A foreign investor may set up its business in India either as an unincorporated or incorporated entity. Unincorporated entities may be in the form of a liaison office, branch office, or project office. This requires the prior approval of the Authorised Dealer bank (banks authorised to deal in foreign exchange) or the Reserve Bank of India (the central bank) in specific circumstances. Incorporated entities may be in the form of a private limited company, public limited company, or limited liability partnership.
Most foreign entities set up their Indian subsidiary as private limited companies. The Indian entity is either fully owned by the foreign investor or is a joint venture with a local partner, with the foreign investor bringing in technical know-how and the local partner bringing in the market access. The franchise option is also increasingly popular with many established foreign brands looking to tap India’s vast market opportunity.
What are the requirements for capital and ownership of quotas or shares by foreign companies in India?
Other than a handful of businesses where sectoral foreign investment caps or complete prohibitions apply, all foreign investments into India qualify for automatic approval, i.e., no prior approval is required for making the foreign investment. There are only certain compliances to be undertaken as part of the investment.
While there is no minimum paid-up share capital requirement for incorporating a company, a private limited company must have at least 2 shareholders. The foreign investor setting up a private company can meet the minimum shareholder requirement by offering 1 share to another person, who will hold the share as a nominee of the investor. While the nominee will be the legal owner of the share, the beneficial ownership over the share will be with the investor.
What are the requirements for the corporate governance of the company in India?
The corporate governance mechanism for companies in India is enumerated in the following enactments:
The Companies Act, 2013 contains provisions relating to the board constitution, board meetings, appointment/removal of directors, general meetings, audit committees, related party transactions, disclosure requirements, etc.;
Securities and Exchange Board of India (SEBI) Guidelines: SEBI is the regulatory agency for the securities market in India, and issues regulations and rules for the protection of investors;
Standard Listing Agreement of Stock Exchanges: For companies whose shares are listed on the stock exchanges;
Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI): ICAI is an autonomous body that issues accounting standards providing guidelines for disclosures of financial information;
Secretarial Standards issued by the Institute of Company Secretaries of India (ICSI): ICSI is an autonomous body that issues secretarial standards. Every company has to observe the secretarial standards with respect to shareholder and board meetings.
What are the legal requirements a foreign company should comply with when incorporating a subsidiary in India?
While there is no minimum paid-up share capital requirement under the law, it is advisable to incorporate the Indian entity with a share capital of at least Rs. 100,000 (approximately USD 1200).
A private limited company must have at least 2 directors. While foreign nationals can be directors of an Indian company, the company must have at least 1 resident director, i.e., a director who has stayed in India for at least 182 days in the previous year.
The company needs to obtain one-time statutory registrations such as the Permanent Account Number, Tax Deduction Account Number, indirect tax registrations and labour law registrations depending on the nature of the business proposed to be undertaken, the number of employees and other related factors.
What is the process for the incorporation of the subsidiary in India?
A company can be formed by filing the incorporation documents online on the website of the Ministry of Corporate Affairs. The incorporation form will require the details of the new company such as the proposed name, registered office address, names of initial subscribers and directors, and the draft charter documents. Once these details have been processed, the Certificate of Incorporation is issued by the jurisdictional Registrar of Companies. The incorporation process takes anywhere between 10 to 20 days.
What are the usual challenges for foreign companies setting up a subsidiary in India?
The challenges that foreign companies may face while setting up a subsidiary in India include complying with myriad Indian employment laws and other legislations. India has a complex tax structure and companies will need the assistance of qualified tax experts to navigate the Indian tax regime.