Doing Business in the New Emerging Power- India
Date: Thursday , October 05, 2006
The sleeping elephant has woken up. Or is it another Asian tiger. Call it what you may, but the truth is that India is on the move. Since economic liberalization began in 1991, India has been clocking an 8 percent GDP growth year after year, foreign direct investments are hitting $10 billion annually, and the stock market has tripled in the last three years. The 300 million strong middle class, with new money in their pockets are continuing to fuel the economic engine.
All this makes India a popular alternative for companies desiring to do business abroad. When you, as an individual or as a foreign company, come to a decision to do business in India, the question arises about the type of business entity you should adopt. In short, you have three options – to establish a liaison / representative office, a project office, or a branch office.
A. Doing Business As A Non-Indian Company
A liaison office may not be engaged in any business activity in India. Rather, it has a limited role of collecting information and marketing your company’s services to prospective Indian customers.
If your company is engaged in manufacturing and trading activities, you may opt to set up a project office for executing a specific project. Such a process requires the approval of the Reserve Bank of India, which is generally accorded to government-aided or approved project.
A branch office may be established by your company to
(a) represent your company in India as a sales/purchasing agent,
(b) conduct research for your company, the results of which will be made available to other Indian companies,
(c) engage in export/import activities, or
(d) promote technical and financial collaboration between the Indian and foreign companies. The branch office, however, is not allowed to engage in direct sales of your company’s products.
B. Doing Business As An Indian Company
As an alternative to doing business in India, you may want to conduct business as an Indian company through a joint venture or a wholly owned subsidiary. The difference between the two is that in a joint venture, a foreign company partners with an Indian entity. In an owned subsidiary on the other hand, the foreign company fully owns equity in another Indian company.
For most industry sectors, especially in the IT field, the foreign company is not required to obtain prior approval from the Secretariat of Industrial Approvals in India and the Foreign Investment Promotion Board. Moreover, to encourage units in the IT sector, numerous government schemes exist, such as: Domestic Tariff Areas, Special Economic Zones, Free Trade Zones, Export Processing Zones, 100 percent EOUs, and Software Technology Parks (STPs).
In particular, STPs enjoy the following special benefits:
(a) automatic clearance and approval to operate as a subsidiary,
(b) income tax holidays,
(c) customs duty exemptions on imports,
(d) excise duty exemptions and sales tax reimbursement on indigenous procurement,
(e) high-speed data communication links for software exports,
(f) no separate export/import licenses,
(g) Green Card for priority treatment in government clearances and services.
The Specifics Of Incorporating In India
In order to incorporate a company in India, the first step is to file an application with the Registrar of Companies. Six proposed names of the subsidiary company must be provided in an order of preference. The Registrar of Companies wants the company’s name to contain at least one word indicative of the nature of the company’s business. For instance, an IT company should include words such as “software” or “technology” and the names should end either in “Private Limited” or “Public Limited.”
If the first few words of the proposed name of the Indian company are those of the parent foreign company, a “No Objection” letter on the letterhead of the parent foreign company allowing the use of the name by the Indian subsidiary expedites the name registration process.
Pursuant to the Indian Companies Act, 1956, a minimum of two shareholders is required to incorporate an Indian company. Further, during the incorporation process, the names, addresses, dates of birth, father’s name, nationality, and notarized copies of passports of the proposed directors of the Indian subsidiary must also be provided.
Next, the Indian law requires a Memorandum and Articles of Association to be undertaken by the Indian subsidiary. A power of attorney may be required from the parent company by which an agent is appointed. The power of attorney must be notarized and authenticated by the Indian Embassy in the foreign company’s original country.
During the Indian subsidiary’s first board of directors’ meeting, the company must have the following items on its agenda:
(a) adoption of appointment of First Directors named as such in the Articles of Association;
(b) adoption of the registered Memorandum and Articles of Association;
(c) taking on record the Certificate of Incorporation of the company;
(d) taking on record the Registered Office of the company;
(e) approval of the financial year;
(f) appointment of First Auditors within one month of the date of incorporation of the company;
(g) approval of Common Seal of the company;
(h) approval of preliminary and pre-incorporation expenses;
(i) allotment of shares and issuance of share certificates to the subscribers;
(j) authorizing a Director to represent the company in general and in taking the necessary steps to register it with various government authorities.
Subsequent to the first board meeting, the following steps must be taken:
(a) opening a company bank account;
(b) obtaining the statutory registers, attendance registers and minute books for the meetings;
(c) preparation of the common seal;
(d) printing share certificates;
(e) obtaining a Permanent Account Number (“PAN”);
(f) obtaining Tax Deduction Account Number (“TAN”);
(g) obtaining Importer-Exporter Code (“IEC”) Number;
(h) obtaining registration under various labor statutes including the Shops and Establishments Act and Provident Funds Act;
(i) registration and enrollment with the Professions Tax authority; and
(j) registration under Central and Sales Tax Act.
The authorized share capital of the proposed Indian subsidiary depends on the words contained in the company’s name. For instance, the authorized share capital of Rs. 50 million ($1 million) is allotted for the use of word “Corporation” in the company name. The authorized share capital of Rs. 10 million ($216,000.00) is for the use of words “International,” “Globe,” “Universal,” “Continental,” or “Asia,” as the first word in the company name. Therefore, words such as those mentioned above are allowed as names only if the authorized share capital of the company totals certain specified amounts.
The registration fees payable to the Registrar of Companies at the time of new company’s registration depend on the intended authorized share capital of the company. A private limited company must have a minimum authorized and paid share capital of Rs. 100,000.00. The registration fees generally range from approximately Rs. 4,800.00 ($100.00) to Rs. 98,000.00 ($2,250.00); however, registration fees can go up to Rs. 25 million depending upon the authorized capital.
In conclusion, when setting up a business in India, careful attention should be given to the industry in which your company will operate. Additionally, a thorough understanding of the Indian regulations is essential to a successful establishment of your business.
1 Both foreign companies in India as well as Indian companies are subject to Indian Companies Act, 1956. 2 STPs are located in Noida, Navi Mumbai, Pune, Gandhinagar, Hyderabad, Bangalore, Chennai, Bhubaneshwar, Jaipur, Mohali, and Thiruvanathapuram.