An In-Depth Guide to Business Setup in India
With evolving landscape, liberal government policies and numerous opportunities for young entrepreneurs and established businesses, India presents a favourable location for domestic and international entrepreneurs to set up a business here. Setting up a company in India involves traversing through a myriad of policies, legal frameworks and market dynamics. These policies are not necessarily complicated but need a professional assessment to reduce the efforts of incorporation. This guide provides an overview of the key considerations and steps involved in this process.
Understanding India as a Subsidiary Country
India offers a wide spectrum of opportunities as an investment destination. The country has significantly enhanced its business environment over the years from an impressive consumer base to robust infrastructure. As such, India has become a prime choice for offshore company setup.
In most sectors, it is possible for foreign companies to establish a fully-owned subsidiary in India to undertake any permissible business activity. 100% FDI has been incorporated in most sectors to boost growth. This allows for an efficient and legally compliant method for setting up a business in India by foreign companies.
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Following are the entry strategies for foreign companies to establish a legal presence in India
Joint Ventures present a strategic opportunity for foreign companies wishing to enter the Indian market, particularly in industries where 100% Foreign Direct Investment (FDI) is not allowed such as Defence, Civil Aviation. Banking, Insurance, Braodcasting and others.
A joint venture involves a partnership between two or more business entities, usually one foreign and one local, to achieve a specific commercial objective.
|Low Risk: By collaborating with a local partner, foreign companies can leverage existing knowledge and infrastructure, often making it a lower-risk entry strategy.
Local Expertise: The foreign entity benefits from the Indian partner’s established market presence, distribution channels, local know-how, and management skills.
|Due Diligence: Proper investigation and understanding of the Indian partner are essential to mitigate potential risks.
Regulatory Compliance: Adherence to Indian laws and regulations is required, and specific approvals might be needed depending on the sector.
Wholly Owned Subsidiary
Foreign companies can establish a wholly-owned subsidiary with 100% FDI, following specific provisions and routes as defined by Indian regulations.
A wholly-owned subsidiary is a company entirely owned by another foreign company. In the context of India, foreign companies can establish such a subsidiary with 100% Foreign Direct Investment (FDI), following specific provisions and routes as defined by Indian regulations. This enables foreign investors to leverage India’s burgeoning markets, technological advancements, and skilled workforce, while aligning with the nation’s legal and financial standards.
|Automatic Route||Flexibility: No approval required from RBI or the Indian Government.
Application: Applicable in sectors where 100% FDI is permissible, offering a streamlined process.
|Government/Approval Route||Approval Required: If 100% FDI is not permissible under the automatic route.
Regulatory Bodies: Consideration by the Foreign Investment Promotion Board (FIPB) and the Ministry of Finance.
Use Cases: Often used in sectors with specific restrictions or conditions on foreign investment.
Setting Up an Offshore Company in India
Foreign businesses can also consider an offshore company setup in India under different structures:
- Branch Office: Foreign corporations can open a branch office in India for specific business activities. However, all profits earned by the branch office are taxable as per Indian law.
- Project Office: If a foreign company has a contract in India, it can set up a project office. This setup is generally temporary and only for the duration of the project.
- Liaison Office: This setup acts as a communication bridge between the foreign company and its Indian customers or partners. It cannot undertake any commercial activity directly and cannot earn any income in India.
Other India Business Setup Options
Private Limited Company
A popular choice for a new business setup in India is the incorporation of a Private Limited Company.
Key Features of a Private Limited Company (PLC) are as follow:
- Limited Liability conferred upon its shareholders. This essentially means that the shareholders are only liable to the extent of their share in the company’s capital should the company incur debts.
- Separate Legal Entity Status implies that the company is a separate legal entity distinct from its shareholders and directors. It has its own assets and can sue and be sued in its own name.
- To form a Private Limited Company, a minimum of two and a maximum of fifteen directors are required. The company must also have at least two shareholders. The directors and shareholders can be the same individuals.
- Private Limited Companies can raise funds through private equity, ESOP and more. They can also issue debentures and accept deposits with relative ease.
- Before proceeding with the registration process, all the proposed directors of the company should obtain a Digital Signature Certificate (DSC) from government-recognized certifying agencies.
- The Directors must obtain a Director Identification Number (DIN), which is a unique identification number.
- The proposed name of the company should be submitted to the Ministry of Corporate Affairs for name approval.
- The Memorandum of Association (MoA), which outlines the constitution and objectives of the company and the Articles of Association (AoA), which outlines the rules and regulations of the company should be drafted and submitted.
Public Limited Company
This structure is ideal for businesses with large capital requirements and looking for an option to list on the Indian stock markets. It requires a minimum of three directors and seven shareholders.
One Person Company (OPC)
Introduced by the Companies Act, 2013, the OPC allows single entrepreneurs to enjoy the benefits of limited liability while operating as a sole proprietor. This structure is suitable for small businesses and startups. However, this is not feasible in terms of international investments.
Limited Liability Partnership (LLP)
A Limited Liability Partnership (LLP) is a unique form of business entity that merges the features of a partnership and a corporation. As the name suggests, an LLP provides limited liability to its partners, similar to shareholders in a corporation, while allowing the flexibility of partnership-like business operations.
Step-by-Step Guide to Setting Up a Business in India
- Market Research and Feasibility Study: This involves conducting a comprehensive market analysis to evaluate the potential of the new business setup in India.
- Choosing the Right Business Structure: This involves determining the appropriate legal structure for the business.
- Obtaining Necessary Licenses and Permits: Gathering and fulfilling all necessary licenses, permits and regulations relevant to the business setup in India.
- Securing Office Space and Infrastructure: Identifying a suitable location and acquiring the necessary infrastructure to support business operations in India.
- Hiring Talent and Human Resources: Recruiting a skilled workforce to support the business while keeping in mind India’s employment regulations and practices.
- Understanding Taxation and Financial Planning: Acquiring a clear understanding of India’s tax laws and constructing a robust financial plan for your business setup in India.
- Opening Bank Accounts and Funding Options: Establishing a corporate bank account in India and exploring various funding options for the new business setup in India.
- Embracing Technology and Digital Solutions: Incorporating appropriate technology and digital solutions to optimize the operation of the business setup in India.
It’s important to note that setting up a business in India by foreign companies may involve additional steps and considerations. It might be beneficial to engage business setup services in India to navigate through the process efficiently and effectively.
Business Setup Services in India
Legal Advisory and Consultation Services
At R Associates, we offer full-service legal consultation which includes providing advice and support on the legal aspects of setting up a company in India.
Business Incorporation Assistance
This service facilitates the entire process of business incorporation from registration to obtaining necessary licenses. It plays a crucial role in new business setups in India.
Compliance and Secretarial Services
These services ensure your business adheres to all the relevant laws and regulations in India. They are vital when you are setting up business in India with foreign companies.
Taxation and Accounting Support
Expert advice in taxation and accounting helps businesses to manage their finances effectively. This becomes critical in scenarios such as an offshore company setup in India, where cross-border taxation issues might arise.
Challenges and Opportunities for Foreign Companies
- Cultural and Language Barriers: Foreign companies interested in setting up a business in India often face cultural and language barriers. However, these can be mitigated by investing in cross-cultural training and hiring local talent who understand the nuances of the Indian market.
- Overcoming Bureaucratic Hurdles: The process of a new business setup in India or an offshore company setup in India can be fraught with bureaucratic challenges. Having knowledgeable partners on the ground can help navigate these hurdles and ensure compliance with local laws and regulations.
- Leveraging India’s Diverse Market Potential: Despite the challenges, setting up a business in India by foreign companies offers significant opportunities. India’s vast and diverse market presents immense potential for growth and expansion. The government’s ongoing efforts to improve the ease of doing business is also making India an increasingly attractive investment destination.
Success Stories: Foreign Companies in India
- An overseas Ed-Tech startup that sought to enter and capitalize on India’s burgeoning education technology sector faced several regulatory complexities. Guided proficiently by R Associates through their team providing business setup services in India, they successfully established a subsidiary in India. Today, the Indian operations significantly contribute to the startup’s global presence thus underscoring the benefits of an offshore company setup in India for foreign enterprises.
- The second case study revolves around an international e-commerce startup that after gaining initial traction in the Indian market planned to expand its operations. The challenges in their journey of new business setup in India were met with strategic investments in local infrastructure and talent.
In light of the foregoing discourse, it is irrefutable that the process of setting up a company in India presents an intricate landscape to navigate characterized by a plethora of legislative stipulations and administrative intricacies. However, the propitious business climate in India buttressed by the nation’s economic vigor and sectoral diversity presents an invaluable prospect for both domestic and international establishments. Be it a domestic entity considering a new business set up in India or a foreign institution contemplating setting up business in India, the instrumental role of proficient business setup services in India is underscored by the complex yet rewarding nature of the Indian business environment.
Frequently Asked Questions
What are the major challenges faced by foreign businesses in India?
Understanding the complex regulatory and legal framework, navigating cultural and language barriers, dealing with bureaucratic hurdles and coping with infrastructural deficiencies are few challenges faced by foreign businesses in India. Additionally, understanding India’s diverse consumer base, adapting to local tastes and preferences and ensuring effective supply chain management can be challenging.
Can foreign nationals invest in India without local partners?
Foreign nationals can invest in India through a wholly-owned subsidiary in most sectors. The Indian government allows 100% Foreign Direct Investment (FDI) under the automatic route in many sectors. However, certain sectors may require government approval or have limits on foreign ownership.
Is it mandatory to have a physical office presence in India for business setup?
Certain types of businesses like a Private Limited Company, One Person Company (OPC) or a Limited Liability Partnership (LLP) require a registered office address in India. This address does not necessarily have to be a commercial space – it could be a rented home address as well. If setting up business in India by foreign companies then we can provide startup legal advice in India.
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