Applicable Laws & Legal Compliances for India Entry of Foreign Drone & UAV Manufacturers: Best FDI Attorney Advice in Delhi NCR
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“In the recent years a lot of drone and UAV manufacturers are looking forward to their India entry by way of foreign direct investment in India. The Make in India initiative has opened the gates for foreign corporations to register their company or register their corporation in India. The drone and UAV market shall be witnessing an exponentially huge growth and the Government of India has also tweaked its policies. Therefore, the foreign Investor or Corporation should consult the best FDI attorney in India and obtain legal advice before investing their money in India.”
Introduction
Drones also known as Remotely Piloted Aircraft (RPA) or commonly known as Unmanned Aerial Vehicles (UAV) have become a major part of a countries administration system widely used for reconnaissance and surveillance missions. The increase in the use of drones in the commercial, military, and civil domains has posed serious concerns which paved the way for legal regulations and legislations to govern drone activities in the country. These policies aim to ensure the regulated use of drones and the safety of its citizens and also at protecting the fundamental rights such as the right to privacy of its citizens. India has enacted several policies and regulations to ensure that Unmanned Aerial Vehicles (UAV) are used to shape the governance structure of the country by benefiting its citizens. These unmanned vehicles have varied set of applications from monitoring citizens for governance purposes to aerial mapping. India, as a country which promotes and supports technological development, its ambition for UAVs is high but it is facing hurdles in regulating business activities and promoting international business in India without a full-fledged law governing drones or UAVs.
Applicable Laws governing Drones in India
The Directorate General of Civil Aviation (DGCA), India’s civilian airspace regulator, issued guidelines for the use of RPAs in Indian airspace by civilian and commercial entities on August 27, 2018. The policy is also seen as beneficial and successful because it is likely to solve a large regulatory gap in India’s drone regulation management and execution. The drone is regulated in India presently based on the Drones Rules, 2021. As per the regulations released by the Directorate General of Civil Aviation on February 9th 2022, import of drones or UMV is banned in India with certain exceptions. The ban is not applicable to drones which are imported for military, defense, and research and development purposes for foreign companies with “due clearance” attained from the DGCA. But the imports of components to India do not require any approvals. Drones in completely knocked down or completely built up or semi knocked down form is prohibited and this exception is also granted to security, defense, research and development. This initiative was taken to boost the ‘Make in India’ movement and encourage business and manufacturers in India. However, the import of components of drones is not banned but some restrictions are imposed on the import taking into consideration the safety and security of the country. Import of drones are allowed by any educational institutions which are recognised by the state or central government, by drone manufacturers, government recognised research and development entities, or by government organizations only in cases where the import authorisation is received from Directorate General of Foreign Trade. The list of companies which may import drones for the purpose of defense and security is not specified in the notification.
For a foreign company to register as a drone manufacturer in India, it has to register itself through the digisky portal managed by the Directorate General of Civil aviation. However, for a foreign company to register as manufacturer of UAVs it has to be an authorized representative of a company which is in India. For the purpose of the registration as a drone manufacturing company the digisky’s website, the name as per the identity proof will be requested (The id proof will be asked in the later stages), email id of the organization, a mobile number registered in India and a unique password. After the stage of registration, a profile should be created to proceed further with the application.
The Sea Customs Act of 1878, the Aircraft Act of 1934, the Indian Telegraph Act of 1885, the Indian Wireless Telegraphy Act of 1922, and the Foreign Trade Act of 1992 all regulate the import of drones into India. The certificate of production and airworthiness from the Directorate General of Civil Aviation is required to obtain an import clearance for a drone. This Certification Criteria applies to Unmanned Aerial Systems (UAS) made in India by local manufacturers as well as importers of UAS. Under the UAS Certification Scheme, local producers, importers, and assemblers of UAS are referred to as manufacturers. Furthermore, India is regarded as one of the world’s top three importers of military-grade drones. All individuals who own or possess, or are engaged in leasing, operating, transferring, or maintaining a UAV in India, all Unmanned Aerial systems that are currently being operated in or over India, and all UAV that are registered in India are covered by the Aircraft Act. Except in the case of an Unmanned Aerial system with a maximum all-up weight of more than 500 kilograms, the rules of the 1937 Aircraft Rules are not applicable to Unmanned Aerial systems. The act does not apply to Unmanned Aerial systems owned or operated by the Union of India’s naval, military, or air services. In India, no person may fly an UAV unless it complies with a type certificate or is excluded from the necessity of a type certificate under the rules mentioned in the act.
Any individual requesting a type certificate must submit a request in Form D-1 on the digital sky platform, along with the fee mentioned in rule 46, and the prototype Unmanned Aerial system must be physically delivered to the authorized persons, details, and documents required in respect of the prototype UAVs.
Within sixty days of receiving the application, the Quality Council of India or the certified testing body will review the proposal and send the test report, along with its suggestions, to the Director General. Within fifteen days of receiving the test report, the Director General shall grant to the individual a type certificate for the specified kind of Unmanned Aerial system based on the test report and the suggestions received. The Director General may provide type certification to any kind of Unmanned Aerial system based on the approval granted to that type of UAVs by such of the Contracting States as may be designated by the Central Government by the announcement in the Official Gazette.
Methods through which a Foreign Company can be an Authorized Representative of an Indian Company
There are numerous ways for a foreign corporation to establish a presence in India. The choice of business structure is entirely dependent on the desired outcomes. For foreign enterprises looking to enter India, there are primarily three options which are forming a Subsidiary/Joint Venture (JV), the second one is by opening a Branch Office (BO) and the third alternative is to form a liaison office (LO). A foreign company can operate as an Indian entity or as a foreign company in different ways. As a foreign entity, it may form a liaison office, or a branch office, or a project office. In case it wants to operate as an Indian entity it can be a limited liability company, joint venture Indian partner, Limited liability partnership. Incorporating a company in India has been made easier and faster than in the past. The ministry is taking a number of steps to make it easier for Indian and foreign subscribers to form a company in India at a low cost and in a short amount of time. The ministry has taken some initiatives as part of easing the doing of business. It includes online Filings, New web forms allow for on-screen filing and real-time data verification, allowing for smooth company formation, Faster application processing, with practically all filings being done online and in real time, modern web forms allow an investor to start a corporation in as little as 5-6 days. It only has minimum fees the Companies (Incorporation) Rules, 2014, Rule 38(2). With the publication of this announcement, the MCA will charge no fee for all incorporations with an authorised capital of up to INR 15, 00,000. Further, there is no Minimum Paid Up Capital Requirement, The Ministry of Corporate Affairs has granted private companies an exemption under the Companies (Amendment) Act, 2015, which abolished the requirement for a minimum paid up capital. There is also no need for a Director Identification Number (DIN). A DIN is only given to people who are going to be directors of a new company or who are currently directors of a company. Due to which DIN is not necessary to be applied for separately when forming a new company; it is issued suo moto by MCA when filing a company formation application. There is no Physical Presence of the applicant required in India. Documents can be apostilled and added to a form without the need to travel to a specific location. There is no CAP percentage and the GST, PAN and TAN shall be issued.
Liaison Company Office
One of the ways for a foreign company to establish a business presence in India is to form a liaison office or a representative office; the other options are to open a branch office, a Limited Company (either as a wholly owned subsidiary or as a Joint Venture) or a Limited Liability Partnership. A Liaison Office is a safer way for any foreign company which wants to start a business in any country since its very distinctive as the company is not fully establishing its business but merely opening an office to study and learn about the business in India before making huge businesses decisions. A Liaison Office aims to establish a foreign company’s first presence in India.
The Liaison Office can only perform liaison functions, i.e., it can act as a communication link between the Head Office and parties in India. The main task of a liaison office set up in India is limited and focused on gathering information and studying the potential market opportunities and to enlightening the Indian customers about the working of the company and the products they sell. The costs of such offices will be totally covered by inward remittances of foreign exchange from the Head Office outside India. A Liaison Office can represent the parent company or the group of companies in India, promote technical or any financial collaborations between parent or group companies and companies in India, promote export or import from or to India, and act as a communication channel between the parent company and Indian companies, among other things. Even though they have their presence in India, they do not have permission to engage in any sort of business activity which shall earn them any income or profit in India. Customers cannot be solicited by a Liaison Office as it is not permissible to advertise. They also do no have the power to invest. Any immovable property, such as land or even an office, cannot be purchased by a Liaison Office. A Liaison Office cannot be opened by a private company or a partnership. A Liaison Office can only be opened by a company incorporated outside of India. The Reserve Bank of India must be consulted for permission (RBI). Permission to open such offices is initially granted for a three-year period, which can be extended by an AD Category I bank at any time.
Another criteria for setting up a Liaison company is that during the previous three financial years, the parent company should have made a profit. The net worth, that is the total paid-up capital and free reserves, minus intangible assets as per the most recent Account Statement certified by a Certified Public Accountant or the Audited Balance Sheet or any Registered Accounts Practitioner by whatever name must be at least USD 50,000 or its equivalent.
Setting-up of a Branch Office
Branch Offices (BO) are similar to Liaison offices in that they are not incorporated companies, but rather extensions of a foreign company. The Branch Office, on the other hand, can conduct commercial activity on behalf of the parent company. The BO has the ability to perform research, import and export, give consulting services, provide information technology (IT) services, and provide technical support for products supplied by its parent business. By opening a branch office in India, a foreign company may import or export drone components, if the company has a manufacturing unit in India. Branch Office’ means any establishment described as a branch by the company, or any establishment carrying on the same or significantly the same activity as the company’s main office, or any establishment involved in any manufacturing, processing, or production, but does not include any establishment specified in any order issued by the Central Government.
For international enterprises who want to establish a temporary presence in India, a branch office is an appropriate business strategy. The branch office functions as an extension of the parent company’s operations, carrying on the same business and activities. Most organisations utilise this technique to gain a better understanding of the Indian market without committing to a long-term relationship. Due to this reason, any company which wants to establish or expand their presence in Asia should examine and do a proper study as to which branch office might fit their market entrance requirements. Companies that want to open a branch office in India must make sure that the applicant company is incorporated outside of India, that the name of the Indian branch office is the same as the parent company (if the branch office does not generate revenue from India operations, the parent company must cover its expenses), that the branch office’s net worth is at least $100,000, and that the parent company has a profitable revenue stream.
In India, a branch office cannot directly engage in manufacturing unless it is done in a Special Economic Zone (SEZ) with the intention of exporting products. It might even outsource the work to an Indian company. Furthermore, a foreign company must be involved in trading and manufacturing activities in its home country in order to open a branch office in India for the purpose of exporting and importing goods, offering professional or consulting services, performing research, and promoting and serving as buyers and sellers for the parent company are all things that the parent company does. A foreign corporation must request clearance from the Reserve Bank of India (RBI) to operate a branch office in India under the terms of the Foreign Exchange Management Act (FEMA) of 1999. Form Each action that the branch office proposes to do in India requires RBI authorisation.
The RBI and later the MCA must both authorise a BO’s registration. The registration of a BO takes 45 days. Furthermore, while registration renewal is not required in most circumstances, RBI may provide clearance for a period of two to three years, after which renewal is required. Export or import of commodities is one of BO’s approved operations. In India, representing the parent company and acting as a buying or selling agent, conducting research in which the parent company is involved In India, we provide information technology and software development services. Professional or consulting services are provided. airline/shipping company from another country, promoting technical or financial relationships between Indian enterprises and their parent or abroad group corporations, and providing technical support for parent/group company products. The RBI restricts BOs from directly performing manufacturing and processing tasks. Such task must be subcontracted to an Indian manufacturer by BOs. The RBI, on the other hand, has established an exception for BOs operating in Special Economic Zones (SEZs), allowing them to engage in manufacturing.
Entering into Strategic Partnerships or Joint Ventures in India
Joint Ventures between Indian and foreign companies are a way of pooling or combining the resources and skills of two otherwise unconnected companies. A foreign company, as defined by Section 2(42) of the Companies Act 1956, is any corporation or body corporate formed outside India that has a place of business in India, whether directly or through an agent, and conducts any business activity in India in any other way. A Joint Venture Agreement must be signed by both sides in order for an Indian company to form a partnership with a foreign corporation. Prior to the start of the Joint Venture negotiations, such an agreement will include clauses relating to secrecy and non-disclosure of information. Investment of up to 74 percent in a Joint Venture without RBI clearance is required for the successful development of an International Joint Venture in fields such as telecommunications, medications and pharmaceuticals, advertising, and hotel and tourist. If a Joint Venture company has more than 74 percent of the total stock, authorisation from the Foreign Investment Promotion Board (FIPB) or the Secretariat of Industrial Approvals (SIA) is required. Foreign engagement with Indian enterprises has resulted in significant development improvements in many sectors of India’s economy, which has aided the country’s progress. The list of joint ventures in India with international corporations will be discussed in this article. Since independence, India has seen several successful cases of international joint ventures growing.
Foreign companies might take a low-risk approach to joint ventures if they undertake due diligence on their Indian partners. A joint venture enables foreign corporations to use their Indian partners’ existing networks while also allowing them to send their Indian profits outside of the country once they have been taxed.
Leasing of Drones in India
To some extent, cross-border lease activities are limited to aircraft leasing, which is the most popular mode of financing, maritime equipment, and railroad rolling stock. Leasing of general-purpose machinery, electronic equipment, and automobiles account for a tiny percentage of global commerce in these items. Foreign investors are interested in international financing, particularly debt instruments. Understandably, financial leasing is merely a safer form of debt financing. Cross-border leases have long been utilized to maximise tax benefits by taking advantage of legal differences between countries. Cross-border leasing mainly helps to move the jurisdiction of a lease to a nation that recognizes the legal form of a transaction as tax legislation in most industrialised countries matures enough to disregard the form of a financial lease.
Reasons why the lease of drones in India is a better alternative-
• Supremacy of lessor ‘ownership rights: The lessor’s legal stake in the leased property has been accepted in most nations, which is a clause in the UNIDROIT international lease treaty. No other lessee creditor or statutory authority with any claim against the lessee can have a greater legal interest in the property to override the lessors. The Apex court of India in the case of K A Mathai alias Babu v. Kora Bibbikutti (1996) SCC (Cri) 281, has maintained the owner’s legal interest in the property and his rights of repossession despite the lack of a phrase to that effect in the agreement in a case involving hire-purchase. It didn’t matter if such a condition was precisely included in the agreement because it was a basic right over the property. In cases of hire-purchase or lease, Indian courts have recognized the owner having direct control to the asset. The Supreme Court ruled in a hire-purchase case of KK Mathai alias Babu v. Kora Bibbikutty and another (1996) SCC 281, that the right to reclaim control of the property was an inherent right of the owner of the asset, even when the agreement did not include a clause to that effect.
• Permission granted by Reserve Bank of India for cross border lease: Cross-border lease transactions are expressly approved by the RBI. The RBI clarified in Circular No. 16 dated September 14, 1996 that capital items imported under financial leases would be treated the same as external commercial borrowings (ECBs). That is, in all circumstances where ECB is permissible, an Indian lessee can engage in a cross-border lessor for a capital goods lease. The criteria and pre conditions for ECBs are outlined in the Government’s June 1996 Guidelines. On request to the RBI, an Indian business will be able to get a cross-border finance lease of property valued up to US $ 3 million.
• Immunity against local tax: Article 366 (29A) of the Indian Constitution treats a lease transaction similar to a sale. State governments are the most likely to levy sales taxes, whereas the central government is responsible for interstate sales. The Central Sales Tax Act, Sections 4 and 5, grant total exemption to import sales, that plainly includes any off-shore lease transactions. As far as the core transaction is concerned, this locks the transaction against any conceivable taxes now or in the future.
FAQs on Laws relating to Drones & Unmanned Aerial Vehicles (UAVs) and Legal Compliances relating to Drones & Unmanned Aerial Vehicles (UAVs)
1) What is the classification of Unmanned Aerial Vehicle?
The UAVs can be categorised as follows-
a) Hybrid Unmanned Aerial systems.
b) Rotorcraft;
c) Aeroplane;
These three UAVs can be further divided into autonomous Unmanned Aerial system or as remotely or model piloted aircraft system.
UAVs shall be classified on the basis of weight as
1) Large UAV- weighing more than 150 Kg
2) Medium UAV- weighing more than 25 kg but less than or equal to 150 kg
3) Small UAV-weighing more than 2 kg but less equal to than 25 kg
4) Micro UAV- weighing more than 250 grams but less than equal to 2 kg
5) Nano UAVA-weighs less than 2 grams.
2) What is the certification standard of Unmanned Aerial Vehicle?
The Central Government may, on the suggestions put forward by the Quality Council of India, define the standards for obtaining a type certificate for Unmanned Aerial systems by notification in the Official Gazette, and these defined standards may focus on encouraging the usage of made-in-India products, design features, mechanisms, and Unmanned Aerial systems, also the Navigation with Indian Constellation Indian regional navigation satellite system.
3) What are the conditions for importing drones or Remotely Piloted Aircraft (RPAs) into India?
For operating in a de-licensed frequency range, any company wanting to import RPAS in India must acquire Equipment Type Approval (ETA) from the WPC Wing, Department of Telecommunication (s). This approval is only valid for a specific make and model.
Besides the Nano category, the applicant must submit an application to the DGCA for import clearance along with an ETA. The Director General of Foreign Trade, DGFT will deliver a licence for the import of RPAS based on the import clearance which has been obtained by the DGCA.
4) Is the import of drones completely banned in India?
No, import of drones for the purpose of security, research and, development, defences allowed in India. The import of drones are allowed by any educational institutions which are recognised by the state or central government, by drone manufacturers, the government recognised research and development entities, or by government organization only if import authorisation is obtained from DGFT.
5) Is the import of nano drones permitted in India without due clearance from DGCA?
No, import of any drones in completely knocked down or completely built up or semi knocked down form is prohibited and banned in India. This initiative was taken in order to boost the ‘Make in India’ movement and to promote Indian made good. The exception available is with regard to the purposes of security, defence, research and development.
6) Is there ban on the import of components to India by foreign manufacturers?
No, there is no ban on the import of components of drones to India, since most of the drone components are not produced in India and import of it is necessary. But the import of drone components is restricted and regulated by DGCA.
7) Which is the present body governing the import of drone components in India?
The Director General of Civil Aviation (DGCA), governs the import of drone components to India. Even though there is no ban on the import of drone components in India, the act is restricted by DGCA. Any foreign manufacturer who wants to import drone components to India should get clearance from DGCA.
8) What are the alternatives to the foreign companies which want to manufacture or import drones?
A foreign company needs to be an authorized representative of an Indian company. For foreign enterprises looking to enter India, there are primarily three options which are forming a Subsidiary or Joint Venture (JV), the second one is by opening a Branch Office (BO) and the third alternative is to form a liaison office (LO). Another option available is through entering into a contract with an Indian company or leasing the drones with an Indian company for a specific period.
9) Is setting up a liaison company in India a good alternative to a foreign company?
A Liaison Office can represent the parent company or the group of companies in India, promote technical or any financial collaborations between parent or group companies and companies in India, promote export or import from or to India, and act as a communication channel between the parent company and Indian companies, among other things. A foreign company who is planning to manufacture drones in India may first set up a liaison company in order to study about the potential market opportunities and will also help to inform prospective Indian customers about the company and its products.
10) What are the drawbacks of opening a liaison company for a foreign drone manufacturer?
It is not permitted to engage in any business activities or earn any income in India. Customers cannot be solicited by a Liaison Office. It is not permissible to advertise or invest. Any immovable property, such as land or even an office, cannot be bought by a Liaison Office. A Liaison Office cannot be opened by a private company or a partnership. Hence setting up a liaison company will not be a good option if the company wants to make an immediate profit in `India or if it wants to advertise it products to customers.
11) Is opening up a branch office in India a good alternative to a foreign company?
It can conduct commercial activity on behalf of the parent company. The BO has the ability to perform research, import and export, give consulting services, provide information technology (IT) services, and provide technical support for products supplied by its parent business. The Branch office functions as an extension of the parent company’s operations, carrying on the same business and activities. Hence a foreign company may set up a drone manufacturing unit in India and import the drone components.
12) What are the drawbacks of opening a Branch office for foreign drone manufacturers?
In India, a branch office cannot directly engage in manufacturing unless it is done in a Special Economic Zone (SEZ) with the intention of exporting products. It might even outsource the work to an Indian company. Furthermore, a foreign company must be involved in trading and manufacturing activities in its home country in order to open a branch office in India for the purpose of exporting or importing goods, providing professional or consultancy services, conducting research, and representing and acting as a buying or selling agent for the parent company. A foreign corporation must request for clearance from the Reserve Bank of India (RBI) to operate a branch office in India under the terms of the Foreign Exchange Management Act (FEMA) of 1999.
13) Is entering into a joint venture a good option for foreign drone manufacturers?
The joint venture has chances of low risk if proper due diligence is undertaken by the foreign company on the Indian partners. A joint venture enables foreign corporations to use their Indian partners’ existing networks while also allowing them to send their Indian profits outside of the country once they have been taxed.
14) Is leasing drones by foreign manufacturers in India a good idea?
Yes, it is a good idea to lease drones to make a profit and to indirectly introduce the product in India. Further in India, more powers and rights are vested with the lessor than the lessee, the RBI has also allowed cross border lease agreements, further it also provides immunity against local taxes in a state. However, import of drones will be subject to the import clearance issued by DGCA.
15) Can foreign manufacturers set up a manufacturing unit in India for making drones?
Yes, foreign manufacturers can set up a manufacturing unit in India to manufacture drones since the Central government through this initiative aims to increase the production and manufacture of products or drones and to increase the job opportunity of Indians in India as a part of “Make in India” initiative.
The business laws of India and/or the corporate laws of India have seen a dynamic change in the last decade. Thus, there exists a cogent need to obtain appropriate legal consultation from the best corporate attorney in India or from the best corporate law firm in India before commencing work.
Conclusion
This Notification, combined with the recently introduced UAV Production Linked Incentive (“PLI”) plan, will encourage overseas manufacturers to establish a presence in India, while simultaneously delivering a boost to domestic production. This initiative by the government will result in a rise in investment in the Indian drone sector, as well as provide more job possibilities. In addition, these improvements will allow Indian drone start-up companies to increase the production and contribute to the country’s total drone manufacturing boom. However, it must be determined whether Indian drone makers have the capacity to serve the entire drone market (even on a price parity basis) without relying on foreign drones at this time. To bring domestically built drones on pace with imported drones, the sector must maintain competitive price points. It is also expected that the DGCA will be prompt in issuing approvals to foreign companies seeking to manufacture in India, in order to provide a level playing field. Indian importers who have placed an order with foreign companies for the import of drones will be harmed in the short term, as the recent Notification on 8-02-2022 will take effect immediately. The DGFT may have considered phasing down the Notification as a precautionary step, while considering the interests of drone importers and producers in mind. Foreign importers or manufacturing companies would have been able to systematically adhere with the regulatory change as a result of this.
Authored By: Adv. Anant Sharma & Afsana Khan