Several entrepreneurs from outside India wish to incorporate a private limited company in India. But they are often unaware of the procedures. In this blog, we will help you know what it takes to start a company in India. But before we take a deep dive into how to start a company, let’s get to the basics first. There are some basic points you should be well aware of before you lay the foundation of your business.
Introduction to Foreign Direct Investment(FDI)?
According to Wikipedia, A foreign direct investment is an investment in the form of controlling ownership in business in one country by an entity based in another country.
To put in simple words, the capital to be invested in a company by the foreign nationals is termed as or classified under Foreign Direct Investment.
We can classify the entry of Foreign Direct Investment by Foreign Nationals into two parts:
The former is put in place for the sectors that have fewer restrictions concerning foreign investment, while the latter requires the scrutinized investment that is approved by the government.
In both cases, as soon as the FDI is received and accepted by the recipient company, the Reserve Bank Of India(RBI) should be notified using form FC-GPR within 30 days from allocating shares to foreign shareholders.
So the first thing anyone interested to invest in a company in a different country should look for is the FDI policy.
Now that we know how to invest, let’s dive into the opportunities where you can make the investments:
A Liaison office, otherwise termed as a Representative office, needs the approval of the government of India for an establishment. There’s not much you can do commercially through a Liaison office; the tasks are limited to collecting information, promotion of export/import, and facilitation of technical/financial collaboration.
The government of India allows foreign companies to set up branch offices in India which have manufacturing and trading activities out of India. You can establish a branch office in India if you are:
- Acting as a buying or selling agent to represent the parent company in India.
- Providing services in Information Technology and Software Development in India.
- Providing a parent company with the technical support required for the products.
- Exporting and Importing goods.
- Conducting research
- Facilitating financial/technical collaboration between the parent company and companies in India.
The project office is one of the best setups for a foreign company looking for a temporary project/site to execute a specific project in India. A project office is under the obligation of performing only the tasks related to the scheme specified during the establishment of the company; any unrelated task is prohibited.
4.Private Limited Company
Private Limited Company is the most popular type of business among Foreign Investors to build a subsidiary, joint venture or a solely owned company.
Here are the primary features of a Private Limited Company:
- There is a restriction on the shareholders right to transfer the shares.
- The number of shareholders is limited to 200.
- There is no privilege for inviting the public to subscribe to shares or debentures.
5.Limited Liability Partnership (LLP):
Introduced through the Limited Liability Partnership Act 2008, LLP is an alternative corporate business entity widely used because of 100% FDI and its less compliant nature as compared to a Private Limited Company. It is equivalent to an LLC.
Just like a partnership firm, LLP lets the members organize their internal management as per a mutually-arrived agreement. The best part about establishing an LLP is that it is considered a completely separate legal entity from its partners. So as an LLP is fully liable for its assets, the partners would only be responsible for their contribution in the LLP. Further, no partner can be held accountable for the misconduct of another partner.
The process to incorporate a private limited company and LLP is somewhat similar, which is as follows:
1.Management and Shareholders:
A private limited company can have a minimum of 2 shareholders and maximum of 200, which can either be a person or a corporate entity and a minimum of 2 directors up to a maximum of 15 directors. The directors need to be 18 years of age and can’t be a corporate entity. One of the directors should have stayed in India continuously for 186 days during the financial year, i.e., 1st April to 31st March.
The Board of Directors of an Indian Private Limited Company must have a director who is both a citizen and a resident of India. However, it is not mandatory for the board of directors to be a shareholder of the company.
2.Obtaining Digital Signature:
Directors of the company, both Indian and Foreigners require a Digital Signature Certificate(DSC) for filing the incorporation documents and continued compliance documents for a company. A DSC is equivalent to a handwritten signature that verifies the identity of the sender who is submitting reports through the internet.
Following are the documents that you require to submit for getting a DSC:
1.Documents for foreign nationals residing in India:
- Resident permit certificate issued by the Assistant Foreigner Regional Registration
- Officer, an officer of the Bureau of Immigration of India
- An attested application form with a photo
2.Documents for Foreign National:
- An attested application form with a photo
3.Obtaining Director Identification Number(DIN) and Approval of Name
As per the Companies Act, 2013, it is mandatory for every individual intending to become a director or a company in India, to obtain a Director Identification Number(DIN).
Once you’ve got your hands on the Digital Signature Certificate(DSC), you can obtain DIN from the Directors by filling form DIR-3 with the registrar of companies.
Name Approval of The Company:
Once you’ve obtained DSC and DIN, you can move forward to getting the name of your company approved. Certain guidelines should be taken into consideration while applying for the Name Approval:
1. Make sure that your company’s name is unique and hasn’t been adopted by any other company, you can check it at mca.gov.in
2. Make sure that there is no registered trademark in the same name, you can check it at ipindia.nic.in
3. Make sure that the first half of the name is unique. It’s best to avoid geographical references, adjectives, abbreviation and generic terms. Also, words such as Bank, Exchange and Stock Exchange needs to be approved by RBI and SEBI.
4.Name Approval of The Company:
Once you’ve obtained DSC and DIN, you can move forward to getting the name of your company approved. There are certain guidelines that should be taken into consideration while applying for the Name Approval:
1. Make sure that your company’s name is unique and hasn’t been taken by any other
company, you can check it at mca.gov.in
2. Make sure that there is no registered trademark in the same name, you can check it at Ipindia.nic.com
3. Make sure that the first half of the name is unique, it’s best to avoid geographically
references, adjectives, abbreviation, and generic terms. Also, words such as Bank,
Exchange and Stock Exchange needs to be approved by RBI and SEBI.
5.Filing For Incorporation of a Private Limited Company
Once the name is approved, you can file the incorporation documents with the Ministry of Corporate Affairs to incorporate the company. The required documents for incorporation include affidavits and declarations from Directors, Memorandum Of Association, Article of Association, and the registered address proof.
6.Memorandum of Association(MOA) and Article of Association(AOA)
MOA and AOA are essential documents which show the intention of foreign nationals or Indian nationals of becoming shareholders in a company. MOA is considered as the charter of a company; it includes all the objectives, rights, liabilities with regards to the constitution of the company and is recognized by law as valid.
Now, this is the procedure that is needed for incorporation of a Private Limited Company in India, but there are still certain questions that remain unanswered which we’ll get into right away.
1. How much does it cost to register a company?
For a private limited company in India, a minimum paid up capital of INR 1,00,000 (approximately $2000) is required. There is no upper limit on paid-up capital and authorized capital.
2. What’s the difference between paid-up capital and authorized capital?
The authorized capital is a limit that has been approved by the Registrar of the companies up to which you can issue shares to the public or members.
Paid up capital is the paid portion of the capital that is subscribed by the shareholders.
3. Do I have to be an Indian Citizen or need a local partner to register?
For starting a company in India, it is mandatory to have a minimum of two individuals and an address is required in India. One of the directors needs to be both a citizen and a resident of India. One of the directors should have stayed in India continuously for 186 days during the financial year, i.e. 1st April to 31st March.
4. Do I have to pay Income Tax?
Any income earned in India is subjected to Income Tax. The required TDS is deducted from their remuneration or commission as per the provisions of the Income Tax Act.
5. Do I Need a Visa to Set up a Company?
Yes, a foreign national is required to be present for the signing of Affidavit during the later stages of incorporation, and his/her arrival should be in Business Visa.
6. Are there any Incubators/Accelerators in India?
India ranks third globally, with the most number of Incubators/Accelerators after China and USA.
While the above points help register your business and get you set to expand, there is never an ideal plan. Just make sure you’re thoroughly prepared for incorporating your company. Sometimes, things may not go as planned, but to become successful, you have to adapt to shifting situations.
Are we missing out some important points?
Drop your suggestions below, and we would love to implement those.
And if a comment isn’t enough for you, we can connect through firstname.lastname@example.org