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03 January 2022
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5 minutes

Incorporation in India: four factors to consider

As one of the world’s fastest growing economies, and one that has returned to pre-pandemic growth levels, there are many reasons to enter the Indian market. However, India has previously had a reputation as one of the most complex jurisdictions in Asia in which to do business and, moreover, a challenging environment for foreign companies seeking to incorporate there.

Today, the government’s commitment to transparency and digitalisation is making India an increasingly business-friendly market. That being said, foreign companies still need to prepare for challenges during the incorporation process.

Steady improvements

In the past few years, India has been steadily improving in terms of reducing the complexity of incorporation, entity management and compliance.

In our recent Global Business Complexity Index 2021, India dropped from a global ranking of 18th in 2020 to 20th in 2021 for the complexity of establishing and operating a business (a higher ranking indicates a higher level of complexity). However, it is still the fifth most complex place to do business in Asia.

The government has been actively working towards providing an environment that enables the establishment of new businesses, by focusing on improving the regulatory framework, increasing transparency and enhancing the ease of doing business.

Progress on digitalisation

Governments across the globe are turning to digitalisation as a means of improving upon, or even removing, the more traditional processes that have long been a source of complexity in business and trade.

And India is no exception in this regard. Moreover, the Covid pandemic has sped up the process of digitalisation out of necessity, something that is evident even at local authority level in India.

As part of the Indian Government’s Ease of Doing Business (EODB) initiatives, the Ministry of Corporate Affairs has deployed a new web form, dubbed ‘SPICe+’ (pronounced ‘spice plus’), replacing the earlier SPICe form which offers 11 services by three central government ministries and departments (the Ministry of Corporate Affairs, the Ministry of Labour and the Department of Revenue within the Ministry of Finance). The aim of doing so is to reduce the time taken, cost and number of procedures required to start a business in India; it is applicable for all new company incorporations with effect from 7 June 2021.

Four considerations before incorporating in India

While India is steadily reducing the complexity of its incorporation procedures and business environment, challenges still exist. These must be considered and prepared for in advance of incorporation, and include aspects such as the requirement for a minimum of two shareholders, trademark checks and obtaining a no objection certificate (NOC) in case of any similarities (phonetic or alphabetical) related to the proposed entity, sectoral caps for foreign direct investment, obtaining mandatory registrations and tax IDs, and so on.

The procedure to incorporate a private limited company in a local scenario is straightforward and takes around a week – or 10 days including the date of incorporation. However, the process to incorporate a company with overseas management can be a comparatively tedious, as well as time consuming – taking approximately 30–45 days – considering the various KYC and legalisation requirements.

Here are four things to bear in mind ahead of launching into the incorporation process in India:

1. Resident director

Firstly, the Indian Companies Act requires the appointment of at least one resident director from the beginning of the incorporation process.

This can present an early challenge for foreign companies wishing to incorporate in India, as they may not think about appointing a resident director until after the company has been established. In India, however, a resident director needs to be appointed to your board from the outset, in order to satisfy the government’s resident directorship criteria.

2. Principal place of business

Secondly, a company must identify a place of business from the first day.

In India, the ‘principal place of business’ is the primary location where a company operates and where all of its books and records are maintained. The full address of the company’s office in India which is deemed to be its principal place of business should also be capable of receiving and delivering any communications.

It is not feasible for a company to enter into any license agreement before its principal place of business in India has been established and its address identified. Considering that this can sometimes be challenging, the government has begun offering flexibility by allowing a company to note its correspondence address in the incorporation application. However, the company must then confirm the address of its principal place of business within 30 days of incorporation. This registered address process can present a challenge for a foreign company incorporating in India who wish to conduct business immediately.

3. ‘Commencement of Business’ certificate

The Commencement of Business certificate must be obtained within 180 days of the company’s incorporation. This basically certifies the receipt of payment from shareholders to the company’s Indian bank account for the amount of share capital agreed during the incorporation process.

This certificate is critical because, until the company obtains one, it cannot begin to trade, hire employees or enter into any kind of contract. Penalties for non-compliance are high, both for the company and directors.

4. Know Your Customer (KYC) requirements

The Indian government requires KYC verification procedures for banks, financial institutions and other organisations, in order to prevent money laundering, tax evasion and other financial crimes. This has made doing business in India much safer and more reliable for both customers and companies.

In 2018, the government introduced various KYC checks under the Companies Act, such as director, shareholder and registered office verification. Additionally, there are stringent legal processes for foreign directors or owners at the time of set up, like apostilled, consularised or notarised passport copies, government-issued proof of address for foreign directors, charter documents for foreign shareholders, and so on, although these requirements are rapidly liberalising.

Talk to us

TMF India can provide full administrative support for your prospective or existing operations in this market, from entity incorporation, to local directorship services, HR and payroll and accounting & tax services. We assist both local and global companies looking to do business in India.

Contact our experts today to find out how we can help grow your business.

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