Last update: October 2011
Setting up a Company
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Setting up a Company
Consolidated FDI Poilcy
Setting up a company in India is now subject to the consolidated FDI policy. All Foreign Direct Investment into India must now follow the conditions set by the FDI policy which is reviewed every 6 months.
Restrictions on foreign investment have been removed and the procedures simplified in some areas of the Indian economy.
April 2011 (Circular 1 of 18)
October 2011 (Circular 2 of 18)
The consolidated Foreign Direct Investment poilcy for the recent changes effective from April 10th 2012 have had siginficant changes made to improve the investment envrioment.
For further information, please read Sudit K Parekh & Co Business Alert - Changes in FDI Poilcy
Setting up Business in India
Establishing a foreign company involves setting up one or more of the following types of business, under the Indian Companies Act, 1956:
Investing in a joint venture company as a foreign investor (minority, equal or majority share-holding)
Setting up a holding company (investment company) in India with plans for downstream investment in other activities or India companies
Setting up a wholly owned subsidiary in India, 100% owned by foreign shareholders
For further information, please read the Policy and Procedures for Foreign Investors
Please note that information provided is for guideline purposes only. For further information please contact a member of the IPTU Team.
PAN (Permanent Account Number)
A Permanet Account Number (PAN) is issued by the income tax department in India for all those who file thier income tax returns. It is also compulsory to quote PAN in all documents relating to financial transactions.
For further information, please read the Sudit K Parekh & Co Tax Alert Document.
Income Tax Notification
The India tax authorities have issued a notification laying down the Form in which Annual statement is required to be furnished in respect of a Liaison Office in India. The statement will have to be in Form 49C which will be applicable from current financial year ending on 31st March, 2012. The newly notified Form seeks voluminous details and therefore has far-reaching implications for Liaison Offices.
For further information, please read the Sudit K Parekh &Co Tax Alert Document.
Foreign Investment Promotion Board
Foreign Investment Promotion Board (FIPB) of the Government of India is constituted mainly to promote inflows of Foreign Direct Investment into the country, as also to provide appropriate institutional arrangements, transparent procedures and guidelines for investment promotion and to consider and approve/recommend proposals for foreign investment.
For further information, please go to the Ministry of Finance website, Foreign Investment Promotion Board
Foreign Direct Investment
With limited exceptions to the following areas:
- Retail trading*
- Lottery business
- Gambling and Betting
- Chit funds
- Nidhi company
- Real Estate Business or Construction of Farm Houses
- Trading in Transferable Development Rights (TDRs)
- Manufacturing of:
o Cigarettes of tobacco and tobacco substitutes
*(except single brand product retailing)
Foreign Direct Investment in single brand products is allowed, but under certain conditions. The department of industrial policy and promotion is currently reviewing its policy on foreign direct investment into Multi-Brand Retailing.
Investing in India
Foreigners can invest directly into India under the automatic route which allows upto 100% of foreign direct investment. Some areas of the Indian economy may require government approval, and in some cases, foreign direct investment may be allowed under the automatic route and require government approval passed a certain percent of ownership.
- Prior approval of the government on the recommendations of the Foreign Investment Promotion Board (FIPB) is required for:
- activities that require an industrial licence
- industries reserved for the public sector
- manufacture of items reserved for the small scale sector or units in which foreign investment is more than 24% in the equity capital
- proposals in which the foreign collaborator has an existing financial technical relation in India in the same field
- proposals for acquisition of shares in an existing India company in favour of a foreign investor
- Prior approval of the government is compulsory for:
- Banking and Non Banking Financial Companies (NBFCs)
- Civil Aviation
- Telecom Services
- Petroleum Explorations
- Venture Capital Funds
- Trading; Defence Production
- Atomic Energy
- Bulk Drugs and Intermediates
- Advertising and Films
For more information regarding foreign direct investment, please take a look at the Consolidated FDI Poilcy.
Foreign Investment Implementation Authority
The government has set up a Foreign Investment Implementation Authority (FIIA) in the Ministry of Commerce and Industry, which facilitates quick transaction of Foreign Direct Investment approvals into implementations, provides a proactive one-stop aftercare service to foreign investors by helping them obtain the necessary approvals and sort out operational problems and meet with various Government Agencies to find solutions to problems and maximising opportunities through a partnership approach.
For further information, please read the Manual on Industrial Policy and Procedures
Procedure under Automatic Route
Foreign industries that don't have to require any prior are required to notify the regional office concerned of Reserve Bank of India (RBI) within 30 days of receipt of inward remittances and file the required documents with that office within 30 days after issue of shares to foreign investors:
Name And Address Of Foreign Investor
Date Of Receipt Of Funds (In Rupees)
The Original Foreign Inward Remittance Certificate From The Authorised Dealer And Other Specified Information
Copy Of The Foreign Collaboration Agreement
Details Of Government Approval (Depending On What Area/Sector You Are Investing Into)
Decisions on all foreign investment are taken within 30 days of application and the use of foreign brand name/trades is possible.
Procedure under Government Approval
The Foreign Investment Promotion Board (FIPB) considers all activities that are not covered under the automatic route and require Government approval:
- Application for all Foreign Direct Investment cases, except Non-Resident Indian (NRI) investments and 100% Export Oriented Units (EOU), should be submitted to the FIPB Unit, Department of Economic Affairs (DEA), Ministry of Finance.
- Application for Non-resident Indian and 100% Export Oriented Units cases should be presented to the Secretariat for Industrial Assistance (SIA) in Department of Industrial Policy & Promotion
- Application for NRI and 100% Export Oriented Units cases should be presented to SIA in Department of Industrial Policy & Promotion
- Application can also be submitted with Indian Missions abroad who forward them to the Department of Economic Affairs for further processing
For further information, please read the Comprehensive Manual for Foreign Investment Policy (Chapter 1)
Investors are required to give the description of activities as per the National Industrial Classification of all Economic Activities (NIC), while submitting applications to the Reserve Bank of India and the Secretariat for Industrial Assistance (SIA).
For further information, please read the National Industrial Classification 1987
Secretariat for Industrial Assistance
Secretariat for Industrial Assistance (SIA) has been set up by the Government of India in the Department of Industrial Policy and Promotion in the Ministry of Commerce & Industry to provide a single window service for entrepreneurial assistance, investor facilitation, receiving and processing all applications which require Government approval, conveying Government decisions on applications filed, assisting entrepreneurs and investors in setting up projects (including liaison with other organisations and State Governments) and in monitoring implementation of projects.
It also notifies all Government Policy decisions relating to investment and technology, and collects and publishes monthly production data for select industry groups.
For further information, please go to the Department of Industrial Policy and Promotion in the Ministry of Commerce & Industry website
Types of Legal Forms for Doing Business
There are three main forms of business in India, defined as follows:
An individual on his/her own account carries out the business or profession. No formal procedure or formality is required for setting up a sole proprietary.
A business relationship entered into by a formal agreement between two or more persons or corporations carrying on a business in common. Such partnerships are created under the Partnership Act of 1932 and if needed is registered with the Registrar of Firms.
A legal entity formed under the Companies Act, 1956. It can be public or private.
Incorporation of a Company
Incorporation of a company in India is governed by the Companies Act, 1956. Part II of the Act deal with the incorporation of a company and matters related to.
Companies set up with Foreign Direct Investment have to be incorporated under the Indian Companies Act with the Registrar of Companies (ROC) and all Indian operations would be conducted through this company. Once a company has been duly registered and incorporated as an Indian company, it is subject to Indian laws and regulations as applicable to other domestic Indian companies.
To get incorporated a company has to follow some steps, which can take between three or four months:
1. The name:
The name is the symbol of a personal existence. The company must select three or four suitable names and should indicate the main object of the company. The name should not resemble to the name of any other company already registered and must not violate the provisions of Emblems and names (Prevention of Improper Use) Act, 1950. A foreign brand name for the sale of goods in India is permitted.
The company must apply to the concerned Registrar of Companies to ascertain the availability of name of General Rules and Forms along with a fee (Form 1-A). On submitting the application, the Registrar of Companies sends an approval letter in about 10 days. If proposed name is not available apply for a fresh name on the same application.
2. Memorandum of Association:
An important step in the formation of a company is to prepare a document called Memorandum of Association. It is the charter of the company that contains the basic conditions on which the company is incorporated (the name, the State in which the registered office is to be situated, the main objects of the company to be pursued, the liability of the members and the authorized capital).
3. Articles of Association:
Articles of Association of the company are the regulations that govern the internal management of affairs of the company and the conduct of its business. The Articles are subordinate to the Memorandum of Association.
4. Registration of company and issue of capital:
After completion of the preliminaries the company has to file with the Register of Companies of the State in which the company is proposed to be incorporated with:
- Memorandum of Association and Articles of Association duly stamped and one duplicate of each, signed by at least two subscribers in his own hand, his father's name, occupation, address and the number of shares subscribed for and witnessed by at least one person
- The agreement, if any, which the company proposes to enter into with any individual for appointments as its managing
- A copy of the letter of the Registrar of Companies intimating the availability of the proper name
- Documents evidencing payment of prescribed registration and filing fee
- Documents evidencing the directorship and situation of the Registered Office (Form 32 and Form 18) and declaration of compliance with requirements of the Companies Act (Form 1 and Form 29) for giving consent to act as Director in case of public company be also given
- The amount of registration fee payable (regulated with reference to the amount of authorized capital)
Upon compliance with all requirements, the Registrar will register the company and issue a Certificate of Incorporation of company. It brings the company into existence as a legal entity.
6. Issue of share capital:
After registration, the company can start his business for which it requires fund. In case of a private company, the capital is to rise by way of private arrangements whereas a Public Limited Company can raise funds from the public. The company will issue shares to the subscribers to its memorandum and other members of the company. It is necessary for a public company to obtain the Certificate of Commencement of Business, before starting her business.
For further information, please go to the Ministry of Company Affairs website
For further information about the Forms, please read the instruction kit publishes by the Ministry of Company Affairs, which will provide the basic guidelines to fill an e-form.
The ministry of corporate Affairs of India has announced plans to simplify the time it takes to incorporate a new company to one day.
Setting up a Joint Venture or Wholly Owned Subsidiary
A foreign company can commence operations in India by incorporating a company under the Companies Act, 1956 trough Joint Ventures or Wholly Owned Subsidiaries.
Foreign equity in such Indian companies can be up to 100% depending on the requirements of the investor, subject to equity caps in respect of the area of activities under the Foreign Direct Investment (FDI) policy. Details of the FDI policy, sectoral equity caps & procedures can be obtained from Department of Industrial Policy & Promotion, Government of India
Foreign companies can set up their own operations in India by forging strategic alliances with Indian partners.
A Joint Venture may entail the following advantages for a foreign investor
Established distribution/marketing set up of the Indian partner
Available financial resource of the Indian partners
Established contacts of the Indian partners which help smoothen the process of setting up of operations
Local partners contribute in the form of specialised knowledge about local conditions
Establishing a joint venture in india: an overview
India's foreign direct investment (FDI) rules have been substantially liberalised since the country first allowed foreign investment in the early 1990s. Most sectors are now open to 100% FDI. However, many foreign investors still prefer to set up a joint venture with an Indian partner company as this can, for instance, give them access to the Indian partner's pre-established market and distribution channels, local management and know-how.
This article examines the following key factors involved in establishing a joint venture between a foreign investor and an Indian partner.
Source: MLS Chase
Foreign Direct Investment in Limited Liability Partnership
Foreign Direct Investment in a Limited Liability Partnership is now allowed, subject to the following conditions:
Foreign Direct Investment will need to be approved at the Government route, only in Limited Liability Partnerships operating in sectors where 100% Foreign Direct Investment is allowed. There should be no Foreign Direct Investment linked performance conditions.
Limited Liability Partnership with Foreign Direct Investment will not be allowed to operate in:
Real estate business
An Indian company having Foreign Direct Investment will be allowed to make a downstream investment in a Limited Liability Partnership where both companies operate in sectors where 100% FDI is permitted, through the automatic route. Limited Liability Partnerships with FDI are not allowed to make any downward Investment.
Foreign Capital Contribution in Limited Liability Partnerships will only be allowed by way of cash consideration. Investment by Foreign Institutional Investors, External Commercial Borrowings and Foreign Venture Capital Investors will not be allowed.
The Limited Liability Partnership with Foreign Direct Investment has a designated partner or an individual which acts in accordance with the provisions of the LLP Act 2008, and should be a company registered with the companies Act 1956.
The designated partner should be a ‘person resident of India’.
The designated partners will be responsible for compliance with the above conditions and penalties imposed on the Limited Liability Partnership.
FDI in other entities other than those mentioned above is not allowed.
Source: Consolidated FDI Poilcy October 2011
Wholly Owned Subsidiary Company
Foreign companies can also set up wholly-owned subsidiary in sectors where 100% foreign direct investment is permitted under the FDI policy.
For registration and incorporation, an application has to be filed with Registrar of Companies (ROC). Once a company has been duly registered and incorporated as an Indian company, it is subject to Indian laws and regulations as applicable to other domestic Indian companies.
For details please visit the website of Department of Company Affairs under Ministry of Finance.
(Source: Ministry of Commerce & Industry)
Setting up a Representative Office
Setting up a representative office (or liaison office) is one possibility for foreign companies to set up their operations in India.
Representative office acts as a channel of communication between the principal place of business or head office and entities in India. A representative office cannot undertake any commercial activity directly or indirectly and cannot, therefore, earn any income in India.
Its role is limited to colleting information about possible market opportunities and providing information about the company and its products to prospective Indian customers. It can promote export/import from/to India and also facilitate technical/financial collaboration between parent company and companies in India.
Approval for establishing a representative office in India is granted by Reserve Bank of India (RBI).
(Source: Ministry of Commerce & Industry)
Setting up a Project Office
Foreign companies planning to execute specific projects in India can set up temporary projects/site offices in India.
RBI has now granted general permission to foreign entities to establish project offices subject to specified conditions. Such offices cannot undertake or carry on any activity other than the activity relating and incidental to execution of the project.
Project offices may remit outside India the surplus of the project on its completion, general permission for which has been granted by the RBI.
(Source: Ministry of Commerce & Industry)
Setting up a Branch Office
Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up branch offices in India for the following purposes:
Export/import of goods
Rendering professional or consultancy services
Carrying out research work, in which the parent company is engaged
Promoting technical or financial collaborations between Indian companies and parent or overseas group company
Representing the parent company in India and acting as buying/selling agents in India
Rendering services in Information Technology and development of software in India
Rendering technical support to the products supplied by the parent/group companies
Foreign airline/shipping company
A branch office is not allowed to carry out manufacturing activities on its own but is permitted to subcontract these to an Indian manufacturer. Branch offices established with the approval of RBI, may remit outside India profit of the branch, net of applicable Indian taxes and subject to RBI guidelines.
Permission for setting up branch offices is granted by the Reserve Bank of India (RBI).
Branch offices on a "Stand Alone Basis" would be isolated and restricted to the special economic zone (SEZ) alone and no business activity/transaction will be allowed outside the SEZs in India.
No approval shall be necessary from RBI for a company to establish a branch/unit in SEZs to undertake manufacturing and service activities subject to specified conditions.
Representative Office/Project Office or Branch Office can undertake any permitted activities. Companies have to register themselves with Registrar of Companies (ROC) within 30 days of setting up a place of business in India.
(Source: Ministry of Commerce & Industry)
Last update: October 2010
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