Liberalization of the Indian economy began in mid-1991.  Foreign investment is now encouraged and many foreign companies have established operations in the country.  Under the New Industrial Policy, 1991 (amended from time to time), the Government of India ("GOI") has opened up most sectors for 100% foreign investment under the automatic route.  In addition, sectoral caps have been prescribed by the GOI where 100% foreign investment is not permitted.  Sectors such as banking, telecommunications, print media, etc. are among the restricted restricted, where foreign companies can invest upto 49% or 74% (as designated) in the equity of an Indian joint venture company.  In the restricted sectors and in cases where a foreign investor has an existing joint venture or technology agreement with an Indian company in the same field, prior GOI approval is required.  Investments falling within the 100% foreign investment category do not require the prior GOI approval.  All that such an investor needs to do is to intimate the Reserve Bank of India, once the foreign investment is made.

Under India's Companies Act, 1956, as amended, it is possible to incorporate private, public and non-profit companies.  A private limited company (closely held corporation) requires a minimum of two directors and between two and fifty members.  Additionally, its articles of association must impose restrictions on transfer of its shares.  A private limited company cannot raise funds from the public through IPOs, etc., and this can be done only by a public limited company, which requires a minimum of three directors and seven members.  Currently, Indian company law does not permit limited partnerships (LPs) and limited liability companies (LLCs).

The memorandum and articles of association of an Indian company cannot be amended except by a vote to that effect by holders of 75% or more of the voting stock of the company.  However, day-to-day management control can be effected through ownership of 50%+1 share of the voting stock of the company.  The foregoing percentages need to be kept in mind when negotiating joint ventures or other arrangements with Indian companies.

The current rate of income tax applicable to Indian companies is 30% plus a surcharge (effectively, 33.66%).  The current rate of income tax applicable to branch offices or Permanent Establishments of foreign companies in India is 40% plus a surcharge (effectively 41.82%). These rates change annually with effect from April 1.

India has executed double taxation avoidance agreements with many countries, including the UK, the US, Cyprus, Mauritius, Singapore, etc.  Favorable tax treatment is available under these treaties.  It is fairly common for international companies to route their investment into India through Mauritius in order to avail of reduced withholding taxes on payments of royalty, technical service fees, interest on loans, capital gains, etc.