Foreign Investors has the following business module available in India.
- Sole Proprietorship
- Limited Liability Partnership (LLP)
- Private Limited Company
- Public Limited Company
The foreign companies are also allowed to setup their business entity in India in the following manner:
- Branch Office
- Liaison Office/Representative Office
- Project Office
- Joint Venture Company
- Subsidiary Company
It may be noted that a Joint Venture Company or Subsidiary Company could be either a Private Limited Company, or a Public Limited Company
Selection of right kind of business module depends upon so many factors. It is always advisable to consult a Chartered Accountants firm well versed in law before taking final decision in this regard as the matter has to be viewed from various angles which includes the applicability of the provisions contained under the Companies Act, 1956, Foreign Exchange Management Act, 2000 (FEMA), Income Tax Act, 1961 other applicable Indian Rules & Regulation of Reserve Bank of India and Ministry of Commerce & Industry.
It is also mandatory for Non resident investors or non resident shareholders to seek Government Approvals for Investing in India. The Govt. policy in the last couple of years has changed drastically in this regard. Foreign Investment Promotion Board (FIPB) & Reserve Bank of India (RBI) are the principle Monitoring & Regulatory Authorities in this regard. It should be inconformity with the sectoral cap on investment by person resident outside India under Chapter X of FEMA (Annexure B). Further Annexure A of the same chapter prescribed the activities which are prohibited or restricted.
A Company in India can have foreign directors subject to fulfillment of certain terms & conditions. The directors of an Indian company, both Indian and foreigner, are required to obtain Director Identification Number - DIN and Digital Signature Certificate - DSC
The bodies corporate i.e. Private Limited Co. or Public Limited Co. are required to comply with various legal formalities time to time as prescribed under the Indian Companies Act 1956, Indian Income Tax Act, 1961, Foreign Exchange Management Act, 1999 and Central Custom & Excise Act, (Service Tax). The formalities may vary from City & State where the registered office of the company is situated and the nature of business activities being carried out by the company.
PRIVATE LIMITED COMPANY
A private limited company has the following features:
- Number of shareholders is limited to fifty excluding its present & past employees;
- Shareholders’ right to transfer shares is restricted; and
- Prohibition on invitation to the public to subscribe for any shares in or debentures of the company.
- Prohibits any invitation or acceptance of deposit from persons other than its members, directors or their relatives.
PUBLIC LIMITED COMPANY
A Public Limited company has the following features:
- It must have at least seven members.
- A public company is not authorized commence business immediately on receipt of Incorporation certificate. In order to be eligible to commence business as a as a corporate body, it must obtain another certificate called "Certificate of Commencement of Business ".
- It must publish a prospectus or file a statement in lieu of a prospectus before it can start transacting business.
- A public company is required to have at least three directors.
- It must hold statutory meetings within a period of not less than 1 month nor more than 6 months from the date at which the company is entitled to commence business.
There are several other provisions contained in the Companies Act 1956 which are applicable only to a public limited company those are relevant for day to day operation of the company.
Foreign companies are allowed to set up branch office in India for the purpose of following activities:
- export/import of goods
- rendering professional or consultancy services
- R&D, promoting technical or financial collaborations,
- representing the parent company, acting as buying/selling agents
- rendering services in IT and development of software
- rendering technical support to the products supplied by the parent/group companies foreign airline/shipping companies.
Such branch offices could be established with the approval of the government of India and may remit outside India profit of the branch, subject to applicable Indian Rules & Regulation.
LIAISON OFFICE/REPRESENTATIVE OFFICE
A Liaison Office could be established with the prior approval of appropriate Government Authorities as prescribed under the prevailing Indian Rules & Regulations. The Liaison Office can undertake the activities which are confined to collection of information, promotion of exports/imports and facilitate technical/financial collaborations. However, it cannot undertake any commercial activity in any manner.
Foreign Companies planning to execute specific projects in India can set up a temporary project/site offices in India for carrying out activities only relating to the project for which it has setup project office. The Government of India has now granted general permission to foreign entities to establish project offices subject to terms & conditions.
LIMITED LIABILITY PARTNERSHIP (LLP)
It is a new phenomenon in Indian context. The Parliament of India has enacted (Limited Liability Partnership (LLP) Act of 2008). Therefore, now the Indian laws permits to Incorporate LLP. It shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession. The liability of the partners would be limited to their agreed contribution in the LLP. Further, no partner would be liable on account of the independent or unauthorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct.
LLP is an alternative corporate business module that provides the benefits of limited liability of a Company but allows its members the flexibility of organizing their internal management on the basis of a mutually-arrived agreement, as is the case in a partnership firm.
This module is recommendable for small and medium enterprises in general and for the enterprises in services sector in particular.
JOINT VENTURE COMPANY
Joint Venture Companies are the most preferred module of corporate entities for doing business in India to achieve specific objectives of a partnership like temporary arrangement between two or more firms. JVs are advantageous as a risk reducing mechanism in new-market penetration, and in pooling of resource for large projects. The Company incorporated in India, even up to 100% foreign equity, are at par at domestic companies. A Joint Venture may be any of the business modules available. There are no separate laws for joint ventures in India. They, however, present unique problems in equity ownership, operational control, and distribution of profits (or losses).
A subsidiary, in business matters, is an entity that is controlled by a separate entity. The controlled entity is called a company, corporation, or limited liability company and in some cases can be a government or state-owned enterprise, and the controlling entity is called its parent (or the parent company). The reason for this distinction is that a lone company cannot be a subsidiary of any organization; only an entity representing a legal fiction as a separate entity can be a subsidiary. While individuals have the capacity to act on their own initiative, a business entity can only act through its directors, officers and employees.
Note that contrary to popular belief, a parent company does not have to be the larger or "more powerful" entity; it is possible for the parent company to be smaller than a subsidiary, or the parent may be larger than some or all of its subsidiaries (if it has more than one). The parent and the subsidiary do not necessarily have to operate in the same locations, or operate the same businesses, but it is also possible that they could conceivably be competitors in the marketplace. Also, because a parent company and a subsidiary are separate entities, it is entirely possible for one of them to be involved in legal proceedings, bankruptcy, tax delinquency, indictment and/or under investigation, while the other is not.
The most common way that control of a subsidiary is achieved is through the ownership of shares in the subsidiary by the parent. These shares give the parent the necessary votes to determine the composition of the board of the subsidiary and so exercise control. This gives rise to the common presumption that 50% plus one share is enough to create a subsidiary. There are, however, other ways that control can come about and the exact rules both as to what control is needed and how it is achieved can be complex.
Subsidiaries are separate, distinct legal entities for the purposes of taxation and regulation. For this reason, they differ from divisions, which are businesses fully integrated within the main company, and not legally or otherwise distinct from it.
Subsidiaries are a common feature of business life and most if not all major businesses organize their operations in this way over the world.
PROCEDURE FOR ESTABLISHMENT OF BUSINESS IN INDIA
The following chart contains various formalities for incorporating a Private Limited Company in India.