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Incorporation

Setting up a company in India

When setting up a company you may want to consider these factors:

  1. Business Factors

    As India has stringent bureaucratic requirements, (for example, there are FDI regulations for a number of sectors) it is exceedingly important that you check whether prior approval is needed from the Reserve Bank of India or other authorities before setting up a business presence,

    You may want to consider the following when making your decision :-

    • The industry and type of business that will be conducted
    • Nationality of the headquarters / individuals (s)
    • Presence of existing trade agreements or relationships
  2. Location

    Location will be another factor. Separate cities and regions may have different rules, costs and availability. It is always recommended to seek advice from relevant professionals, such as business or legal advisors, accountants and others depending on your needs.

  3. Regional language

    Regional language may be an influence. In India, each state resembles a separate country, often with its own language, cultural practices and preferences. Although Hindi is the national language, India has 21 other different official languages such as Bengali, Telugu, Marathi and Gujarati meaning some terminology may be different in various regions. Nonetheless, English is used widely in most official political and commercial communication.

Your Options

There are three types of business forms available to foreign companies in India. Each of these business forms has distinct advantages and disadvantages, as well as differing scope of business activities, registration requirements and minimum capital requirements. In most cases it will depend on the degree of commitment a company has to India and the planned business activity.

When setting up a company in India, you have the following options:-

  • Corporation
  • Project / Branch Office
  • Liaison (Representative) Office

This article provides a general guideline for foreign businesses on entering India for business purposes. In particular, it looks at common pathways to establishing a business presence in India, generally through a corporation, branch office or liaison office. In addition, various economic, tax and regulatory factors are provided throughout as a source of useful information to assist those who will enter the Indian economy. The guide also looks at some immigration requirements such as obtaining appropriate visa status.

Data is based on the time of writing, September 2015 or closest available dates.

Limited Liability Corporation

Incorporation of a company in India is often a lengthy, difficult and costly process due to the numerous bureaucratic requirements companies are required to comply with.

There are four types of corporations that can be set up, subject to foreign direct investment (FDI) guidelines although the two most commonly used are:

  • Private limited company
  • Public limited company

The most commonly selected option is the private limited company, however the choice largely depends on the expected activity level in India.

1.Private limited company (Pvt Ltd)

Private limited companies are usually chosen for small and middle-sized companies. Private companies are a more popular form as they are less cumbersome to incorporate and are subject to less stringent reporting requirements. Usually, foreign corporations set up their subsidiary companies as private companies.

Investment Capital Requirements

The minimum paid-up capital is INR0.1m (approximately $1620), with a minimum of two subscribers. Rights to transfer its shares are restricted and the maximum number of members it can have is limited to 50. In addition, the public is prohibited from subscribing for any shares / debentures in the company and any invitation or acceptance of deposits from parties other than its members, directors or relatives is prohibited.

Management 

A private company is required to have a minimum of two directors, up to a maximum of 15.

Every private company that is a subsidiary of a listed company that has paid up capital exceeding INR 50m ($810,000) is is also required to appoint a whole time / managing director.

It is worth noting that every person elected as a director is required to obtain a Directors Identification Number (DIN).

Accounting / auditing requirements

Preparation of financial statements is mandatory for each company, and the balance sheet and profit and loss account of the company have to be filed with the Registrar of Companies within six months from the end of the financial year.

All companies are required to undergo a statutory audit within six months from the end of the financial year. Auditors of a company are appointed/re-appointed in the AGM of a company. The company in a general meeting may remove auditors before the expiry of their term in office. Auditors are required to make a report to the members of the company in respect of the accounts (balance sheet, profit and loss account) examined by them at the end of each financial year.

2. Public limited company

A public company is defined under Indian law as a company which is not a private company.  A private company which is a subsidiary of a pubic company is also considered to be a public company. Public companies which are listed are also subject to Securities and Exchange Board of India (SEBI) regulations.

Investment Capital Requirements

The a minimum paid-up capital to incorporate a public limited company is INR 0.5m (approximately $8,100)and there must be at least seven subscribers.

There are no limits to the number of members.

Management 

Public companies are required to have a minimum of 3 directors, up to a maximum of 15.

All public companies are required to appoint a whole time / managing director. An approval from the Central Government (Department of Company Affairs) is required if the remuneration proposed to be paid to the board of directors is more than what is prescribed in Schedule XIII of the Act.

Accounting / auditing requirements

In addition to a yearly audit, listed public companies have to undergo a limited review within 45 days from the end of the quarter. They are also required to file their financial statements within two months from the end of the financial year.

Listed companies are also subject to a secretarial audit to be undertaken by a company secretary or qualified chartered accountant for purposes of reconciling total issued and listed capital with depositories and total admitted capital.

The accounting  / auditing requirements for an unlisted public company are the same as for a private company.

Incorporation process

Broadly, incorporation can be divided into the following steps:

Step 1: Obtaining a Director Identification Number (DIN) online

1) Download and complete e-Form DIN-3. This form has to be submitted along with a photograph of the applicant and a scanned copy of supporting documents.

These include an Affidavit containing the applicant’s name, middle name and date of birth. In addition, proof of address (not older than 2 months from the date of filing of form DIN-3) and proof of identify (a copy of the applicant’s Income Tax Permanent Account Number (PAN) Card and passport) must be filed. The Affidavit has to be executed on non-judicial stamp paper and must be duly notarized.

2) The e-Form must be digitally signed by a practicing professional (i.e. Chartered Accountant/ Company Secretary/Cost and Works Accountant) or the Company Secretary in full time employment of the company as verification of the details provided.

3) After certification, the applicant submits the completed application to the MCA website and obtains a DIN-3 number.

Agency: Ministry of Corporate Affairs (MCA)

Time: 1 day

Cost: INR 100

Step 2: Obtaining a Digital Signature Certificate (DSC) online

Under the Indian Government’s new MCA21 e-Governance program, all documents filed under the program must be filed using a valid DSC.

A Class-II Digital Signature Certificate can be obtained for either 1 or 2 years, and can be renewed for another 1 or 2 years.

Once the Digital Signature Certificate is obtained, the authorized personnel (directors/manager/secretary) are required to register the same with MCA for statutory e-filing. This process is to be done online with MCA after the DIN has been obtained.

Agency: Any of the eight agencies approved by the Controller of Certification Agencies.

Time: 1 day

Cost: Varies by agency, however it ranges from INR 400 to INR 2650. The cost will vary in accordance with the duration of the Digital Signature Certificate.

Step 3: Reserve a company name online with the Registrar of Companies

The MCA has a prescribed set of guidelines regarding name availability, which all chosen company names are required to adhere to.

1. Check the availability of the proposed name through the MCA21 portal. Alternatively, engage a professional (practicing chartered accountant, company secretary or cost accountant) to perform the check on the MCA 21 portal and provide a search report which can then be attached to the application. Up to six names may be nominated.

2. Complete eForm 1A with all the relevant details and declarations. If a professional has been engaged to check availability of name, have the professional certify and digitally sign the eForm 1A.

3. Upload the eForm 1A to the MCA 21 portal and pay the application fee of INR 1000 electronically (net banking or credit card).

4. If the e-Form 1A has been certified by a professional (as described, above), the proposed name shall be approved by the Registrar of Companies on a priority basis via the Straight Through Process (“STP”), provided the name is not similar to any existing trademark, any of the words proposed in the company’s name does not exactly match any existing company’s name and the name does not consist of a single word (other than private limited).

5. If successful, the chosen name will be reserved for the applicant to use for 60 days from the date of approval. If the proposed company is not incorporated during this 60 day period, the approval will lapse and the name will be available to other applicants.

Agency: ROC, MCA

Time: 2-3 days

Cost: INR 1,000

Step 4: Prepare the Memorandum and Articles of Association 

Ensure that the company’s Memorandum and Articles of Association are in accordance with the Companies’ Act 2013 and India’s FDI laws, where necessary.

Step 5: Filing of incorporation application online

e-forms 1, 18 and 32 must be electronically filed on the MCA’s website. In addition, scanned copies of the signed Memorandum and Articles of Association, must be attached to e-Form 1. Proof of location Registered Office in the Form of Lease Deed must be attached to e-Form 18. The 3 forms as well as the memorandum and articles of association must be certified by a practicing professional for accuracy of the information/declarations.

The applicant must also pay the prescribed filing fees and stamp duties online when filing the application.

The certificate of incorporation is immediately issued by the Registrar of Companies, signed digitally and sent via email to the Company.

Agency: ROC, MCA

Time: 5 days

Cost:

Fee schedule for a small company of paid-up share capital between INR 500,000 and INR 1,000,000:
– Filing of the Memorandum of Association: INR 2,000
– Filing fee for filing the Articles of association: INR 400

– Filing fee for Form INC-7: INR 400
– Filing fee for Form INC-22: INR 400
– Filing fee for Form DIR-12: INR 400

Stamp duty for Articles of Association: IINR 2,000 (INR 1,000 on every INR 5 Lakhs of authorized capital or part thereof subject to a maximum of 50 Lakhs of Stamp Duty)

– Stamp duty for Memorandum of Association: INR 200

Step 6: Request and obtain a Certificate to Commence Operations 

Under the Companies Act 2013, a Private Company cannot commence its business or make any borrowings unless it files a statement that the subscription money and minimum paid-up capital has been brought in. (Section 11) with the Registrar of Companies.

As such, companies are required to file eForm INC-21: Declaration Prior to the Commencement of Business or Exercising Borrowing Powers with the ROC prior to commencing operations.

Agency: ROC

Time: 5 days

Cost: INR 400 for a company with capital between INR 500,000-2,499,999

Step 7: Make a company seal

Under the Companies Act, 1956, all companies are required to have a common seal. Under Section 22 of the Companies Act, 2013, only a person authorized by the company, in writing under common seal, is empowered to execute deeds on behalf of the company.

Time: 1 day

Cost:

INR 350-500

Step 8: Obtain a Permanent Account Number (PAN) from an authorized franchise or agent appointed by National Securities Depository Services Limited (NSDL) or Unit Trust of India (UTI)

Under Indian tax law, each person must quote his or her permanent account number (PAN) for tax payment purposes and the tax deduction and collection account number (TAN) for depositing tax deducted at source. The PAN is a 10-digit alphanumeric number issued on a laminated card by an assessing officer of the Income Tax Department.

The applicant is required to complete Form 49A (statutory form for applying for PAN), pay the application fee of INR 93 (plus applicable taxes currently at 12.36%) either online or otherwise and submit the application form together with his or her proof of identity, proof of address and 2 recent photographs to the authorised agent/designated service centres for verification.

Agency: Private agencies authorised by UTI or NSDL, as outsourced by the Income Tax Department (Federal)

Time: 7 days

Cost: INR 93

Step 9: Register with Employees’ Provident Fund Organisation

The Employees Provident Funds & Miscellaneous Provisions Act, 1952 applies to an establishment, employing 20 or more persons and engaged in any of the 183 Industries and Classes of business establishments, throughout India excluding the State of Jammu and Kashmir. Provident Fund registration is optional if the number of employees is under 20.

As of April 2012, all employers are required to register online with the EPFO online portal in order to generate challans for making any remittances (www.epfindia.gov.in). Filing of Electronic Challan cum Return (ECR) and deposit of contributions are also done online through the same website.

Agency: Employees Provident Fund Organisation

Time: 12 days

Cost: No charge

Step 10: VAT registration

VAT registration is done online.

Agency: Department of Sales Tax

Time: 10 days

Cost: INR 500 (Registration Fee) + INR 25 (Stamp Duty) for compulsory VAT registration)

Step 11: Registration for medical insurance 

The employer is required to register for medical insurance as mandated under Employees’ State Insurance (General) Act by submitting Form 01 to the relevant authorities. It takes 3 days to a week for the Employer Code Number to be issued. The “intimation letter” containing the Code Number is sent by post to the employer.

Employee medical registration is also submitted after the employer’s registration is complete. The ESI Act is applicable to all establishments having 20 or more employees.

Agency: Employees’ State Insurance Corporation (Federal)

Time: 9 days

Cost: No charge

Step 12: Various other registration (only if company is set up in Mumbai)

The company will also be required to comply with various other registrations only if it is set up in Mumbai :

a. Obtain a tax account number for income taxes deducted at source from the Assessing Office in the Mumbai Income Tax Department

Time: 7 days

Cost: INR 55

b. Register with Office of Inspector, Mumbai Shops and Establishment Act

Time: 2 days

Cost: INR 1,200 (registration fee) + 3 times registration fee for Trade Refuse Charges (INR 3,600)

c. Register for profession tax with the Commissioner of Profession Tax, Department of Sales Tax

Time: 2 days

Cost: No charge

 

 

 

 

 

 

 

Branch Office

Foreign corporations operating in India can operate as a branch office without the need to incorporate. However, it is generally advisable to incorporate rather than set up a branch office in India, given the numerous drawbacks associated with having a branch office. Having said that, foreign enterprises wanting to set up a branch in India for lower levels of activity are allowed to do so.

A foreign company can establish a branch office in India provided it has obtained prior approval from the Reserve Bank of India (RBI), namely if it is engaged in a sector where 100 percent FDI is permitted under the automatic route under the FDI Policy. Other cases and those of NGOs, Not-for-Profit Organisations, Government Bodies and Departments are considered by the RBI in consultation with the Indian government.

The application needs to be filed with the RBI through an Authorised Dealer Banker. Approval is location specific and subject to guidelines issued in this regard. There are eligibility criteria and procedural guidelines for establishment of a branch office by foreign entities in India.

Generally, a branch office is engages in the same activity as its parent. However, a branch may not engage in retail trading, manufacturing, or processing activities except in Special Economic Zones (which may require prior permission). A branch office is permitted to undertake the following activities:

  • Import/export goods
  • Render professional or consultancy services
  • Carry out research work engaged in by the parent company
  • Represent the parent company as it’s buying/selling agent in India
  • Promote technical / financial collaboration between the group of companies
  • Provide IT services and develop software
  • Render technical support for group companies

On setting up a branch office, a report on its activities must be submitted within five working days of the branch office becoming functional to the Director General of Police (DGP) of the state concerned in which the branch office is established.

Annually, the branch office is required to submit an Annual Activity Certificate to the DGP of the State and with an Authorised Dealer (Banker).

The following items have to be reported:

  • List of personnel employed, including foreigners in the India office;
  • List of foreigners other than employees who visited India offices in connection with the activities of the company;
  • Whether all foreign nationals employed at the branch office are on E visas. If not, indicate details of such foreign nationals;
  • Whether the foreign nationals on E visas have reported to the mandatory authorities i.e. a Police Station etc. If not, the name of such nationals/ nationality, along with the relevant details and reasons for not complying with the requirement;
  • Projects/contracts/collaborations worked upon or initiated during the year;
  • List of equipment imported for business activities in India.

For further reading, please refer here.

Project Office

If a foreign company is engaged by an Indian company to execute a project in India, it may set up a project office without obtaining prior approval from Reserve Bank of India subject to prescribed reporting compliances. As applicable in case of a branch office, a project office is treated as an extension of foreign company and is taxed at the rate applicable to foreign companies.

A project office is subject to the same reporting requirements as a branch office.

Additionally, a project office is required to submit a certificate from a chartered accountant detailing the status of the project and certifying that the accounts of the project office have been audited. This report has to be sent to the state DGP along with the Annual Activity Certificate.

 

Liaison Office

This is the easiest and least expensive type of foreign investment structure to set up and has no registered capital requirements. The defining characteristic of an liaison office / representative office is its limited business scope.  A LO is generally forbidden from engaging in any profit-seeking activities, and can only legally engage in purely marketing or informational activities relating to commercial, financial and economic matters but does not actually conduct any actual business.

LOs may be set up in India provided the foreign company obtains prior approval from the RBI.

A LO is permitted to engage in the following activities:

  • Representing parent/group companies in India
  • Promoting import/export in India
  • Promoting technical/financial collaborations on parent company/group’s behalf
  • Coordinating communications between parent/group companies and Indian companies

A LO is subject to the same reporting requirements as a branch office.

Joint ventures

Foreign companies can also set up joint ventures with Indian or foreign companies in India. There are no separate laws for joint ventures in India and laws governing domestics companies apply equally to joint ventures. Joint ventures may be set up as partnerships or incorporated as a local subsidiary.

Outsourcing Employment Through a GEO Employer of Record Service

Whether to incorporate in India, and what sort of entity to setup are just two of the many choices companies must make when expanding into a new market.

If the company intends to have staff in India they must also decide whether they will administer that employment internally or use a Global Employment Organisation to handle payroll and employment responsibilities. A GEO Employer of Record solution is an attractive alternative where

  • the company is looking to setup an office quickly
  • the company wants to work within a defined budget
  • the company wants to limit its initial commitment in India
  • the company needs help with tax, employment, immigration and payroll compliance in India

The complexity of employment regulations in India makes the use of a GEO advisable coupled with local legal counsel to ensure full compliance with employment laws, for example the drafting of local contracts for workers.

Shield GEO provides a comprehensive service in India allowing companies to deploy their staff quickly with reasonable, clearly stated costs and timeframes. The company contracts directly with Shield to employ and payroll their staff on their behalf in India.

Shield GEO then becomes the Employer of Record. Shield GEO assumes the legal responsibility for these employees, sponsoring them on work permits, complying with local employment law and running their monthly payroll. Using Shield GEO is the fastest and most cost effective way to deploy local and foreign workers into India. Read more about outsourced employment through Shield GEO.

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