Legal Aspects of Setting Up a

Business in India

By Poorvi Chothani and Vidhi Agarwal

www.lawquestinternational.com

© LawQuest 2010. All Rights are Reserved.

 Investment Scenario for FDI Inflows into
India
Foreign 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 the
Ministry of Finance

• It is further shaped by Press Notes and Notifications issued by the:

- Ministry of Commerce and Industry;
- Reserve Bank of India;
- India’s Central bank which administers and regulates the flow
of foreign exchange promulgated by the Foreign Exchange
Management Act, 1999 (“FEMA”); and
Securities Exchange Board of India

• The FDI policy and its current Press Notes have been consolidated
into one Policy Circular in March this year , which is to be updated
every 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 of
Merger/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

© LawQuest 2010. All Rights are Reserved.

 Permitted Entities for Foreign Direct
Investment
• Indian Company

• Partnership Firm – only permitted for NRIs and PIOs

subject to certain limitations;

• Proprietary concern – only permitted for NRIs and PIOs

subject to certain limitations;

• Trusts other than FVCF are not permitted

• DIPP has released a Discussion Paper considering FDI

in Limited Liability Partnership Firms

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 Steps to Incorporate a company in India
Start

Retaining Professional Services

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)

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

Receipt of Certificate of Incorporation

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Private Limited Company can commence business
 Director Identification Number (DIN)
• A unique identification number for an existing director or
a person intending to become the director of a company.

• A pre-requisite for e-filing of certain company related

documents

• DIN is individual specific and not company specific, so

only one DIN is required per director/person

Who should apply - Existing director of a company or

who intends/proposed to be a director of company in
future

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 Digital Signature Certificate (DSC)
• Is like hand written signature
• Helps establish the identity of the sender filing the documents
through internet which sender can not revoke or deny.
• Is not only a digital equivalent of a hand written signature but
adds extra data electronically to any message or a document
where it is used to make it more authentic and more secured.
• It ensures that no tampering of data is done once the
document 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 Offices
in India is regulated in terms of:
– Application for Permission from Reserve Bank of India
under Reserve Bank Route and Government
Route.

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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 is
required to set up a Branch office.

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 Liaison Office (Representative Office)
Permissible Activities
Liaison 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 market
opportunities, 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 for 3 years & may be extended

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 Establishment of Liaison Office by
Foreign Insurance Companies / Banks

• Foreign Insurance companies - Establishment

only after prior approval from the Insurance
Regulatory and Development Authority (IRDA)

• Banks – prior approval from Department of

Banking 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 specific

projects in India can set up a project office for this
purpose. Conditions laid down by RBI need to be
fulfilled. The foreign entity only has to furnish a
report to the RBI giving the particulars of the
project/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 University
Grants Commission

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 Business Model
• FDI under the automatic route permitted (since 2002) but
not 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 the
Companies 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 objectives
and/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 Company’s 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 for
Entry and Operations of Foreign Universities in India
Imparting Technical Education, 2005 (the Foreign
Universities Regulations)
• The Prohibition of Unfair Practices in Technical Medical
Educational 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 at
different stages in the legislative procedure.

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 Innovative models
• Twinning programs
• Companies create trusts and a separate
subsidiary that owns the infrastructure,
assets and provides services; trust pays
for assets; teaching and fees routed
through the trust; FDI into the companies
providing the education services and asset
• Institutes offer Post graduate diploma
courses – 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 profit
structures is restricted
• Compliance with Foreign Contribution
Regulation 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 its
objects
• Annual reports to be filed

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 FCRA Practice Pointers
• Better to get FCRA registration for one
single donation
• Commitment from single donor necessary

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 LawQuest’s Areas of Practice
• Global Corporate Immigration
• Employment Law
• Foreign Direct Investment
• Foreign Indirect Investment
• Company and Commercial
• Transactions
• Real Estate
• Private Clients
• Intellectual Property

© LawQuest 2010. All Rights are Reserved.

 Thank You

© LawQuest 2010. All Rights are Reserved.