Four considerations for incorporating in India
As one of the world’s fastest growing economies, and one that has returned to pre-pandemic growth levels, India offers a wealth of investment opportunities.
Previously, India was considered one of the most complex jurisdictions in Asia in which to do business. Today, the government’s commitment to transparency and digitalisation is making India an increasingly business-friendly market. However, foreign companies may still face some challenges on the journey to incorporation.
Making steady improvements
In the past few years, the Indian government has been steadily working to reduce the complexity of incorporation, entity management and compliance.
In our Global Business Complexity Index (GBCI) 2023, India ranked as the 33rd most complex business environment. This marks a significant improvement on its position in the 2022 GBCI, where it ranked in 25th place.
The government has taken steps to create an environment that is conducive to establishing new businesses by improving the regulatory framework, increasing transparency and enhancing the ease of doing business.
The journey to digitalisation
Governments across the globe are turning to digitalisation to improve, or even remove, the traditional processes that have long been a source of complexity in business and trade.
And India is no exception. The Covid-19 pandemic sped up the process of digitalisation in the country, even at local authority level.
As part of the Indian Government’s Ease of Doing Business (EODB) initiatives, the Ministry of Corporate Affairs has made entity setup easier, faster and more cost-effective by creating SPICe+ (pronounced “spice plus”), an integrated electronic form. The Ministry has also launched MCA 21 Version 3.0, a portal that includes features such as e-scrutiny, e-adjudication, and e-consultation and compliance management. Board meetings are now conducted virtually, which allows directors in any location to participate. The Ministry has also made it mandatory for companies to convert their physical securities into electronic form, thereby making dematerialisation applicable to all entities.
Four considerations for incorporating in India
While India is steadily simplifying incorporation procedures, starting a business in India can be challenging and includes considerations such as: the requirement of 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.
Incorporating a private limited company in a local scenario is straightforward and takes around a week or 10 days, including the date of incorporation. However, incorporating a company with overseas management can be tedious and time-consuming, and could take approximately 30-45 days, depending on the various Know Your Client (KYC) and legal requirements.
Here are four considerations for incorporating a company in India:
1. Resident director
The Indian Companies Act requires the appointment of at least one resident director at the start of the incorporation process. While this may present a challenge for foreign companies that may only be planning to appoint a resident director after incorporation, it is a key requirement.
2. Registered address of the business
Aa company must identify a place of business from the first day.
In India, the registered address of a business is the primary location where a company operates and where all its books and records are maintained. The registered address is deemed to be the company’s principal place of business and should be capable of receiving and delivering any communications.
It is not feasible for a company to enter into any licence agreement before its principal place of business in India has been established. Because this process can sometimes be challenging, the government now allows companies to include their 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. The registration process can be challenging for companies wishing 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 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.
A company cannot trade, hire employees or enter into any kind of contract until the certificate has been obtained. Penalties for non-compliance are high, both for the company and the directors.
4. 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 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 setup, such as 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.
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