OUTFOSYS TECHNOLOGIES: HOW TO INCORPORATE IN INDIA:

HOW TO INCORPORATE IN INDIA:

Types of Business Entities in India

Types of Companies in India - Types of Corporate Entities in India - Types of Legal Entities in India - Options for Foreign Investors Doing Business in India

Foreign Investors Establishing Business in India

Foreign investors planning to incorporate in India are required to seek governmental approval before investing in India. Some approvals are automatic, - RBI Approvals - though application is required for those approvals. Special Permission - FIPB Approvals - could be obtained to invest over and above the regular percentage allowed. See our FDI in India Sector wise Guide for more information on various conditions of investing in India. Also see Withholding Tax Rates For Foreign Companies Doing Business In India Under The Tax Treaties & the Joint Ventures in India

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In India, the following types of business entities are available:

Private Limited Company

Public Limited Company

Unlimited Company

Limited Liability Partnership (LLP)

Partnership

Sole Proprietorship

Liaison Office/Representative Office

Project Office

Branch Office

Joint Venture Company

Subsidiary Company

Both the Indian promoters and the foreign promoters can form the following business entities: Private Limited Company, Public Limited Company, Limited Liability Partnership, Unlimited Company, Partnership and Sole Proprietorship. The foreign companies also have the options of forming the following type of business entities: Liaison Office/Representative Office, Project Office, Branch Office, and Joint Venture Company. It must be noted that a Joint Venture Company is not a separate type of legal entity; it could be either a Private Limited Company, a Public Limited Company, or an Unlimited Company. Similarly a wholly owned Subsidiary of a foreign company in India could be either a Private Limited Company, a Public Limited Company, an Unlimited Company, or a Branch Office.

For a foreign Investor in India it is very important to choose a right kind of business or corporate entity which best suits its purposes and takes care of liability issues and tax planning issues. Foreign Companies planning to do business in India should pay special attention to Entry Strategies in India for Foreign Investors and corporate structuring to save taxes to the best extent allowed by laws and international tax treaties.

It is also mandatory for foreign investors or foreign shareholders, both individuals and corporate shareholders, to seek Government Approvals for Investing in India In some special cases Foreign Investment Promotion Board, FIPB Approval for Foreign Investment in India is required. In other cases Reserve Bank of India, RBI Approvals for Foreign Investment in India is required. The sectors where RBI Approval for foreign investors is available under automatic route can be found at FDI in India Sector wise Guide.

There are various steps required to establish a business in India, before and after incorporation, as mentioned hereinafter. See also the Procedure for Formation of Company in India.

A Company in India can have foreign directors provided some conditions are fulfilled. The directors of an Indian company, both Indian and foreigner directors, are required to obtain Director Identification Number - DIN and Digital Signature Certificate - DSC

There are some restrictions regarding issuing sweat equity for a company incorporated in India.

Also see Annual Corporate Filings in India for corporate maintenance requirements in India.

Private Limited Company

IT is mandatory for foreign investors to obtain governmental approval for incorporating in India or forming a joint venture in India. In some sectors certain restrictions apply.

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A private company is a company which has the following characteristics:

shareholders’ right to transfer shares is restricted;

the number of shareholders is limited to fifty; and

an invitation to the public to subscribe to any shares or debentures is prohibited.

A Private Limited Company is the most popular form of business entity used for Foreign Investors in India, including USA investors in India. It takes some time to incorporate in India as there are various steps required in forming a private limited company in India. There are various steps required to establish a business in India, before and after incorporation, as mentioned hereinafter.

Public Limited Company

Limited Liability Partnership now available in India India

A law to allow "Limited Liability Partnership" (LLP) in India has been enacted by the Parliament of India recently. (Limited Liability Partnership (LLP) Act of 2008)

LLP is an alternative corporate business entity 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 format would be quite useful for small and medium enterprises in general and for the enterprises in services sector in particular, including professionals and knowledge based enterprises.

For more details visit LLP in India

A public company is defined as a company which is not a private company. The following conditions apply only to a public company:

It must have at least seven shareholders.

A public company is not authorized to start business upon the grant of the certificate of incorporation. In order to be eligible to commence business as a corporation, it must obtain another document called "trading certificate".

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 and obtain government approval for the appointment of the management.

There are several other provisions contained in the Companies Act 1956 which are applicable only to public companies and should be consulted.

Liaison Office/Representative Office

A Liaison Office could be established with the approval of the government of India. The role of Liaison Office is limited to collection of information, promotion of exports/imports and facilitate technical/financial collaborations.

Liaison office cannot undertake any commercial activity directly or indirectly.

Project Office

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 that project. The Government of India has now granted general permission to foreign entities to establish project offices subject to specified conditions.

Branch Office

Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India for the following purposes:

Export/Import of goods

Rendering professional or consultancy services

Carrying out research work, in which the parent company is engaged.

Promoting technical or financial collaborations between Indian companies and parent or overseas group company.

Representing the parent company in India and acting as buying/selling agents in India.

Rendering services in Information Technology and development of software in India.

Rendering technical support to the products supplied by the parent/ group companies.

Foreign airline/shipping company.

A branch office is not allowed to carry out manufacturing activities on its own but is permitted to subcontract these to an Indian manufacturer. Branch Offices established with the approval of RBI, may remit outside India profit of the branch, net of applicable Indian taxes and subject to RBI guidelines Permission for setting up branch offices is granted by the Reserve Bank of India (RBI).

Procedure for Formation of Company in India

Limited Liability Partnership (LLP)

A law to allow "Limited Liability Partnership" (LLP) in India has been enacted by the Parliament of India recently. (Limited Liability Partnership (LLP) Act of 2008).

This format would be quite useful for small and medium enterprises in general and for the enterprises in services sector in particular, including professionals and knowledge based enterprises.

As proposed in the Bill, LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession. While the LLP will be a separate legal entity, liable to the full extent of its assets, 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.

For more details visit LLP in India

Typical Procedure to Establish Business in India

In India establishing a business takes some time. Besides incorporation there are many other formalities in establishing a business in India. The following chart contains typical formalities including incorporating a private limited company in India:

Nature of Procedure in India Procedure Number Duration (days)

Obtain DIN for proposed Directors of the new Company 1 3*

Obtain DSC for proposed Directors of the Company 2 3*

Filing the proposed name of company for approval to the Registrar of Companies (ROC); Get the Memorandum and Articles of Association vetted by the ROC and printed 3 7

Make an application to the Superintendent of Stamps or an authorized bank requesting for stamping of the Memorandum of Association and Articles of Association. 4 1

Present the required documents along with the registration fee to the Registrar of Companies to get the certificate of incorporation 5 9

Obtain a company seal 6 3

Apply for UTI Investors Services Limited/National Securities Depository Ltd. to obtain a Permanent Account Number (PAN) 7 15*

Obtain a Tax Account Number (TAN) for income taxes deducted at source from the Assessing Office in the Income Tax Department 8 15*

Filing for Government Approval before RBI/FIPB for Foreigners and NRI's 14 15*

Totals: 14 40

Note: Procedures sometimes take place simultaneously. Instances of this are marked with an asterisk (*). The above procedures and timings are indicative for a typical big city in India where all the required documents are ready with the promoters. The actual time and procedure may vary with city and state and the nature of business.

All the procedures must be followed.

SPECIAL NOTE

NEW DIRECTOR REGISTRATION REQUIREMENTS IN INDIA

DIN - Director Identification Number

Directors for an Indian company, both Indian and foreigners, must register and get and identification number under the new requirements. It is called Director Identification Number- DIN.

DSC - Digital Signature Certificate for Directors

Directors for an Indian company, both Indian and foreigners, are also required to get Digital Signature Certificate - DSC - under the new requirements. Digital Signature Certificate (DSC) is required for all Directors or authorized representatives of any company and professional who will require to sign ROC forms or documents. A DSC, like hand written signature, establishes the identity of the sender filing the documents through internet which sender can not revoke or deny. A DSC is not only a digital equivalent of a hand written signature it adds extra data electronically to any message or a document where it is used to make it more authentic and more secured. There are various classes of DSC.

Click here to Contact us for Obtaining DIN and DSC in India

Requirements for a Private Limited Company

A Registered Business Name: This must be followed by the word ‘Limited' or ‘Ltd'. The Companies Registration Office exercises some control over the choice of name, it cannot be identical (or very similar to) the name of an existing company. It won't be considered if it is offensive or illegal and the use of certain words in a company (for example, `Institute', `National') can only be used in certain circumstances. The company name must be displayed in a conspicuous place at every office, or other premises where the company carries out business.

A Registered Office: This need not necessarily be the same address as the business is conducted from. Quite frequently the address used for the registered office is that of the firm's solicitor or accountant. This is the address, through, where all official correspondence will go.

Shareholders: There must be a minimum of two shareholders (also described as `members' or `subscribers'). A private company can have up to fifty shareholders.

Share Capital: The company must be formed with a stated, nominal share capital divided into shares of fixed amounts. Small companies are frequently formed with a nominal share capital of Rs.100.

Memorandum of Association: The memorandum is the company's charter. It states the company's name; the situation of its registered office; its share capital; the fact that liability is limited and, most importantly, the object for which the company has been formed. In theory, the company can only operate in the areas mentioned in the objects clause but in practice the clause is drawn to cover as wide an area as possible, and anyway a 75 per cent majority of the members of the company can change the objects whenever they like. Nevertheless, it is worth bearing in mind that directors of the company will incur personal liability if the company engages in a type of business which is not authorized by the objects clause. The memorandum must be signed by at least three shareholders.

Articles of Association: The document contains the internal regulations of the company, the relationship of the company to its shareholders and the relationship between the individual shareholders. Many companies don't bother to draw up their own articles but adopt (sometimes with some modifications) articles set out in the Companies Act.

Certificate of Incorporation: This is the document, which the registrar of companies issues to you once he has approved your choice of name and your memorandum. When you receive this document your company legally exists and is ready to trade.

Auditors: Every company must appoint a qualified auditor. The auditor's duty is to report to the treasurer whether or not the books of the company have been properly kept, and that the balance sheet and profit and loss account presents (or doesn't present) a true and fair view of the company's affairs and complies with the Companies Act. Auditors are appointed or re-appointed at general meetings at which annual accounts are presented, and they hold office from the conclusion of the meeting until the next general meeting.

Accounts: The Companies Act lays down strict rules on accounting. Every company must maintain a set of records, which show the financial position at any one time with reasonable accuracy. The accounts comprise a profit and loss account and balance sheet with the auditors' and directors' reports appended. A new company's accounting reference period begins on its incorporation and runs until the following 31st March - unless the company notifies the registrar of companies otherwise. Within ten months of the end of an accounting reference period, an audited set of accounts must be laid before the shareholders at a general meeting and a set delivered to the registrar of companies.

Registers, etc.: In addition to the accounts books, companies are required to have: a register of members and share ledger; a register of directors and secretaries; a register of share transfers; a register of charges; a register of debenture holders; a book can be purchased to hold all of the above. This will be provided automatically if you buy a running concern.

Company Seal: All companies must have an engraved seal. This must be impressed on share certificates and must be used whenever the company has to execute a deed. Again, this is included in the ready-made company package.

Corporate Documents & Registration of a Company

For incorporating a company in India, an application for registration should be submitted to the registrar of companies with the following documents:

1. Memorandum of Association;

2. Articles of Association;

3. a declaration signed by a person named in the articles of the proposed company as a director, manager, or secretary of the company, or by an advocate of the Supreme Court or High Court, or by an attorney entitled to appear before the High Court, or by a chartered accountant practicing in India stating that all the requirements of the Companies Act 1956 and the applicable rules with respect to the registration and other matters have been complied with;

4. a list of persons who have consented to act as directors of the company.

5. if the proposed company is a public company, consent of very person prepared to act as a director must be submitted in a prescribed form;

6. information about directors, managing directors and managers and secretary must be submitted in a prescribed form;

7. information about the registered office in a prescribed form;

8. power of attorney in favor of one of the promoters or any other person, authorizing him/her to make corrections in the documents submitted to the registrar of the companies, if it becomes necessary; and

9. applicable registration fee payable to the registrar of the companies.

Advantages of Incorporating in India

Many tax exemptions available to the company set up in Special Economic Zone;

Many tax incentives available to IT companies;

India has got double taxation treaties with many countries;

Minimum authorized capital of only INR 100,000 (US $ 2250 approximately) is required to form a private company in India;

Skilled and intelligent employees available at nominal rate;

With its large base of English speaking skilled human resource, it is most sought after destination for business process outsourcing, Knowledge processing etc.

Applicable Laws for Forming a Company in India

The laws applicable for incorporating a company in India include the Indian Companies Act of 1956, read with Companies (Central Governments') General Rules and Forms,1956, the Indian Income Tax Act, and other laws & regulations. The Foreign Exchange Management Act of 1999 is applicable for foreign investments and transactions.

Where to Incorporate in India?

A company incorporated in any state of India can do business in all the states of India. The following are the locations of ROC's in India:

States & U.T.'s of India ROC Locations

Delhi & Haryana Registrar of Companies Delhi & Haryana,

NEW DELHI

Karnataka Registrar of Companies Karnataka

BANGALORE

Maharashtra, Dadra & Nagar Haveli Registrar of Companies Maharashtra

MUMBAI ( Bombay )

Pune, Kolhapur, Ratnagiri, Satara, Sindhudurga, Sangli, Sholapur & Ahmednagar districts in Maharashtra Registrar of Companies Pune,

PUNE

Tamil Nadu Registrar of Companies Tamil Nadu,

CHENNAI ( Madras )

Coimbatore, Nilgiris, Periyar Salem, Dharmapuri & Dindigul, Quaid-e-Milleth districts in Tamil Nadu Registrar of Companies Coimbatore

COIMBATORE

Gujarat Registrar of Companies Gujarat,

AHMEDABAD

Andhra Pradesh Registrar of Companies Andhra Pradesh,

HYDERABAD

Assam, Tripura, Manipur, Nagaland, Meghalaya, Arunachal Pradesh, Mizoram & Shillong Registrar of Companies Assam, Tripura, Manipur, Nagaland, Meghalaya, Arunachal Pradesh, Mizoram & Shillong

SHILLONG

Bihar & Jharkhand Registrar of Companies

PATNA

Goa, Daman & Diu Registrar of Companies Goa, Daman & Diu,

GOA

Jammu & Kashmir Registrar of Companies Jammu & Kashmir

JAMMU & SRINAGAR

Kerala, Amindivi, Minicoy & Lakshadweep Islands Registrar of Companies Kerala

COCHIN

Madhya Pradesh & Chhattisgarh Registrar of Companies Madhya Pradesh,

GWALIOR

Orissa Registrar of Companies Orissa

CUTTACK

Pondicherry Registrar of Companies

PONDICHERRY

Punjab, Himachal Pradesh & Chandigarh Registrar of Companies Punjab, Himachal Pradesh & Chandigarh,

JALANDHAR

Rajasthan Registrar of Companies Rajasthan ,

JAIPUR

Uttar Pradesh & Uttaranchal Registrar of Companies Uttar Pradesh,

KANPUR

West Bengal Registrar of Companies West Bengal

CALCUTTA (Kolkata)

Andaman The Registrar of Companies Andaman

PORT BLAIR

Sweat Equity in a company in India

The question is asked a lot, if an Indian company can issue sweat equity. There are separate rules for sweat equity in a private company in India and a public company in India.

Sweat Equity in a private company in India

The provisions for issue of Sweat Equity are covered under Section 79A of the Companies Act. It provides that a company may issue sweat equity shares of a class of shares already issued if the following conditions are fulfilled:

the issue of sweat equity shares in authorized by a special resolution passed by the company in the general meeting.

The resolution specifies the number of shares, current market price, consideration, if any, and the class or classes of directors or employees to whom such equity shares are to be issued.

not less than one year has, at the issue elapsed since the date on which the company was entitled to commence business.

The sweat equity shares of a company whose equity shares are listed on a recognized stock exchange are issued in accordance with the regulations made by the Securities and Exchange Board of India in this behalf.

In view of the above provisions, you can't issue Sweat Equity at the time of incorporation of your Company as one year has not elapsed since the date on which the company was entitled to commence business.

In addition to the above provision, other regulatory provisions are applicable for issuing sweat equity shares for a private company in India. Please feel free to Contact us for further information about sweat equity in an Indian company.

Sweat Equity in a public company in India

The aforesaid provisions regarding issuing of Sweat Equity under Section 79A of the Companies Act are applicable to a public company in India.

The sweat equity shares of a company whose equity shares are listed on a recognized stock exchange are issued in accordance with the Securities and Exchange Board of India (Issue of Sweat Equity) Regulations, 2002. Please feel free to Contact us for further information about sweat equity in an Indian company.

Services Offered by Us

Madaan & Co. has helped foreign companies in setting up there operations in India and other countries. A careful tax planning is required before opening a subsidiary, branch, joint venture, project office or liaison office in India. We can help you in corporate planning, corporate structuring and setting up in India and other countries. We have also helped US law firms in handling their India related legal work. We can help your law firm or company in setting up in India and other countries. Click here to Contact us

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OUTFOSYS TECHNOLOGIES

Wednesday, March 16, 2011

HOW TO INCORPORATE IN INDIA:

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