What Type of Entity Should We Use to Set Up Our Business?

Private Limited Company

Private limited company (“company”) is a type of legal entity structure preferred by most foreign entities for undertaking commercial activities in India. A company is owned by shareholders (a minimum of two shareholders with an upper limit of two hundred). There is no requirement of a minimum paid-up share capital. A company is managed by its board of directors (minimum of two directors), and unlike a branch office, liaison office, and project office, a company is as an independent legal entity under Indian laws.

Limited Liability Partnership

An LLP can normally be established within seven to ten days of online submission of the requisite incorporation documents with the ROC.

Branch Office, Liaison Office, and Project Office

A foreign entity seeking to establish a branch office/liaison office in India is required to obtain permission from the Reserve Bank of India (RBI) and file an application in Form FNC with the RBI for this purpose. Applications from such foreign entities are processed under either (i) the automatic route, i.e. where no approval from the RBI/Government is required before investing, or the (ii) government route, i.e. where prior approval from RBI/Government is required to be taken before any investment is made.

1. Branch Office

Unlike a company, a branch office can only engage in the business activities specifically permitted by Indian law, which are stated below:

1. Exporting and importing goods.
2. Rendering professional or consulting services.
3. Carrying out research work in which the parent company is engaged.
4. Promoting technical or financial collaborations between Indian companies and parent or overseas group companies.
5. Representing the parent company in India and acting as buying/selling agents in India.
6. Rendering services in Information Technology and development of software in India.
7. Rendering technical support for the products supplied by the parent/ group companies.
8. Serving as a foreign airline and shipping company.

Note that the foreign entities may also establish a branch office in Special Economic Zones to undertake manufacturing and service activities under general permission of the RBI subject to complying with the prescribed conditions. With regard to liability, the branch and company structure also differ. For a company, liability arising from the actions of the business or its employees is generally limited to the Indian company only. The same is not true for a branch, since Indian law treats a branch as merely an extension of its head office overseas.

1. Liaison Office

The approval to set up a liaison office is initially granted for a period of three years and may be extended thereafter by the Authorised Dealer Bank for further periods of three years each from the date of expiry of the original approval/ extension granted by the RBI, subject to the foreign entity being in compliance with the prescribed conditions at the time the request is submitted. It is further provided that the foreign entities engaged in construction and development sectors and Non-Banking Finance Companies are permitted to open a liaison office for two years only. No further extension would be considered for liaison offices of entities which are Non-Banking Finance Companies and those engaged in construction and development sectors (excluding infrastructure development companies). Upon expiry of the validity period, the liaison office should either close down or be converted into a joint venture/wholly owned subsidiary in conformity with the extant Foreign Direct Investment policy.

1. Project Office

The project office, unlike the company, branch office, or liaison office, may only be established to execute specific projects in India. In order to operate a project office no prior permission is required from the RBI, subject to the project office securing from an Indian company a contract to execute a project in India. In case of a proposal for opening a project office relating to the Defence sector, no separate approval of RBI would be required if the foreign entity has been awarded a contract by with the Ministry of Defence or Service Headquarters or Defence Public Sector Undertakings.

A foreign entity operating a project office is also required to provide a report detailing information such as the name and address of the foreign entity, reference number and date of awarding the contract, total amount of contract, particulars of the entity awarding the contract, location of the project office, etc., together with such documents as prescribed to the local RBI office and other authorities under whose jurisdiction the project office is established.

What are the Legal Issues Associated with the Start-Up of a Company?

1. Role of Promoters and Shareholders

The promoters of a company are responsible for undertaking the process of incorporation and such promoters may be individuals or business entities. There must be a minimum of two promoters for all private limited companies except a one person company. The promoters are also responsible for paying expenses associated with the company’s incorporation/registration, however, they may be reimbursed by the company for those expenses post registration.

1. Reservation of the Company’s Name

The first step in the company registration process is the name reservation. In order to reserve the name, one of the promoters is required to submit the required form, online at the official website of the Ministry of Corporate Affairs located at www.mca.gov.in. The promoter submitting the name reservation form is required to provide the proposed name of the company together with one alternative name and the application fee. The application will be rejected by the ROC, if:

1. in its opinion, the name is undesirable or its usage constitutes an offence under applicable law; or
2. the requested name is identical to or nearly resembles the name of another company, or the name is contained in another party’s registered trademark, or in a trademark application under consideration;

The proposed name may be reserved for twenty one days.

1. Director Identification Number

One of the most important steps to register a company is for the promoters to select and register the initial company directors. Only individuals may be appointed as directors (no business entities) and required to supply information requested in the required form. Companies are required to have a minimum of two directors and one of the directors must be someone who has resided in India for a minimum 182 days in the previous financial year from the date of appointment.

1. Attachment of e-Memorandum and e-Articles of Association

Indian companies are required to register online, on the official website of the Ministry of Corporate Affairs located at www.mca.gov.in, the e-Memorandum of Association and e-Articles of Association in their prescribed forms (“Charter”). The Charter sets forth the company’s main objective in seeking incorporation, amount of registered capital, and basic rules the company is required to follow after incorporation is successfully completed. The Charter documents shall be attached to the SPICe plus application form.

1. Registered Capital and Paid-Up Capital

Note that the company’s paid-up capital (under normal circumstances) represents the shareholders’ total exposure to liability associated with the company. There is no minimum paid-up capital requirement under Indian law.

1. Registered Office

Every company is required to have an office address and have it registered with the ROC. In order to accomplish this the company is required to file the prescribed form online with the ROC together with authorization to use the premises signed by the owner or landlord (together with proof of ownership or lease).

1. Additional Requirements

The company shall also be required to file the following:

1. Permanent Account Number (Tax Registration Number) – application to be filed with the nominated agency of the Income Tax Department, Government of India, such as National Securities Depository Limited (NSDL).
2. Tax Deduction and Collection Account Number (“TAN”) – application to be filed with the nominated agency of the Income Tax Department, Government of India, such as NSDL.
3. Form SPICe needs to be accompanied by e-form AGILE Pro which is a consolidated application form which enables application of registration for the following i.e. registration of GSTIN, EPFO, ESIC, professional tax registration and opening of bank account.

The above registrations can normally be completed within fifteen to thirty working days from the date of providing all the required information and documents to the relevant government authorities.

1. Director Signing Authority

Many times, as a controlling mechanism, the company will designate that a combination of two or more directors signing together are authorized to sign on behalf of the company. Also, many companies will designate that a director(s) may sign on behalf of the company only together with the company seal. This makes the physical presence of the company seal another kind of control mechanism.

1. Company Auditor

The directors are required to appoint the first auditors within 30 days from the date of registration.

1. Official Fees

The amount of official fees payable to the ROC is calculated based upon the amount of the company’s authorized capital using a detailed table set forth in the applicable statue.

1. Public Access to Company Details

After the company is incorporated, many details regarding the company’s structure are easily available to the public at the government website, including the company’s Corporate Identification Number, ROC Code, authorized capital, paid-up capital, date of incorporation, address of registered office, e-mail address, date of last annual general meeting, balance sheet, company status, and the names of directors.

What are the Legal Issues Associated with Operating as a Foreign-Held Company?

1. Regulated Activities

Under relevant law, investment from foreign investors and non-resident investors in some sectors is completely prohibited and in other sectors foreign investment is allowed subject to certain rules.

1. Approval Required

Foreigners may invest in India using one of the following two routes depending upon the type of business activity they seek to engage in

1. automatic route, for which no approval is required (activities which qualify for the foreign company to utilize the automatic route include sectors/ activities such as airports inclusive of greenfield projects (100% ownership) and existing projects (100% ownership) , air transport services inclusive of scheduled air transport service/ non-scheduled air transport service (up-to 49 % ownership & up to 100% for NRIs and OCIs) and helicopter services/seaplane services (100% ownership) requiring Directorate General Civil Aviation (DGCA) approval, other services under civil aviation sector inclusive of ground handling services subject to sectoral regulations and security clearance ( 100 % ownership) and maintenance and repair organizations (100% ownerships), courier services, construction development: townships, housing, built-up infrastructure, industrial parks, cash & carry wholesale trading/wholesale trading (including sourcing from MSEs), e-commerce activities, single brand product retailer trading (100% ownership), tea sector including tea plantation (100% ownership), railway infrastructure, commodity exchange, Credit Information Companies (CIC), infrastructure company in the Securities Market, Non-Banking Finance Companies (NBFC), power exchanges, agriculture & animal husbandry, petroleum & natural gas, mining and exploration of metal and non-metal ores, teleports (100% ownership),cable networks, telecom services (up-to 49 % ownership), single brand product retail trading (up-to 49 % ownership), asset reconstruction companies ( 100 % ownership), insurance (up-to 49%), banking private sector (up-to 49 % ownership), and
2. approval route, for which an approval is required (activities requiring the foreign company to obtain prior approval under the Government/ Approval Route includes sectors/activities like terrestrial broadcasting (FM radio) (up-to 49%), up-linking of ‘news & current affairs’ TV channels, up-linking of non-‘news & current affairs’ TV channels/ down-linking of TV channels (up-to 49%), print media (up-to 26%), publishing/printing of scientific and technical magazines/specialty journals/ periodicals, publication of facsimile edition of foreign newspapers (up-to 100%), satellites- establishment and operation (up-to 100%), private security agencies (from 49% up-to 74%), multi brand retail trading (up-to 51%), banking- public sector (up-to 20%), mining and mineral separation of titanium bearing minerals and ores, its value addition and integrated activities (up-to 100%), defence industry subject to industrial license under the Industries (Development & Regulation) Act, 1951 (from 49% up-to 100%), telecom services (above 49 % ownership), banking private sector (above 49 % ownership - up-to maximum of 74 % ownership), pharmaceutical sector of brownfield projects (above 74% ownership).

 

1. Reporting Requirements

1. Inward Remittance Foreign-held companies are required to issue a capital instrument within 60 days from the date of receipt of the inward remittance received through normal banking channels including the escrow account.
2. Issuance of Shares Any Indian company with foreign investors is required to file Form FC-GPR within 30 days from the date of issue of shares. The Reserve Bank of India (“RBI”) has introduced a user manual (the “SMF Manual”) in the year 2018 wherein the procedure for filing a single master form to integrate the existing reporting norms for foreign investment in India. Under the aforesaid form, the reporting of foreign direct investment which was previously a two-step procedure, comprising the Advance Remittance Form (“ARF”) and Form FC-GPR, has now been merged into a single Form FC-GPR which shall be filed online. One key aspect under the SMF Manual is that it states that there is no provision for an authorised dealer bank to resend or attach any clarification once an SMF is filed.

What is the Process to Obtain a Work Permit?

The procedure and requirements to obtain an Employment Visa in India are less defined than in many other countries, and presiding officials have wide discretion in deciding who qualifies. The following, however, is a description of the general process and requirements.

1. Conditions for Grant of Employment Visa

1. Indian law allows the following foreign nationals to be eligible for an Employment Visa:
2. Please note that the following rules are also applicable for grant of Employment Visa:

1. Documentation for Employment Visa

The Indian Missions/Posts receiving the application may also require additional supporting documents for processing the Employment Visa application. The processing time for the Employment Visa application will depend upon the policy and procedures of the Indian Missions/Posts in that particular country.

1. Employment Visa Period

Employment Visas are issued for a maximum period of five years. The nature of employment is the major deciding factor for determining the period for which the Employment Visa can be issued. The duration of the Employment Visa depends on the following:

1. A foreign technician/expert may get an Employment Visa for a period of five years or the duration of the bilateral agreement between India and the foreign government, whichever is less, with multiple entries.
2. Highly skilled foreign personnel being employed in the IT software and IT enabled sectors, the duration is up to three years or the term of assignment, whichever is less, with multiple entries.
3. A foreigner coming to India for employment not covered in (i) and (ii) above can be granted Employment Visa with validity up to two years or the term of assignment, whichever is less, with multiple entries.

Employment Visa may be extended by the State Governments/Union Territories/Foreigner Regional Registration Office (FRRO)/Foreigners Registration Office (FRO) beyond the initial visa validity period, up to a total period of five years from the date of issue of the initial Employment Visa, on a year to year basis, subject to good conduct, production of necessary documents in support of continued employment, filing of Income Tax returns and no adverse security inputs about the foreign national. The period of extension should not exceed five years from the date of issue of the initial Employment Visa.

1. Intra Company Transfers

There are no set requirements to receive an Employment Visa as an internal transfer, and they are granted on a case by case basis; however, in general, it is preferred that the applicant have a four-year university degree, and the official may take into account the availability of local staff to fill the position.

1. Dependents

Spouses and children of the Employment Visa holder may qualify to receive an X visa to reside (not work) in India. The dependents are required to obtain the X Visa prior to entering India. The following supporting documents are required to be submitted together with the X visa application for the spouse/children of a foreign employee:

1. A completed visa application form
2. A current valid passport of the spouse/children of the foreign employee
3. Recent passport photographs
4. Marriage certificate (in case of the spouse)/Birth certificate (in case of the children)
5. Passport and Indian visa issued to the foreign employee

 

1. Registration of Foreign Nationals

An Employment Visa issued for a period of 180 days or less (with multiple entries) does not require FRRO/FRO registration. Whereas, an Employment Visa issued for a period of more than 180 days, the foreign national should register with the concerned FRRO/FRO within 14 days (except for nationals of specific countries, in which case the period may be as short as twenty-four hours or seven days) from arrival in India. FRRO offices are bigger offices and work mostly in metropolitan areas whereas FRO are smaller offices and are available at all other places. Note that each local FRO or FRRO may have different registration requirements.

On registration, the FRRO/FRO concerned may issue a Residential Permit for the validity of the visa period. However, if there is any change in the residential address, the foreign national is required to immediately report the change of address, in writing, to the FRRO/FRO concerned.

At the end of the registration process the foreign applicant will be issued a residence permit, which will usually have the same validity period as the Employment Visa. If there is any change in the residential address, then the foreign employee should immediately report the change of address, in writing with the concerned FRRO/FRO. Registration is required to be done only once during the validity of the Employment Visa, irrespective of the number of times the foreigner leaves and re-enters India. Only if the foreigner re-enters India on a new visa will he be required to register again.

1. Employment Visa for NGO Work in India

Employment Visas are also granted to the foreigners who wish to come to India for honorary work (without salary) with NGOs registered in India. Employment Visa in such cases bears special endorsement “TO WORK WITH NGO” (Name of the NGO and place of work). The foreigners may be paid honorarium up to a ceiling of USD 160.54 per month.

What Incentives are Available to Foreign Investors by the Government Authority?

Special Economic Zones

Special Economic Zones (“SEZ”) are areas within India designated by the government to give investors who establish businesses (referred to as units) in those areas the following investment incentives:

1. Income tax holidays and extended carry forward of losses;
2. Exemption from excise duty on the procurement of goods, including raw materials from a Domestic Tariff Area (“DTA” ) used for setting up the SEZ unit. DTA refers to the whole of India, including territorial waters; however, it does not include areas within SEZs);
3. Duty free import of raw materials, capital goods, spare parts, etc.
4. Duty free exports;
5. Duties draw back on goods and services purchased from the DTA; 
6. Supplies to SEZs are zero rated under IGST;
7. No import license required for certain goods;

SEZ Tax Incentives

1. Tax Exemptions on Income from Exports
2. Customs Duty Exemptions
3. Central Excise Duty Exemption
4. Integrated Goods and Service Tax Exemption

Additional Benefits under SEZs

SEZ units are also afforded the following benefits:

1. SEZ units may, subject to certain conditions, pay managerial remuneration up to a limit of INR 24 million per annum to its managing director, director, manager, and managerial personnel without approval from the government, (in the event that the business is not earning profit or has only small profit), which is not otherwise allowed to non-SEZ companies.
2. A foreign person may be appointed as a director even if he does not satisfy the requirement of being a resident in India for at least twelve months prior to his appointment.

SEZ Requirements

Investors seeking to establish a unit in an SEZ are required to submit an application with the Development Commissioner’s office under whose jurisdiction the Special Economic Zones operate.

Export Oriented Unit

The Export Oriented Unit program seeks to attract projects that earn foreign exchange earnings through the sale of exports. Normally, only projects with a minimum investment of INR 10 million in the project’s production facility building and machinery are considered for Export Oriented Unit status; however, projects with less investment are sometimes considered.

Additional Incentives Available

The Indian government, also, offers the following additional investment incentives to qualifying investors.

1. Tax Incentives in the Infrastructure Sector
2. Tax Incentives Available to Other Sectors

What are the Legal Issues Associated with Foreign Ownership of Land?

1. Acquisition or Transfer of Immovable Property by Foreign Nationals

A foreign national may acquire or transfer the immovable property in India, if at the time of purchase that foreign national qualifies as a ‘person resident in India’. This rule, therefore, makes the legal definition of ‘person resident in India’ quite important. In order for a foreign national to qualify as a ‘person resident in India’, he is required to have resided in India for more than 182 days during the preceding financial year (financial year is defined here as April 1st to March 31st) for employment, business, vocation or any other purpose in India. Further, the type of Indian visa granted to such foreign national must clearly indicate his intention to stay in India indefinitely.

Indian law also grants rights to own an immovable property (other than agricultural land/ plantation property/ farmhouse) in India, to individuals who qualify as Non-resident Indian (NRI) and/or OCI, by way of purchase, gift or inheritance. Further, an NRI or an OCI is also entitled under the Indian laws to transfer the immovable property to a person resident in India, an NRI or an OCI, by way of sale or gift. In case the transfer is by way of gift, the transferee should be a relative as defined by law. An NRI or an OCI, however, need not qualify under the residency criteria to acquire or transfer the immovable property in India.

2.Acquisition of Immovable Property by Branch Office and Project Office of Foreign Companies

Foreign companies with branch offices or project offices, in India, engaged in specified business activities (see Chapter 13) or designated projects, respectively, are permitted to acquire immovable property in India for their own use and to pursue such business activities or designated projects, as the case may be. However, Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Macau, Hong Kong and Democratic People’s Republic of Korea companies are not allowed to acquire immovable property in India for a Branch/Project Office without prior RBI approval.

3.Acquisition of Immovable Property by Indian Subsidiaries of Foreign Companies

In contrast to the rules applicable to the foreign companies with branch offices/ project offices/liaison offices in India, Indian law does not place restrictions on acquisition or transfer of immovable property in India by the Indian subsidiaries of foreign companies.

1. Leases

Persons resident outside India, including but not limited to branch offices, project offices and the liaison offices of foreign companies operating in India, have general permission to acquire or transfer the immovable property in India, on leases not exceeding five years.

1. Title Search

Every prospective purchaser/lessee of the immovable property in India should perform a thorough title search of such immovable property prior to purchasing it or taking it on lease.

1. Documentation

Transferring the title of immovable property requires that a conveyance/sale deed be executed by the purchaser and the seller, be properly registered with the jurisdictional sub-registrar for the area where the immovable property is situated, after payment of the adequate stamp duty.