India is a land of variety – colours, festivals, languages, religions, which work almost in synchronisation with the chaos and complexities of the laws of the land. It would not be unfair for international businesses to think that the same traits would filter down to the setting up of a business and future ease of working in a country with such a well-entrenched web of functionality. But there is no better way to describe India’s richness than the saying that there is a method to the madness, and we live in the rainbow of chaos. Just ask the thousands who flock to diverse parts of India year after year, to not only realise that despite the multitude of legislative changes from state to state, how uniform and simple it is to set up a business and the usefulness of the countries interconnected markets.
After surpassing a year during which a mask had become mandatory to wear, it seems like professionals across the board had decided to do the same for their professional services. Especially the clearest and simple tasks had taken up the garb of being equivalent to writing code for a nuclear launch! Investing in the land of diversity and acceptance is an opportunity brimming with the promise of exponential expansion and economic success. The government recognises that to achieve the atmospheric success brought by investors, it must be married to the relentless idolization of simple, functional, and rapid fulfilment. In an endeavour to ensure the realisation of simplicity, an attempt must be made to go step by step into the process.
Will you be Allowed to Invest?
Foreign Direct Investment or commonly known as FDI, apart from contributing to the economic growth of the nation, also facilitates the inflow of better technology, managerial skills, knowledge and generates employment. It was introduced in 1991 under the Foreign Exchange Management Act (FEMA) and to incentivize foreign investment, it planned to pre-approve all investments up to 51% foreign equity participation, allowing foreign companies to bring modern technology and industrial development.
Depending on the service sector your business falls under, investment can come into India in two ways:
Automatic Route – A business investment that falls under the automatic route does not require any prior approval. The investors are required to notify the regional office concerned of Reserve Bank of India (RBI) i.e. the Central bank of India within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issue of shares to foreign investors.
Approval/ Government Route - In some specified sectors, prior approval of government is required in a time-bound and transparent manner by the Foreign Investment Promotion Board (FIPB). FIPB ensures a single-window approval for the investment and acts as a screening agency. FIPB approvals are normally received in 30 days.
Today, most sectors of the economy are open to foreign investments through the automatic route of approval with 100% equity participation. Only a few sectors that are considered to be sensitive, require government approval through FIBP such as defence, insurance, etc.
Prohibited - There are certain sectors, such as gambling, lottery, manufacturing of cigars and cigarettes, etc where FDI is completely prohibited.
Exceptions - Entities from countries that share a land border with India are permitted to invest only under the approval route. This means that the FDI proposal from bordering countries will now require government clearance, even if foreign investments for that sector is placed under the approval route. The rules have been tightened not just for fresh but existing FDI as well. Transfer of ownership of any existing or future FDI where the direct or indirect beneficiary is from these countries will also require government approval.
How do you Invest?
While most sectors fall under the automatic route, your legal counsel in India will assist you in checking for any specific conditions or caps on investments in your sector. If there are approvals needed the pathway to gain approval will be mapped by them before providing you investment vehicle options.
For testing the water or limited commitment and activity:
- Branch office
- Liaison Office
- Project Office
For a more liberal and preferrable commitment:
- Private Limited Company
- Limited Liability Partnership
There are options of entering into a Joint Venture arrangement or a Partnership with an existing Indian company or buying all the shares of an existing business. However, other forms of business organizations like a proprietary firm, partnership firm, trust etc. are either not permitted or not advised for foreigners wanting to do business in India.
Basics for a New Business in India
Depending on the type of entity you decide to set up business in India with, there are a few basics to be required prior to incorporation:
Proof of Existence – Passport and the address proof are required which are required to be attested through the public notary and apostilled.
Members and/or Directors – For registration of any entity, laws in India prescribe a minimum number of people that are essential to start a business.
Registered Office – When registering an entity, an address/ location of the place of business, is required to be filed, which for all future purposes will be known as the registered office of the entity. This is also where all official correspondence from the Ministry of Corporate Affairs/ Registrar of Companies office will be sent. There are a number of options available now for entities looking to do business in India, from buying a property, renting a space, using a local director’s residence or office address or even using your lawyer’s address (after acquiring the requisite permissions).
Suitable Name – There are a few naming guidelines laid down as per law that are required to be followed while registering a new business in India.
Foundation Documents – Depending on the entity, documentation for filing shall be prepared such as an MoA and AoA, or other agreements.
DIN and DSC – Due to the numerous forms to be filled it is mandatory (depending on the type of entity decided to be registered) to get a DIN (Director Identification Number) and DSC (Digital Signature Certificate).
Post Incorporation of the Company
Bank Account – Once the certificate of incorporation has been obtained, a company bank account in India will need to be established with a bank of your choice.
Registrations and Licenses – Once the entity has been incorporated, the authorization to do business is what’s required next. The authorizations come in the form of legal licenses and registrations. While some of them are general and are required for all kinds of businesses, others are specialized and are additionally required for certain kinds of businesses. Such as GST registration, Permanent Account Number, Tax Account Number, Bank Account, Shop and Establishments license (License for physical premises to the commercial establishment). There are also specific registrations required depending on the sector of business such as IEC for export and import, FSSAI for food, etc.
Further Simplification - Reporting Compliances
The RBI merged 9 reporting forms into a single form and introduced a Single Master Form (SMF) via an online reporting platform - FIRMS (Foreign Investment Reporting and Management System), which will provide for the SMF thereby subsuming all the existing reports. Further, Indian entities which have received foreign investment in the past are required to register them by filing an Entity Master Form (EMF).
What about a wholly-owned Foreign Subsidiary?
For a company to be a foreign subsidiary company in India, the company itself must be incorporated in India. It does not matter which country the parent company is incorporated in.
Can a Non-Resident have 100% control?
It may come as a surprise, but anyone of any nationality can set up a business in India and also own 100% of that business. You don’t need residential status or even to be living in the country. The only stipulation is that the company must be registered to an Indian address and there must be one Indian Resident Director. This is for accountability and correspondence of information, not for the purpose of legitimising the ownership of the business.
Is it Really That Simple?
There is a very good reason that some of the largest back offices, export-import companies, IT firms, are thriving here.
Every country globally will always have a few cases of glitches, delays and disappointments and India is no exception to that. However, India has the exceptional positioning of having a majority of its vast population revving to promote and please coupled with a government that is taking the most radical steps to ensure the ease of investing in India with initiatives like, ‘Make In India’ and ‘Invest India’ that are the very driving force of simplifying a task that has unnecessarily been flaunted as impossible hurdles.