Why to do business in India
- India is one of the fastest-growing economies and has emerged as the top FDI destination across the globe. It rose to 9th rank in the list of nations receiving FDI in 2019.
- In 2020, due to the COVID-19 impact, Global FDI declined whereas India bucked the trend and witnessed a 13% increase.
- This is primarily due to Liberalised FDI norms, Improvement in Ease of doing business ranking benefits offered by the Indian Government like tax exemptions for start-ups and SEZ/STP/EHTPs.
- Investment in India can be done via 2 routes:
Automatic Route: No approval is necessary from Government or RBI before investing.
Government Route/Approval Route: Prior to investment, approval from the respective government department is necessary.
- Indian Government over the years have liberalised FDI norms and now almost 98% of the Indian economy is open for FDI through the automatic route.
Starting Business in India
Business in India can be started either by incorporating a separate entity or just opening a BO/LO/PO of a foreign entity.
Branch Office / Liaison Office or Project Office
- Opening a BO (Branch Office)/ LO (Liaison Office) or PO (Project office) can be done by getting permission from AD-I category bank (In cases where 100% FDI under Automatic Route is permitted) or RBI through AD-I category bank (In other cases).
- BO/LO/PO can only perform limited operations in India as permitted by RBI. Prohibited Activities includes Retail trading/ Manufacturing and processing of any kind. Hence generally not preferable for companies with long term plans.
- Need to submit AAC (Annual Activity Certificate) every year to AD-I category Bank and DGIT(IT) in case of BO/LO.
What are BO / LO /PO
a) Branch Office – Can be established in India as a buying or selling agent of the parent company, for providing professional or consulting services, R&D services, for providing technical support for products supplied by the parent company. It can also remit profit generated by it to parent. But it is subject to a 40% Tax rate.
b) Liaison Office – Can act as a representative of a foreign parent but it cannot undertake any commercial activities and must maintain itself from funds sent by Parent. Approval only valid for 3 years and can be extended on application to AD-I Category Bank
c) Project Office – For executing a project given by an Indian company by opening a bank account in India. They can remit profit generated by them like BO and also subject to a 40% rate.
Advantage of BO/LO/PO
- No need to infuse Share capital.
- Low compliance Cost.
- Easy repatriation of funds.
Disadvantages of BO/LO/PO
1.Parent need to have Profit making a record in the last 5 years and a Net worth of 100,000 USD
2.High Tax rate (40% vis-à-vis 22%/25% for companies)
3.Restrictive nature of activities permitted and other restrictions of RBI on bank accounts, no. of offices etc. (Click here for RBI regulations)
A separate Legal Entity like Company/LLP
Due to the restrictive nature of BO/LO/PO, the parent may want to establish a separate entity namely:
a)Company – Private Limited company or Public Limited company
b)Partnership – Normal Partnership or LLP
2 types of companies can be formed under companies Act 2013 i.e. Public limited and private limited.
Major difference between these companies includes No of members and directors required ( 7 and 2) and flexibility in management payment of remuneration to management and restrictions on transfer of shares.
A partnership is a relationship created between persons who have agreed to share the profits of a business carried on by all of them, or any of them acting for all of them. A partnership is not a legal entity independent of its partners and hence has unlimited liability.
LLP (Limited Liability Partnership) is a body corporate and a separate legal entity. Hence it shields its partners from unlimited liability.
Chronological order for setting up a company
Incorporation of Company under Companies Act 2013
|Step NO.||Nature of Activity||Form No.||Required Documents/Information||Expected time limit||Remarks||Reference|
|1||Reservation of Name||Spice Plus||Two names in priority order and Object clause of the company . Object should justify the name||2 Working Days||MCA naming guideline to be followed. Mca will not approve the similar name or registered trademark name .||www.mca.gov.in|
|2||Digital Signature||If Foreign director Notarized /apostille copy of Passport and any address proof Bank statement/Utility Bill. And Passport size photograph is must||2 Working Days||Also E-mail id and mobile number is must for providing OTP before issuing the digital signature||Local Vendor /Consultant will help to get the Digital signature|
|For Indian PAN ,Aadhar and Passport size photo is must|
|3||Incorporation of Company (On approval of this form PAN ,TAN ,PF and ESIC registration number will be allotted.) Din Number will be applied along with the Filling Spice Plus -Part-B||Spice Plus Part-B||List of Subscribers ,Address of registered office with Acceptable Address proof.||7 Working Days||Need minimum 2 Directors and 2 Shareholders ( In case of WOS, One will hold shares as nominee of Holding Company)||mca.gov.in|
|EMOA -EAOA||Memorandum and article of association of company to be prepared and submitted online as a part of incorporation form||mca.gov.in|
|4||Bank Account||7 Working Days||Either in Nationalized or in private bank Opening of bank account is must.|
|For nationalized bank Foreign director has to be personally in India for signature or for other bank if their branch is available in foreign country KYC can be completed without coming to India.|
|5||Introduction of share capital||SH-1 and PAS 3||Fund to be transferref in the bank account as per the share capital mentioned in the MOA||3 working days||Allotment of shares will be done by filling form PAS 3. Share certificate to be issued in form SH-1||mca.gov.in|
|6||FCGPR filling||FCGPR||FIRC/KYC of subscriber||7 working days||This from needs to be filed within 30 days of Incorporation. For this first company has to register on the RBI website create their login and file the FCGPR forms||https://firms.rbi.org.in|
|Valuation report from CA/Registered Valuer|
|7||Appointment of Auditor||ADT-1||Copy of Certified Board resolution and consent letter from Auditor||This from needs to be filed within 30 days of Incorporation||mca.gov.in|
|8||Commencement of Business||INC-20A||Copy of Bank statement showing credit of subscription money||This from needs to be filed within 30 days of Incorporation||mca.gov.in|
|No||Name of Act||Required Doc/Information||Expected time limit||Remarks||Reference|
|1||Goods and Service Tax||Incorporation certificate/PAN/Address proof, Board resolution KYC of all directors||14 days||This number can be applied while incorporating the company by filling the Agile form along with Spice-Part-B. However, as per the new guideline GST office has to do the site inspection before granting GSTN so this will increase the overall time of incorporation process so advisable to apply separately once the incorporation of the company is done.||www.gst.gov.in|
|2||Shop & Establishment Certificate||GST Certificate, Adress Proof||7 days||Based on Local Laws||ahmedabadcity.gov.in|
(your local regional website)
|3||Proffessional Tax||7 days||Registration under the local body which needs to be deducted from the Salary of an Employee||ahmedabadcity.gov.in|
(your local regional website)
|4||IEC Code||Basic documents Incorporation certificate, GST, KYC of Director, Digital signature etc.||7 days||This registration is a must if the company is engaged in the activity of Import or Export||www.dgft.gov.in|
|5||LEI Number||This 20 digit code is required to be obtained if FB and NFB Exposure is more than INR 50 crore||https://www.lei-worldwide.com|
Root of Funding
A. Initial funding
•Parent needs to invest the money as Equity shares at the time of incorporation. However, MCA has done away with the requirement of minimum share capital of Rs. 100,000.
•After the money is received in India, PAS-3 needs to be filed to allocate shares to the Parent and other subscribers.
•Form FCGPR needs to be filed with RBI for Foreign contribution received.
B. Further Funding
Parent can invest further money in the company when needed in following forms
1. Equity Shares:
• Same norms are applicable as Initial funding. So, under sectors with a 100% automatic route, the company can invest money freely without restrictions or approvals as equity shares.
• However, repatriation of money infused as equity shares is difficult before winding up so other forms of the instrument may be considered in case the parent wants to repatriate invested money back to the home country.
2. Preference Shares
They carry a preferential right to receive dividends at a fixed rate as well as preferential rights during liquidation over the equity shares. The company can issue convertible/redeemable Preference Shares. Companies Act 2013 specifically prohibits the issue of Irredeemable preference shares
3. Debentures/Loan •Debentures are debt securities issued by a company with fixed rate of interest.
As per ECB guidelines of RBI, fully and compulsorily convertible preference shares and debentures are treated on par with equity and need not comply with such guidelines. This means Partly/Optionally/Non-convertible Preference Shares/Debentures shall comply with such guidelines. (Refer Guidelines here)