With the recent relaxation in business regulations in the country, more and more foreign companies are making their way to India. In this article, the content marketing manager of iPleaders, Aditya Shrivastava talks about choosing the right business structure for foreign companies entering India
As per an article by Economic Times, India’s contribution to the world economy is on steady growth. There are instances where companies like Vodafone managed to cut through its losses and start earning profits through its phenomenal performance in India. Even Swiss Holcim, the world’s leading cement manufacturer, spent more than 2 billion Swiss Francs on acquiring ACC Ambuja to combat it’s ailing housing market in the USA. These strategies are reflective of the fact that India is indeed one of the fastest growing economies of the world with immense human potential and a market comprising of 1.2 billion people.
India, in the past two decades, has managed to attract not just the biggest of MNCs, but also several Small-Medium Sized Enterprises (SMEs). This sudden inflow of foreign companies making investments in India is primarily because of the low-cost production, the unfathomable potential of the local market, and now the relaxed regulations. It is also undeniable that international media has played a significant role in attracting the foreign companies to India. For example, Tata Chorus has given India an image of a global player on the world stage.
However, India has its own challenges. Even after all the amendments, and relaxations India has only moved to the 100th rank in the ease of doing business category with the Distance to Frontier (DTF) score only at 60.76.
Having said that, starting a business in India is a complex process, and it requires a clear idea of all it’s administrative, legal and cultural aspects with courses like these. Opportunities in India are massive which have attracted a large amount of FDI in the country too. In this post, we will discuss the strategies and do’s and don’ts of setting up a business in India.
What strategy can a company adopt to make an entry in India?
A company in India can enter through the following structures:
1.Incorporation Of A Company (Private Or Public Ltd.)
This is the most common and recommended structure around the world which provides an option of security by having a provision of limited liability. It is highly recommended because it is easier to understand and has comprehensive legislations limiting the scope of confusion. However, it is high on compliance and penalties.
2. Limited Liability Partnership (LLP)
This entity is a hybrid of both a company and partnership. That is while there can be partners to incorporate an LLP. However, the liability in an LLP is limited. As it is a pretty recent setup, there are lesser compliances, and it is highly recommended for effective ease of doing business.
3. Branch Office
Ideally viewed as an extension of the overseas company itself, entering the business through a branch office technically means that you are entering as an independent Indian entity. Although most people argue that it is a viable option, however, entering the Indian market as a branch office means higher tax rates and a lot more compliances.
4. Liaison Office
You can opt for this option if you are looking forward to establishing an entity for a specific project, and it can only be used for that project only. This is not a very commonly opted option as most of the companies look forward to establishing themselves for a longer run.
What Are The Requirements For Establishing A Company In India?
If you plan on establishing a company in India, you require a minimum of two persons and an office address in India. A private limited company requires a minimum of two directors and a minimum of two shareholders (persons or legal entities). In addition to this, one of the directors is required to be an Indian citizen as well as an Indian resident.
What Are The Documents Required For Registering A Company In India?
If you want to register the company in India, the foreign nationals who are determined to serve as the directors will be required to submit a copy of their passport along with valid address proof. A copy of the original documents must be notarized by a notary in the home country or by the Indian Embassy of the country of residence of the director.
If the parent company wishes to become a shareholder in the Indian Company, then the board resolution of the foreign company authorizing such investment would be required. The resolution must have the notarized copy of the certificate of incorporation of the foreign entity attached.
What Are The Formalities After The Company Is Incorporated?
After the company is registered in India, the company is required to have a bank account in its name. Once the bank account is approved, and in place, then the company is required to make an FDI reporting to the Reserve Bank of India. Completing this reporting and getting the approval would mean that your company is compliant and ready to embark its operations in India.
While most of the companies think of operating through a subsidiary company, it is exceptionally crucial to explore all the available possibilities. A cut out for you can depend on what you want your business entity to be. You need to decide on the basis of which model provides you with lesser compliance requirements and easier tax slabs.
In most of the cases, it is also possible to begin with a certain type of a structure, and then transition at a later stage (i.e., when a certain scale of profit/turnover/capital has been achieved.) However, you need to opt for correct guidance and knowledge of the same.
Till then, all the luck.