Setting up business in India – key regulatory considerations

Manan Kenia

K. C. Chheda and Co.

Aparna Kedia

K. C. Chheda and Co.

Increasing demand in an already huge market, fast paced growth, population diversity with immense human potential, cost effective labour, abundant resources and a business friendly environment are just a few of the many reasons why foreign entities and nationals find setting up companies in India an attractive proposition.

When a foreign national or entity is involved, proper and complete documentation in compliance with various regulatory acts is a must.

The accuracy and completeness of the necessary paperwork will determine the timeframe to incorporate a company in India.

Key Regulatory Laws

Foreign Direct Investment Policy (FDI)

The current guidelines in force permit foreign investment in a majority of sectors, both under the automatic route as well as the government approval route, except in he following cases:

- Atomic energy generation;
- Cigars, cigarettes, or any related tobacco industry;
- Lotteries;
- Investment in chit funds;
- Agricultural or plantation activities (subject to exceptions);
- Housing and real estate (subject to exceptions);
- Trading in TDRs
- Any gambling or betting businesses; and
- Further subject to sectoral caps in certain sectors such as insurance, banking, and print media to name a few.

Foreign direct investments (FDI) can be made under two routes – automatic approval route and government approval route depending upon the sector and sectoral caps.

Ministry of Corporate Affairs (MCA) compliances

Currently the following types of structures are available for incorporation of an entity: private limited companies, public limited companies (unlisted/listed), and limited liability partnerships.

- The initial process shall involve “name” approval of the proposed entity.
- Applications are subsequently made to obtain a Director Identification Number (DIN), Digital Signature Certificates (DSC) and a company seal.
- Proof of identity and proof of address (duly attested by an Indian Embassy/Consulate/ High Commission/Apostille) of the proposed foreign directors is a key requirement.
- Appointment of a local Indian resident as one of the directors is the key requirement.
- Subscribers to the Memorandum of Association (MOA) and Articles of Association (AOA) must be specified, and additional precautions have to be undertaken especially when the share capital is proposed to be subscribed by a holding company of the Indian entity.
- A brief write up on the proposed business activity is essential for drafting the “Main Objects Clause” to finalise the MOA.
- A registered office in India is required (either on an outright basis or lease basis).
- Appointment of professional officers must be made (statutory auditor, company secretary).
- The Indian entity must open a bank account in India.
- A “Commencement of Business” certificate within 180 days from the date of incorporation is a prerequisite, without which the Indian entity cannot transact any business activity in India.

Reserve Bank of India (RBI) guidelines

- The Indian entity must comply with the rules and regulations of the RBI, in close coordination with Authorised Dealers (AD), which typically are banks in India, regarding the entity’s proposed infusion of the share capital in the company. The vital compliances to be adhered to are:
- Obtaining entity registration online with RBI.
- Proposed share capital must flow from the bank account of the respective shareholder(s)/ investing entity only, to the extent of capital subscribed.
- Obtaining business user registration with the RBI.
- The filing of Form FC-GPR within 30 days of issue of security is a mandatory requirement.
- Various declarations are required from the directors and/or local appointed representative, if any, along with certificates from the local Chartered Accountant/ company secretary in prescribed formats for completing the above-mentioned compliances.

Income Tax Act

- Obtaining a Permanent Account Number (PAN) and Tax Deduction Account Number (TAN) are necessary.
- A transfer pricing study to determine the “Arm’s Length Price” (ALP) is essential for the transactions proposed to be entered into between the Indian entity and the associated foreign entities, as the provisions of Transfer Pricing are applicable.

Goods and Service Tax (GST) Act

- Registration must be obtained on achieving the turnover beyond the prescribed threshold limit. (This registration is compulsory in the first instance in case the Indian entity proposes to undertake the export of goods and services).
- A “place of business” (warehouse/ factory/office) must be identified as a pre-requisite (either on an outright basis or lease basis).
- An applicable HSN/SAC code commensurate with the proposed business activity must be identified.

Other Compliances

- Obtaining an Import-Export Code (IEC) with the Office of the Directorate General of Foreign Trade (DGFT) is mandatory for the import and/or export transactions proposed to be undertaken.
- Registrations must be made under the Provident Fund (PF), Employee State Insurance Corporation (ESIC), State Profession Tax (PT) and other laws as applicable.

The compliances indicated above are one-time or recurring in nature and can be managed smoothly either through in-house arrangements or may be outsourced to local professional firms in India.

A 100% compliance milestone is easily achievable with the right professionals and systems in place, and the benefits outweigh costs by a sizable margin.

Good Luck & Happy Investing!

XLNC MAGAZINE | No. 09 | Spring 2022


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