officers in default”.

If you are relying on third parties (agents/brokers etc.) in dealing with government entities, exercise diligence to ensure all transactions are above board. Further, if no enforcement action is being taken by a regulator despite non-compliance, there is a greater need to obtain comfort that enforcement is not being avoided via undue influence.

  • Thoroughly communicate the company’s ‘zero tolerance’ policy towards corruption.
  • Institute whistleblower and anti-bribery training programmes for India-specific projects.
  • Monitor third party relationships and material transactions and conduct timely in–house/external audits of your policies to evaluate effectiveness.

Related party transactions (“RPT”)

Under company law, transactions between closely-held group companies attract criminal liability where a related party contract is authorised/entered into without consent of the board of directors and shareholders. Contraventions attract heavy fines and director disqualification.

If the Indian subsidiary is an intra-group service provider or part of a supply chain, ensure all intra-group transactions are authorised via the special procedure prescribed under law.

  • Institute guiding principles to assist the board to segregate ordinary activities from activities with other group companies.
  • Maintain documentation to justify RPTs on arm’s length basis.

Health and safety

Criminal liability (fines/imprisonment) can be imposed for unfair labour practices and failure to comply with laws pertaining to health, safety and welfare of employees.

Genuine complaints from employees of lack of health and safety measures and increased incidence of accidents, mishaps or health issues may be indicative of lax compliance.

  • Conduct regular risk assessments to determine which parts of the business and supply chains are at risk of safety violations.

Sexual harassment

Every woman is statutorily entitled to a safe and secure working environment free from any form of sexual harassment. Non–compliance may result in fines, rigorous imprisonment or cancellation/non-renewal/non-approval of business licenses.

An increased incidence of well performing women workforce resigning or a dominant patriarchal HR approach may be indicative of the existence and tacit forbearance of harassment.

  • Institute an India-specific policy (including establishing an internal committee) and training programmes for employees and consultants.
  • Evaluate the effectiveness of such policies through regular internal/external audits and direct interaction with women workforce.

Corporate social responsibility (“CSR”)

Company law mandates in respect of Indian companies (over a certain threshold): (a) a minimum level of CSR spending; and (b) formation of a CSR committee headed by the company’s board of directors. Companies must issue a public report of their CSR spending or provide an explanation for failure to meet the minimums.

Absence of a CSR policy or committee is a clear indication that management does not have a structured approach to this issue.

  • CSR should be sustainable and entail activities approved under company law.
  • Appoint a specialist CSR resource to oversee activities.

Environment protection

Criminal liability can be imposed if the company fails meet standards prescribed for prevention/control and abatement of environmental pollution.

Each state has its own policies on special kinds of waste (e.g. e-waste). Manufacturing processes involving effluent generation should additionally adopt specific treatment plans which should be regularly audited by HQ technical team.

  • Conduct technical audits on suitability and sufficiency of the treatment plants.
  • Legal departments must follow up on notices from authorities and track responses and mitigation measures.

Labour law compliances

Employees and workmen are entitled to a number of benefits and protected against unfair dismissal under various labour legislations. The applicability of specific labour legislations to the company will depend on the sector, location, nature of work etc. of the company and its units. Criminal liability (fines/imprisonment) can be imposed for non-compliance.

Failure to maintain records and registers is punishable in itself, and can also be a sign of failure to provide labour with legally mandated benefits.

  • Consult legal counsel to confirm the relevant labour legislations applicable.
  • Conduct thorough and regular audits to obtain comfort that all labour management practices are in accordance with legal requirements and are well documented.

IP protection

India has well-established statutory and judicial frameworks for safeguarding IP rights (“IPR”). However, enforcing IPR in India is not always straightforward and can be administratively difficult as the source of infringement may be a large number of small players.

The best way to address risks is to anticipate them and create a strategy to mitigate such risks.

  • Conduct an audit to identify IP assets in India: Remember that IP doesn’t only reside in registered trademarks and patents but includes customer databases, bespoke software, domain names, marketing material etc.
  • Remember that IPR are territorial: IPR must be registered in India even if you have previously protected them in another country. Consult a specialist for advice and assistance with specific IP registrations.
  • Create policies for employees: Employees should understand company IP policies as well as acceptable uses of any third party IP utilised in the business so they don’t violate IPR.
  • Institute confidentiality obligations: Trade secrets and know-how are protected under common law and through contractual obligations, and not under statute. Formulate non-disclosure agreements for third parties and ensure that employment terms contain confidentiality provisions requiring return of all confidential material upon cessation of employment and preventing use of confidential information in any new job.
  • Clearly establish rights over newly created IP: Ensure contracts with third party vendors or contractors (e.g. outsourcing contracts) specify who will own IP created in the course of performance of the contract, as well as any work done with it.
  • Institute data loss prevention measures: Implement a system that tracks any prohibited data movement and restrict the ability to send confidential data to external sources. This is particularly important as Indian data protection laws mandate reasonable data security measures and impose restrictions on the collection, storage and transfer of personal information.

Planning your exit

Exit Strategy

To derive optimum value from your investment, ensure you are able to respond with agility to changes in the market/regulation:

  • Proactively establish contingency plans: retain the ability to restructure the investment if the original strategy does not materialise.
  • Identify your exit early on: mould the business strategy in line with the potential exit option.
  • Detail the exit strategy in the transaction documents: define exit options (IPO, buy-out, winding up etc.), trigger events (milestone date, performance-based etc.) and the process to initiate and execute the exit.
  • Conduct periodic assessments: evaluate whether the investment continues to meet your strategic objectives and is still an optimal use of invested assets.

Dispute Resolution

Because of the regulatory framework, litigation in India is a long-drawn and expensive process. This can adversely affect the business and dilute the value of your investment. Dispute resolution should preferably be through alternate dispute resolution mechanisms such as mediation and arbitration, and where possible conducted via a neutral body/jurisdiction.


The Government of India has in recent times taken a proactive approach to create a more investor-friendly atmosphere in India. Various measures have been taken to attract foreign investment and liberalise the foreign investment policy. The Government has launched several schemes such as the flagship “Make in India” scheme which promotes manufacturing in India to boost job creation and skill enhancement and to facilitate investment, and the “Start-up India” initiative under which laws for incorporating and carrying out business in India have been eased to assist entrepreneurs set up business easily. The ultimate aim of the Government is to ensure, through these reforms, that India continues to be an attractive investment destination for non-residents.

Contact BTG

Queries? Connect with us:

804, Lodha Supremus,
E. Moses Road, Worli, Mumbai 400018

43, Residency Road,
Bangalore 560025

+91 22 6177 2900 / 2482 0820

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