India is the third-largest and fastest-growing hub for technology startups in the global IT landscape, thus attracting several foreign companies to invest and expand their operations here.
The IT sector in the country has a projected value of US $19.93 billion by 2025, proving that starting a business in India is a lucrative option.
But starting a company in India also means tackling its diverse laws and regulations from registration to final compliance.
This article will help you understand how to incorporate a business entity in India if you are based in a foreign country.
Benefits of Starting a Business in India
Before venturing into the diverse landscape of India, foreign companies should understand the advantages it offers for business expansion.
- Fast-growing economy: India ranks as the sixth-largest economy in the world with a thriving domestic market for global companies. Its fast-growing economic stature is a definite attraction for foreign companies wanting to enter new markets in the Asian region.
- Access to high-quality tech talent: India’s unmatched education infrastructure has been churning out highly qualified individuals. The country produces over 2.4 million STEM (Science, Technology, Engineering or Mathematics) graduates annually, thus guaranteeing access to a talented workforce.
- English-speaking population: English is a dominant language for business, trade or international communication. After the United States, India has the largest number of English speakers in the world, which eases the language barriers when hiring Indian talent here.
- Growing startup culture: Between 2016 and 2022, India has witnessed a massive growth of 15,400% in recognised startups. It has an upward trend of technological innovation and adoption to drive its robust growth. With over 27,000 active tech startups, the country leads globally after the United States and China in embracing the startup culture.
- Strong work ethic: Business practices in India may differ region-wise but the workforce displays a strong work ethic and believes in the principles of trust, hard work and collaboration. It follows a well-defined hierarchical structure in organisations.
- Lower operational costs: From setting up infrastructure to getting labour support, the cost of operating a business in India is lower. As per a report, the wages of labour in India are much lower when compared to international standards. This is a significant incentive for foreign startups with limited resources.
Different Business Structures in India
The legal requirements for starting a business in India depend on the type of business you choose. We have listed a few of the business structures in India that foreign companies are allowed to set up:
Private Limited Company
It refers to any business incorporated as a separate legal entity with private ownership and stakeholders.
- Most popular type of business structure for foreign companies
- Must have at least 2 members to be incorporated and a minimum of 2 directors
- Shares of the company cannot be publicly traded
Public Limited Company
This is a joint stock company that can publicly trade its shares in India. It is registered as a different entity from its owners and all its activities are strictly governed under the Indian Companies Act, 2013.
- Requires a minimum of 7 shareholders and 3 directors to be incorporated
- Shares are offered to the general public and the company holds limited liability
Joint Venture Company
It is a business structure in which two or more businesses form a partnership to develop a single enterprise. A foreign company has to find a local Indian company to enter a joint venture.
- Should have two or more partners (foreign and domestic) entering into the joint venture agreement
- Profits, losses, assets and responsibilities are jointly shared among the partners
This refers to a separate independent legal entity in India that is 100% owned by the parent company, which can be based abroad. But foreign companies can only set up wholly-owned subsidiaries by investing in sectors where FDI is allowed by the Reserve Bank of India (RBI) and the Companies Act.
- Share capital is owned by the parent company
- Requires minimum 2 directors and 2 shareholders
This structure serves as an extension of a foreign company’s business in India. It is not a separate legal entity from the parent company and is subject to restrictions.
- More suitable to test the market or make temporary presence in India
- Liabilities extend to the parent organisation
Steps for Establishing Business in India
Expanding in India has to be in accordance with the local rules and regulations. With diverse laws in each state, you must be aware of the legal steps to start a business in India.
Here are the steps to incorporate a business entity in the country:
1. Choose the right structure:
Depending on your immediate needs and growth projections, choose an appropriate business structure. This step is crucial because the legal steps to start a business in India differ for every type of company structure.
Applications for private limited companies and limited liability partnerships must be filed with the Registrar of Companies at the Ministry of Corporate Affairs (MCA). For a branch office, the RBI is responsible for the initial approval.
2. Get documentation in order:
There are a lot of legal requirements for starting a business in India. These include:
- Digital Signature Certificate (DSC): This is an electronic version of a physical signature that authenticates your identity. Incorporation of a business is validated through DSC and has to be affixed on all the documents that are filed on the MCA portal. A licensed certifying authority issues this certificate.
- Fill Form SPICe+: This comprehensive form-filling fast tracks starting a company in India. It has two parts: A (name reservation) and B (all other services such as incorporation, PAN, GST, EPFO registrations etc). The form has to be filled out by registering on the MCA portal.
- Director Identification Number (DIN): This is a unique identification number allocated to an appointed director of a company. The MCA processes it after filling out the SPICe+ form during company registration.
- Drafted Memorandum and Articles of Association: When submitting the forms, you need to attach the Memorandum of Association and Articles of Association. These documents specify the company’s relations with shareholders and also specify its objectives. A local attorney can help to frame these as per your requirements.
- The other primary documents as per legal requirements for starting a business in India include a passport, identity proof and registered address proof of the directors.
As per the Hague Convention guidelines, any document constituting or defining the constitution of a foreign company must be duly certified to be a true copy. It must be notarised or attested by the Indian Embassy in the respective country.
If the documents are not in English, they need a translation attached duly and certified to be correct via a notary.
3. Apply for name approval:
To incorporate a business identity in India, start with a unique name for your company. You can use MCA's Reserve Unique Name (RUN) facility for name approval. The name must not be similar to an existing name, registered company or established trademark in India. This application for a company name is done with the Registrar of Companies in Form INC-1.
4 . File for compny incorporation:
Once you get the name approval, login to the MCA portal and fill out the SPICe+ forms. Attach all the required documents, pay the fees and submit your application for company registration.
5. Obtain PAN and TAN:
Once you receive your certificate of incorporation, you will also receive a Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN). These are very important for taxation purposes and conducting business in India.
6. Get Necessary Licences:
Depending on the nature of business, a foreign company may need certain licences and registrations. IT companies need to have Import Export Code registration, MSME registration, Software Licence Agreements etc.
7. Start a Bank Account:
It is advisable to start a separate bank account to maintain due records of all financial transactions of the company. You will need to submit the certificate of incorporation, PAN and TAN details, passport and visa details of authorised individuals to open a bank account in India.
8. Register for Relevant Taxes:
All foreign companies providing services in India have to obtain Goods and Services Tax (GST) registration. The application for GST is to be done by filling the Form GSTR-5 through the GST common portal. This ensures compliance with Indian tax laws.
How Long Does it Take for Company Incorporation in India?
The process of starting a business in India is long and involves multiple steps. Depending on the company structure you choose, the time frame for approval could vary.
If the name is approved and all documentation is in order, it takes about 10-18 days for starting a company in India. You should thus plan ahead of time and line your business plan accordingly.
Simplify Starting a Business in India With Rapid
India is attractive for foreign companies with its robust economy and quality talent, but establishing a separate entity here can be time-consuming. For Web2 and Web 3 companies wishing to expand their business in India, you can rely on a trusted employer of record like Rapid.
Rapid has deep industry expertise and knowledge of local laws to help in regulatory compliance of your Indian employees. Right from hiring of quality talent, undertaking HR functions, payroll management to employee benefits, its intuitive platform can manage it all.
Even without registering a company in India, you can scale up your business operations and get the best-in-class local benefits like health benefits and background verification services.
To book a demo, click here.