Legal Aspects of Setting Up a Business in India 2.1

8/8/2019 Legal Aspects of Setting Up a Business in India 2.1

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LawQuest 2010. All Rights are Reserved.

Legal Aspects of Setting Up a

Business in India

By Poorvi Chothani and Vidhi Agarwalwww.lawquestinternational.com


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Investment Scenario for FDI Inflows into

IndiaForeign investments are principally regulated by: The industrial policy of the Indian Government formulated by the

Secretariat of Industrial Assistance (SIA) which is an arm of theMinistry of Finance

It is further shaped by Press Notes and Notifications issued by the:- Ministry of Commerce and Industry;- Reserve Bank of India;- Indias Central bank which administers and regulates the flowof foreign exchange promulgated by the Foreign ExchangeManagement Act, 1999 (FEMA); and

Securities Exchange Board of India

The FDI policy and its current Press Notes have been consolidatedinto one Policy Circular in March this year , which is to be updatedevery six months. The last one was published in October 2010


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Foreign Investments in India

Entry Options Direct Investments

Liaison Office/Representative Office

Branch Office

Project Office

Company - Acquisition of Shares under Scheme ofMerger/Demerger/Amalgamation

Indirect Investments Foreign Institutional Investors

Foreign Venture Capital Funds

Other Options Agency

Distributorship

Franchise


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Company Structure in India

Private Limited Company

Minimum 2 shareholders and 2 directors

Minimum Capital US$ 2500

Public Company

Minimum 7 members and 3 directors

Minimum Capital US$ 12500

Indian director and shareholder not mandatory


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Permitted Entities for Foreign Direct

Investment Indian Company

Partnership Firm only permitted for NRIs and PIOssubject to certain limitations;

Proprietary concern only permitted for NRIs and PIOssubject to certain limitations;

Trusts other than FVCF are not permitted

DIPP has released a Discussion Paper considering FDIin Limited Liability Partnership Firms


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Steps to Incorporate a company in India

Start

Retaining Professional Services

Obtaining approval for the proposed name of the Company from the Registrar of

Companies (ROC) on payment of the prescribed fees

Drawing up the Memorandum of Association and payment of the government fees

(Needs to be signed and attested before the Indian embassy in the country of residence

of the foreign national

Drawing up the Articles of Association and payment of government fees (Needs to be

signed and attested before the Indian embassy in the country of residence of the foreign

national

Submission of the declaration of the applicant, consent letters of the proposed directors, registered office

address of the proposed company, Power of Attorney authorizing person(s) to make correction in the

Memorandum and Articles of Association with the ROC

Payment of Registration Fee to the ROC

Obtaining a Director Identification Number for each director

(Application Form along with supporting documents need to be attested before the Indian

Embassy in the country of residence of the proposed director)

Obtaining Digital Signature Certificate for at least one proposed director (Application

Form along with supporting documents need to be attested before the Indian Embassy in

the country of residence of the proposed director)

Receipt of Certificate of Incorporation

Private Limited Company can commence business


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Director Identification Number (DIN)

A unique identification number for an existing director ora person intending to become the director of a company.

A pre-requisite for e-filing of certain company relateddocuments

DIN is individual specific and not company specific, soonly one DIN is required per director/person

Who should apply - Existing director of a company orwho intends/proposed to be a director of company infuture


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Digital Signature Certificate (DSC)

Is like hand written signature

Helps establish the identity of the sender filing the documentsthrough internet which sender can not revoke or deny.

Is not only a digital equivalent of a hand written signature butadds extra data electronically to any message or a documentwhere it is used to make it more authentic and more secured.

It ensures that no tampering of data is done once thedocument has been digitally signed.

Is normally valid for 1 or 2 years, after which renewal is

required. Types - Class-1, Class-2 & Class-3 each having different level

of security.


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Regulations

Establishment of Branch / Liaison / Project Officesin India is regulated in terms of:

Application for Permission from Reserve Bank of

India underReserve Bank Route and GovernmentRoute.


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Branch Office

Can undertake export/import of goods,

Consultancy, research, coordination with local

Provide technical support

Development of software and operations of airline or shipping business.

Not allowed to undertake manufacturing activities

Prior approval of Reserve bank of India isrequired to set up a Branch office.


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Liaison Office (Representative Office)

Perm

issible ActivitiesLiaison Office can:

Represent in India, the parent Company / group companies. Promoting export/import from/to India. Promoting technical/financial collaborations between parent/group

companies & companies in India.

Act as a channel of communication between Head Office abroad &parties in India.

Limited to collecting & providing information about possible marketopportunities, Company & its products to Indian customers.

Liaison Office cannot:

Undertake any business activity other than liaison activities in India,& therefore cannot earn any income in India.

Permission granted initially for3 years & may be extended


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Establishment ofLiaison Office by

Foreign Insurance Companies / Banks

Foreign Insurance companies - Establishmentonly after prior approval from the Insurance

Regulatory and Development Authority (IRDA)

Banks prior approval from Department ofBanking Operations & Development (DBOD)Reserve Bank of India.


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Project Office

General permission by RBI to establish Project office.

Foreign companies planning to execute specificprojects in India can set up a project office for thispurpose. Conditions laid down by RBI need to befulfilled. The foreign entity only has to furnish a

report to the RBI giving the particulars of theproject/contract


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The Business of Education in India

Background

Education offered by the state governments,central government and private bodies

Colleges need to be affiliated to a university

University has to be recognized by the UniversityGrants Commission


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Business Model

FDI under the automatic route permitted (since 2002) butnot popular

School or college education cannot be provided for profit

Structures permitted:

Trusts under the Indian Trusts Act, 1882

Societies under the Societies Registration Act, 1860

Non-profit companies (Section 25 companies, under theCompanies Act, 1956)

Cannot distribute dividends

FDI in trusts or societies is not permitted


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Societies

Charitable, scientific, literary etc.

Simple procedure to alter objectivesand/or name

Statutory compliance requirements

Limited statutory regulation

Few penalties

Dissolution is possible

Statutory meetings required


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Trusts

Charity, social benefit

Difficult to alter objectives,

Relatively simple to change the name No statutory compliance requirements

Nominal penalties

Limited legal status

Limited statutory regulation

Dissolution is possible


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Section 25 Companies

Complex legal process to set it up

Objects cannot be easily changed

Strict compliance with the Companys Act, 1956

Statutory meetings required Full legal status

Complex statutory regulation

Severe penalties for offences and lapses Difficult to change the name

Cannot distribute dividends


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Other Developments

All India Council for Technical Education Regulations forEntry and Operations of Foreign Universities in IndiaImparting Technical Education, 2005 (the ForeignUniversities Regulations)

The Prohibition of Unfair Practices in Technical MedicalEducational Institutions and Universities Bill;

The education Tribunals Bill

The National Accreditation Regulatory Authority for

Higher Educational Institutions Bill.

None of these have yet been legislated into law and are atdifferent stages in the legislative procedure.


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Innovative models

Twinning programs

Companies create trusts and a separatesubsidiary that owns the infrastructure,assets and provides services; trust paysfor assets; teaching and fees routedthrough the trust; FDI into the companiesproviding the education services and asset

Institutes offer Post graduate diplomacourses the Indian School of Business


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Pre-Primary Education

Non-Profit restrictions do not apply to pre-primary education

Very successful business

No licensing or registration requirements Franchise models flourishing:

Example Eurokids

Foreign contributions into a not for profitstructures is restricted

Compliance with Foreign ContributionRegulation Act, 1976 (The FCRA)


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The FCRA

Trust has to be registered with the Ministry of Home Affairs Prior registration required All funds to be received through only one designated bank account Bank account has to be opened before applying for registration Should have a considerable past history of activities Permanent Registration One time registration Registration may be refused if it affects the sovereignty and integrity

of India Entity in formative stage cannot be registered

Need at least three years track record Entity should have made significant contributions in keeping with itsobjects

Annual reports to be filed


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FCRA Practice Pointers

Better to get FCRA registration for onesingle donation

Commitment from single donor necessary


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LawQuests Areas of Practice

Global Corporate Immigration

Employment Law

Foreign Direct Investment

Foreign Indirect Investment Company and Commercial

Transactions

Real Estate Private Clients

Intellectual Property


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Thank You

Legal Aspects of Setting Up a Business in India 2.1

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