Essential Guide for Foreigners Incorporating a Company in India

In India, Indian nationals, foreign nationals, and foreign entities can register various types of companies or business structures, depending on their business objectives, investment size, and the level of liability they are willing to accept. The Companies Act, of 2013, and other relevant laws regulate these entities. Here are the primary types of companies that a foreigner can register in India:

1. Private Limited Company

• Most popular among foreign investors due to its flexibility, limited liability, and ease of raising capital.
• Requires a minimum of two shareholders and two directors, with at least one director being an Indian resident.
• The maximum number of members is restricted to 200.

2. Public Limited Company

• Suitable for those looking to list their company on the stock exchange and raise capital from the public.
• Requires a minimum of seven members and three directors, with no limit on the maximum number of members.
• At least one director must be a resident of India.

3. Limited Liability Partnership (LLP)

• Combines the benefits of a partnership with the advantages of limited liability for its partners.
• There is no minimum capital requirement, and it needs at least two partners. There is no limit on the maximum number of partners.
• At least one of the partners must be a resident of India.

4. Subsidiary Company

• A private limited company formed by a foreign company in India. The foreign company holds more than 50% of the total equity.
• Treated as an Indian company under the Companies Act, 2013, and eligible for all exemptions, deductions, and compliances.

5. Joint Venture

• Formed by two or more companies, which can be a mix of foreign and Indian companies, to undertake a specific business venture.
• It can be structured as a private limited company, public limited company, or partnership firm, depending on the agreement between the entities.

6. Branch Office

• Foreign companies can establish branch offices in India for their business activities, subject to approval by the Reserve Bank of India (RBI).
• A branch office can undertake activities such as exporting/importing goods, providing professional or consultancy services, and carrying out research work in which the parent company is engaged.

7. Project Office

• If a foreign company has secured a contract from an Indian company to execute a project in India, it can set up a project office without the need for RBI approval, subject to certain conditions.
• Functions similarly to a branch office but is specifically for a limited duration to complete the project.

8. Liaison Office/Representative Office

• Established with the approval of the RBI to undertake liaison activities for its parent company.
• It cannot undertake any commercial, trading, or industrial activities and is primarily meant for exploring and understanding the business and investment climate.

Regulations and Approvals

Foreign investment in India is subject to policies and regulations under the Foreign Exchange Management Act (FEMA), 1999, and the Reserve Bank of India. Certain sectors require prior approval from the government or are subject to specific conditions under the Foreign Direct Investment (FDI) policy.

Recommendation

Foreign nationals and entities should consider their business needs, investment plans, and the regulatory environment before deciding on the type of company to register in India. It’s advisable to seek legal and professional advice to navigate the registration process and compliance requirements effectively.

When considering the incorporation of a business entity in India by foreign nationals or entities, it’s essential to navigate through the array of options available under Indian law, primarily regulated by the Companies Act of 2013 and other relevant legislations. Among these, the Private Limited Company and the Limited Liability Partnership (LLP) are two of the most viable and preferred structures for foreigners looking to establish a foothold in the Indian market for the first time. These entities not only offer flexibility and limited liability but also provide a relatively straightforward entry point into the Indian business landscape. This article focuses on these two structures due to their accessibility and suitability for foreign investors initiating business operations in India, contrasting with other forms like Public Limited Companies, Subsidiaries, Joint Ventures, Branch Offices, Project Offices, and Liaison Offices, which might involve more complex requirements or are more suited for specific business operations.

Limited Liability Partnership (LLP)

1. Obtain a Digital Signature Certificate (DSC)

• Firstly, all designated partners need a Digital Signature Certificate (DSC), which is required for filing forms online with the Ministry of Corporate Affairs (MCA).

2. Acquire Director Identification Number (DIN) or Designated Partner Identification Number (DPIN)

• Secondly, obtain a DIN or DPIN for all proposed designated partners. This can be applied for through the MCA portal.

3. Name Approval

• Next, file an application for reservation of name through the LLP-RUN (Limited Liability Partnership-Reserve Unique Name) service on the MCA website. You can propose two names.

4. Incorporation of LLP

• File Form FiLLiP (Form for incorporation of Limited Liability Partnership) on the MCA portal. This form also allows for the application of DIN/DPIN if the partners do not already have one.
• Attach necessary documents, including proof of address of the registered office, proof of identity and address of partners, and the subscriber’s sheet.

5. LLP Agreement

• After incorporation, file an LLP agreement through Form 3 on the MCA portal within 30 days of incorporation. The LLP agreement outlines the mutual rights and duties among the partners and between the LLP and its partners.

6. PAN and TAN Application

• Apply for a Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN) for your LLP.

7. Opening a Bank Account

• With the incorporation certificate, PAN, and LLP agreement, you can open a bank account for the LLP.

Private Limited Company

1. Obtain Digital Signature Certificate (DSC)

• The first step is obtaining a DSC for the proposed directors of the company.

2. Acquire Director Identification Number (DIN)

• Obtain a DIN for each proposed director. The application for DIN can be made through the SPICe+ form on the MCA portal.

3. Name Approval

• Reserve your company name through the SPICe+ Part A form on the MCA website. You can propose two names in order of preference.

4. File SPICe+ Form

• File the SPICe+ (Simplified Proforma for Incorporating Company electronically Plus) application, which is a comprehensive form covering incorporation, DIN application, PAN, TAN, and other mandatory registrations.

5. Attach Required Documents

• Attach the necessary documents, including the Memorandum of Association (MoA), Articles of Association (AoA), proof of office address, proof of identity and residential address of subscribers and directors, and a declaration from the first directors and subscribers.

6. Payment of Fees

• Pay the prescribed fee on the MCA portal after uploading the documents.

7. Certificate of Incorporation

• Upon verification, the Registrar of Companies (ROC) will issue a Certificate of Incorporation along with PAN and TAN.

8. Opening a Bank Account

• With the Certificate of Incorporation, PAN, and other relevant documents, open a corporate bank account.

Below are key differences based on various points between LLP and Private Limited Company

 

Aspect	LLP	Private Limited Company
Legal Structure	Hybrid entity blending features of partnerships and corporations	Independent legal entity distinct from its shareholders
Formation	Formed by filing LLP agreement with Registrar of Companies	Formed by filing incorporation documents with the Registrar of Companies
Liability	Limited liability for partners	Limited liability for shareholders
Governance	Managed by designated partners and partners; less formal structure	Managed by directors and shareholders; formal structure with board meetings, AGMs, etc.
Ownership Transfer	Transfer of ownership involves agreement among partners	Transfer of shares facilitated by share transfer
Minimum Members	Requires at least two designated partners	Requires a minimum of two directors and shareholders
Audit Requirements	Mandatory if turnover exceeds prescribed limits or capital contribution exceeds a specified threshold	Mandatory annual audit regardless of turnover or capital
Taxation	Taxed as a partnership; profits taxed at individual partner level	Taxed as a separate legal entity; profits are taxed at the corporate tax rate
Regulatory Compliance	Relatively fewer compliance requirements	More stringent regulatory compliance requirements
Continuity of Existence	Dissolved upon death, bankruptcy, or withdrawal of a partner, unless otherwise agreed in LLP agreement	Continuity unaffected by changes in ownership or management
Public Disclosure	The lesser degree of public disclosure; financial statements not typically filed publicly	More extensive public disclosure requirements; financial statements filed and available for public inspection
Transfer of Ownership	Restrictions on transferring ownership interests; typically require the agreement of other partners	Transfer of shares allowed subject to shareholder agreement and statutory provisions
Minimum Capital Requirement	No minimum capital requirement	Minimum authorized and paid-up capital requirements apply

Tips for Foreigners

• For both LLP and Private Limited Company registration, engaging a local legal or consultancy firm can significantly ease the process.
• Foreign nationals should ensure they have all necessary documents apostilled or notarized as required.
• Consider obtaining professional assistance for drafting the LLP Agreement or MoA and AoA for a Private Limited Company, ensuring compliance with Indian laws and regulations.

This guide outlines the general steps for registration; however, specific requirements may vary. Always refer to the latest guidelines from the Ministry of Corporate Affairs and consider professional legal advice for a smooth registration process.

Following the company’s incorporation, a significant consideration is the regulatory framework surrounding foreign investment within the company. When a foreigner assumes the role of a Director without engaging in any investment activities, the specific compliances associated with Foreign Direct Investment (FDI) are not applicable. However, when the foreigner decides to invest in the company, it is essential to navigate through the compliances related to FDI, as such investments are categorized under this term. This distinction underscores the necessity for understanding and adhering to the appropriate regulations that govern foreign investments in the business context.

Foreign Direct Investment (FDI) into India’s burgeoning private sector is a significant driver of economic growth, technological advancement, and employment generation. The regulatory framework governing such investments is encapsulated in the Foreign Exchange Management Act (FEMA), 1999, which is administered by the Reserve Bank of India (RBI). This article explores the nuances of FEMA regulations when a foreigner invests in an Indian private company, highlighting the compliance requirements, routes of investment, and reporting obligations.

Understanding FEMA and FDI Routes

FEMA was introduced in India to facilitate external trade and payments and to manage the foreign exchange market. It provides the legal framework for the administration of foreign exchange transactions and aims to promote the orderly development and maintenance of the foreign exchange market in India.

FDI in India is primarily routed through two channels:

1. Automatic Route: Under this route, foreign investments do not require prior approval from the RBI or the Government of India. The investor only needs to inform the RBI after the investment has been made.
2. Government Route: This route requires prior approval from the Government of India, specifically from the concerned ministries or departments. Investments that are not covered under the automatic route fall into this category.

Compliance Requirements

When a foreign investor plans to buy shares or invest in an Indian private limited company, several compliances need to be adhered to under FEMA guidelines:

• Advance Remittance Form (ARF): The company receiving the investment must report the inflow of funds to the RBI by submitting an ARF within 30 days of receiving the investment.
• Issuance of Shares: Post-receipt of investment funds, the company must issue shares to the foreign investor within a stipulated timeframe, typically 60 days.
• Form FC-GPR: Once shares are issued, the company must file the FC-GPR (Foreign Currency-Gross Provisional Return) form with the RBI within 30 days, detailing the share allotment to the foreign investor.

Sectoral Caps and Pricing Guidelines

FDI in India is subject to sectoral caps, which dictate the maximum amount of foreign investment allowed in various sectors. These caps are designed to protect critical sectors from excessive foreign control. Additionally, FEMA and RBI guidelines mandate adherence to pricing guidelines, ensuring that the share price is not undervalued or overvalued in the context of FDI.

Reporting and Documentation

The company must maintain meticulous records of all foreign investments, including documentation related to the ARF, FC-GPR forms, board resolutions, share certificates issued to foreign investors, and any other relevant agreements. Annual compliance reporting, such as the filing of the Annual Return on Foreign Liabilities and Assets (FLA) with the RBI, is also mandatory.

Penalties for Non-Compliance

Non-adherence to FEMA regulations can result in penalties, legal action, and reputational damage. Companies must ensure full compliance with all FEMA guidelines when receiving foreign investments.

Conclusion

FDI is a vital component of India’s economic growth strategy, and FEMA plays a central role in regulating such investments. Understanding and complying with FEMA guidelines is imperative for both foreign investors and Indian companies to ensure a smooth and lawful investment process. By adhering to these regulations, companies can leverage foreign investments to fuel their growth while contributing to India’s economic development.

For detailed guidance and the latest updates on FEMA and FDI policies, it’s advisable to consult the RBI’s official website or seek assistance from legal experts specializing in FEMA regulations.