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
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