Business / Industry Sectors
What kind of entities can be set up in India?
28/04/2013

Incorporation

The entities that foreign companies may set up in India may either be unincorporated or incorporated.

The options for Unincorporated Entities are:

  • Liaison Office: Setting up a liaison office requires the prior consent of the RBI. It acts as a representative of the parent foreign company in India, cannot undertake any commercial activities and must maintain itself from the remittances received from its parent foreign company. It is an option usually preferred by foreign companies that wish to explore business opportunities in India.

 

  • Branch Office: The branch office of a foreign company in India must be set up with the prior consent of the RBI. It can represent the foreign parent company in India, act as its buying or selling agent in India, and is permitted to remit surplus revenues to its foreign parent company subject to the taxes applicable. It is, however, limited to taking up specified activities. The tax on branch offices is 40 per cent plus applicable surcharges and the education cess.

 

  •  Project Office: A foreign company may set up a project office in India under the automatic route subject to certain conditions being fulfilled. The activities of a project office must be related to or incidental to the execution of the relevant project. A project office is permitted to operate a bank account in India and may remit surplus revenue from the project to the foreign parent company. However, the tax on project offices is 40 per cent plus applicable surcharges and the education cess. Project offices are generally preferred by companies engaged in one-time turnkey or installation projects.

 

  • Limited Liability Partnership: A Limited Liability Partnership (“LLP”) is a form of business entity which permits individual partners to be shielded from the liabilities created by another partner’s business decision or misconduct. In India, LLPs are governed by The Limited Liability Partnership Act, 2008.The LLP is a body corporate and exists as a legal person separate from its partners. FDI in LLPs will be allowed, through the Government approval route, only for LLPs operating in sectors/activities where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance related conditions.

 

  • Partnership: A partnership is a relationship created between persons who have agreed to share the profits of a business carried on by all of them, or any of them acting for all of them. A partnership is not a legal entity independent of its partners. The partners own the business assets together and are personally liable for business debts and taxes. In the absence of a partnership agreement, each partner has an equal right to participate in the management and control of the business and the profits/losses are shared equally amongst the partners. Any partner can bind the firm and the firm is liable for all the liabilities incurred by any partner on behalf of the firm. However foreign investment, with non repatriation benefits is permitted in Indian partnership firms with RBI approvals.

 

  • Trust: A trust arises when one person (the “trustee”) holds legal title to property but is under an equitable duty to deal with the property for the benefit of some other person or class of persons called beneficiaries. A foreign resident may only be the beneficiary of a trust and only after receiving the prior consent of the Foreign Investment Promotion Board (“FIPB”).

Incorporated Entities:

Incorporated entities in India are governed by the provisions of the Companies Act, 1956. The authority that oversees companies and their compliances is the Registrar of Companies (“RoC”). Companies may either be ‘private limited companies’ or ‘public limited companies’:

  • Private Limited Company: A private limited company must have a minimum paid-up share capital of INR 100,000 (approx. USD 1850). It carries out business in accordance with its memorandum and articles of association. A private limited company restricts the right to transfer shares; the number of members is limited to 50, it must prohibit any invitation to the public to subscribe to the securities of the company; and must also prohibit the invitation or acceptance of deposits from persons other than members. About 1-2 weeks are required to incorporate a private limited company.

 

  • Public Limited Company: A public limited company must have a minimum paid-up share capital of INR 500,000 (approx. USD 9250). A public company can only commence business after being issued a ‘Certificate of Commencement of Business’ by the ROC, may have more than 50 shareholders and may invite deposits from the public and  may also list its shares on a recognized stock exchange by way of initial public offering (“IPO”).

 

Advantages and Disadvantages of a Private Company

  • Not as stringently regulated as a public company
  • More flexibility than public companies in conducting operations, including the management of the company, issuance of different types of securities and the payment of managerial remuneration
  • Faster incorporation process
  • Restrictions on invitation and acceptance of public deposits
  • Limited exit options

Incorporation process

The important steps with an indicative time frame involved in the incorporation process are:

  1. Name Approval (2-4 days): The RoC must be provided with one preferred name and five alternate names which should not be similar to the names of any existing companies. A no-objection certificate must be obtained in the event that the word is not an ‘invented word’.

 

The use of certain words in the name of the company requires minimum capitalization as outlined in the table below -

 

No.

 Keywords

Minimum Authorized Capital (INR – Indian Rupees)

1

Corporation

  50 Million

2

International, Globe, Universal, Continental, Inter – Continental, Asiatic, Asia, being the first word of the name

 

              10 Million

3

If any  the words in No. 2 above is used within the name (with or without brackets)

              5 Million

4

Hindustan, India, Bharat, being the first word of the name

               5 Million

5

If any  the words in No. 4 above is used within the name (with or without brackets)

              500,000

6

Industries / Udyog

              10 Million

7

Enterprises, Products, Business, Manufacturing

              1 Million

 

 

  1. Filing of Charter Documents (3-5 days): The  Memorandum  and  Articles  of the company will need to be prepared in accordance with the needs of the business and the same must be filed with the ROC, which  will need to be provided with certain information, such as the proposed first directors of the company, and the proposed address of its registered office. The proposed directors of the  company will have to obtain ‘Director Identification Numbers’ and in order to hasten the incorporation process, they should also obtain ‘Digital Signature Certificates’. A private limited company must have at least 2 shareholders and 2 directors whereas a public limited company must have at least 7 shareholders and 3 directors.

 

  1. Certificate of Incorporation: The Certificate of Incorporation provided by the ROC at the end of the incorporation process acts as conclusive proof of the incorporation of the company. A private company can commence business immediately upon receiving its Certificate of Incorporation, whereas a Public company may only commence business once it has obtained a ‘Certificate of Commencement of Business’.

 

  1. Post Incorporation: The company must hold its first board meeting, may appoint additional directors (if any).The company must apply for its ‘Permanent Account Number’ (PAN) and ‘Tax Deduction Account Number’ (TAN). The company must register itself with statutory authorities such as indirect tax authorities, must open a bank account and must put in place the contracts with suppliers and customers that are essential to running the business.
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