Most foreign companies spend months deciding how to enter India, i.e., whether to set up a subsidiary, form a joint venture with a local partner or open a branch. Far fewer spend the same effort on what happens once the entity exists. Yet it is usually after entry, when the business is running and the relationships are tested, that the gap between what an investor expected and what Indian law actually gives it becomes visible.
In short, the risks foreign companies most often underestimate in India are not about choosing the right structure. They concern whether the investor can actually control the entity it owns, whether its contracts can be enforced on the terms it negotiated, whether it owns the intellectual property created for it, whether anyone is responsible for keeping the business compliant, and whether it can leave at the price it agreed. Each of these can be addressed at little cost during structuring and negotiation, and at considerable cost once a dispute has arisen.
This article works through five practical scenarios, each illustrating one of these risks, explains the legal position in India, and sets out what should have been done at the outset. The scenarios are illustrative and do not describe any particular client or case. The article is written for foreign investors, in-house counsel and business leaders managing Indian operations.
Why the Entry Structure Is Only the Beginning
The choice of entry vehicle settles how a foreign company is registered, taxed and regulated. It does not settle how decisions are made within the vehicle, how disputes with partners and counterparties will be resolved, or how the investor can leave. Those questions are answered by the shareholders' agreement, the articles of association, the commercial contracts and the regulatory framework that applies to the business from day to day. When those documents are drafted in haste, or on templates designed for another jurisdiction, the investor often discovers their limits only when it needs to rely on them.
Scenario One: The Majority That Could Not Decide
A foreign company holds 74 per cent of an Indian joint venture, and its local partner holds the remaining 26 per cent. The shareholders' agreement gives the foreign company the right to approve the annual business plan and to appoint the managing director. Three years later, the partners fall out. The foreign company wishes to alter the company's articles and raise fresh capital, but the local partner refuses, and the investor discovers that several of its rights under the shareholders' agreement were never written into the articles.
What the law says. Under the Companies Act, 2013, a special resolution, which is required for matters such as amending the articles, requires the votes cast in favour to be at least three times the votes cast against. A shareholder holding more than 25 per cent of the votes can therefore block such resolutions. In addition, the Supreme Court held in V.B. Rangaraj v. V.B. Gopalakrishnan (1992) 1 SCC 160 that restrictions on the transfer of shares which are not contained in the articles are not binding on the company. As a result, Indian practice has long required that key shareholder rights be incorporated into the articles. Nominee directors also owe their duties to the company under Section 166 of the Act, and not to the shareholder who appointed them, so the investor cannot assume that its nominees will simply follow instructions.
What should have been done. The investor should have mapped every important decision against the voting threshold it requires, recognised that 74 per cent gives control over ordinary resolutions but not necessarily over special ones if the partner holds more than 25 per cent, incorporated its rights into the articles at the time of the investment, and agreed a clear deadlock mechanism, such as escalation to senior management, mediation and, ultimately, a buy-sell arrangement.
Scenario Two: The Contract That Worked Everywhere Except India
A foreign manufacturer appoints an Indian distributor under its standard global agreement, governed by New York law, with disputes to be resolved by the New York courts. The agreement prevents the distributor from selling competing products for two years after termination. When the relationship ends, the distributor immediately begins selling a competitor's products, and the manufacturer obtains a judgment in New York. It then finds that neither the restriction nor the judgment can be readily enforced in India.
What the law says. Section 27 of the Indian Contract Act, 1872 renders void any agreement in restraint of a lawful trade, subject to a narrow exception for the sale of goodwill. In Percept D'Mark (India) (P) Ltd. v. Zaheer Khan (2006) 4 SCC 227, the Supreme Court confirmed that restrictions operating after the contract has ended are generally unenforceable. Covenants which operate during the term of the contract, such as exclusivity, stand on a different footing. As for the judgment, Section 44A of the Code of Civil Procedure, 1908 allows judgments from "reciprocating territories" to be executed directly in India, but the United States is not one of them, so a fresh suit on the judgment would be needed.
What should have been done. For contracts with Indian counterparties, arbitration is usually the more effective route, as India is a party to the New York Convention and foreign awards from Convention countries can be enforced under Part II of the Arbitration and Conciliation Act, 1996. The Supreme Court has also held that two Indian parties may choose a foreign seat of arbitration (PASL Wind Solutions Pvt. Ltd. v. GE Power Conversion India Pvt. Ltd., 2021), and has upheld the enforceability of an emergency arbitrator's order in an India-seated arbitration (Amazon.com NV Investment Holdings LLC v. Future Retail Ltd., 2021). The commercial protection itself should have been built around in-term exclusivity, minimum purchase commitments and confidentiality obligations, rather than a post-termination non-compete which an Indian court is unlikely to enforce.
Scenario Three: The Technology the Subsidiary Did Not Own
A foreign software company sets up an Indian subsidiary, which engages a team of independent contractors to build a product for the group. Separately, its Indian distributor registers the group's brand as a trade mark in India in its own name. When the group later seeks to sell the business, the buyer's due diligence reveals that the subsidiary cannot show it owns the code, and that the brand in India belongs to someone else.
What the law says. Under Section 17 of the Copyright Act, 1957, an employer is the first owner of works created by employees in the course of employment, but this does not extend to independent contractors, who remain the first owners of what they create unless the rights are assigned. An assignment must be in writing under Section 19, and where the agreement does not specify its duration or territory, the Act presumes a period of five years and a territory limited to India. On trade marks, a foreign brand owner cannot assume that its reputation abroad will protect it in India. In Toyota Jidosha Kabushiki Kaisha v. Prius Auto Industries Ltd. (2018) 2 SCC 1, the Supreme Court held that Toyota had not established that its "Prius" mark had acquired goodwill in India at the relevant time, and the claim failed.
What should have been done. The subsidiary should have used written, worldwide and perpetual assignments of intellectual property in every contractor and consultancy agreement, and assignment clauses in employment contracts covering work created outside working hours where relevant. The group's trade marks should have been registered in India in the parent's name before the brand was introduced to any local partner, with the distributor given only a limited licence.
Scenario Four: The Compliance Gap Nobody Owned
A foreign parent runs its Indian subsidiary with a small local team, while all major decisions are taken at headquarters. Two years in, it discovers that the reporting of its share subscription to the Reserve Bank of India was filed late, that its annual return on foreign liabilities and assets was missed, and that its employment practices have not been updated for the new labour codes. Its directors in India are now personally exposed.
What the law says. An Indian company receiving foreign investment must report the issue of shares in Form FC-GPR within 30 days of allotment and file an annual return on foreign liabilities and assets by 15 July each year, and contraventions under the Foreign Exchange Management Act, 1999 attract penalties, although many can be compounded. The regulatory baseline has also moved significantly. The four labour codes came into force on 21 November 2025, replacing a large number of earlier labour statutes, and the Digital Personal Data Protection Rules, 2025, notified in November 2025, bring the Digital Personal Data Protection Act, 2023 into operation in phases. Changes in the ownership chain can also have consequences, as investment linked to countries sharing a land border with India may require government approval.
What should have been done. Compliance should have been treated as a governance function from the outset, with a named owner in India, a compliance calendar covering corporate, foreign exchange, tax, labour and data protection obligations, and regular reporting to the board. Where decisions are taken abroad, the investor should ensure that its Indian directors receive the information they need to discharge duties which the law places on them personally.
Scenario Five: The Exit That Was Priced by Someone Else
A foreign private equity investor holds a minority stake in an Indian company and has a put option requiring the promoters to buy its shares after five years at a price giving it a fixed annual return. When it exercises the option, the promoters argue that the clause is unenforceable under India's foreign exchange rules.
What the law says. The Foreign Exchange Management (Non-debt Instruments) Rules, 2019 permit equity instruments with optionality clauses, but only subject to a minimum lock-in of one year and without any assured return, and a non-resident selling shares in an unlisted company to a resident cannot receive more than their fair value determined under an internationally accepted pricing methodology. A put option promising a fixed return therefore conflicts with the rules. Indian courts have nonetheless enforced foreign arbitral awards arising from such arrangements. In NTT Docomo Inc. v. Tata Sons Ltd. (2017), the Delhi High Court enforced an award of about USD 1.17 billion, treating it as damages for breach of contract. However, that route depends on the facts, on the framing of the award and on the courts' approach to public policy, and it is not a substitute for a compliant exit mechanism. The tax treatment of the exit is a further consideration, as the Supreme Court's January 2026 judgment in the Tiger Global case shows that treaty relief on exit gains can no longer be assumed.
What should have been done. The exit should have been structured around fair value, with the valuation methodology agreed in advance, supported by drag-along and tag-along rights, a right to require an initial public offering or third-party sale within a defined period, and contractual remedies framed as damages for breach. Tax on exit, including withholding by the buyer and indemnities from the seller, should also have been addressed in the investment documents.
Addressing These Issues at the Negotiating Table
The common thread in each scenario is timing. The investor had leverage when it was negotiating its entry, and lost it once the money was invested and the relationship had soured. Before signing, a foreign company entering India should:
- Test its control against the statute. Map each important decision to the voting threshold the Companies Act requires, and make sure its rights appear in the articles of association as well as the shareholders' agreement.
- Draft contracts for Indian enforcement. Use arbitration with a carefully chosen seat, avoid relying on post-termination non-competes, and check whether any foreign court judgment would be enforceable in India.
- Secure its intellectual property in writing. Obtain written, worldwide and perpetual assignments from everyone who creates work for the business, and register trade marks in India in its own name before introducing local partners.
- Assign responsibility for compliance. Build a compliance calendar, name an owner in India and report to the board, particularly in light of the labour codes and the data protection rules.
- Plan the exit on the day of entry. Use exit mechanisms that comply with the foreign exchange pricing rules, agree the valuation method in advance and allocate exit tax risk in the documents.
Conclusion
Foreign companies rarely fail in India because they chose the wrong entry vehicle. They run into difficulty because the documents governing that vehicle did not reflect how Indian law treats control, contracts, intellectual property, compliance and exit. Hence, the most valuable legal work in a market entry is often done after the structure has been chosen but before the first rupee is invested. Thus, an investor that addresses these issues while it still has negotiating leverage will find that the market reality in India is far closer to the market entry it planned.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
