How NRIs can incorporate a firm6 min read . Updated: 04 Jan 2019, 12:54 AM IST
The process of company incorporation is online and it practically takes few weeks to complete the whole process in case of foreign investors
Choice of the legal form of an entity is one of the key considerations for foreign investors and entrepreneurs planning to do business in India. There are various options like company, branch office, project office, liaison office, firms, etc., depending upon the business requirements.
This article focuses on two important options that are generally considered by the non-residents to do business in India. These are private limited company (private company) and limited liability partnership (LLP), due to the following reasons:
•Global acceptability: Both private company and LLP are globally accepted legal entity forms with similar governance and regulatory recognitions;
•Limited liability: An important feature is the limited liability of the shareholder (in case of private company) and partners (in case of LLP), which contributes to private company/LLP being a preferred entity option;
•Legislative clarity: Most statutes governing businesses in India such as Foreign Exchange regulations, corporate law, Income tax law, etc. recognize private companies and LLPs as separate legal entities distinct from their constituent members / partners.
Private companies and LLPs are governed by different statutes in India. A private company is incorporated and governed by the Companies Act 2013 (the Companies Act) read with rules and regulations prescribed thereunder. Similarly, an LLP is incorporated and governed by the Limited Liability Partnership Act, 2008 (LLP Act). While the broad legislative construct is provided by these statutes, the foreign investors need to also comply with various other regulations and requirements like Foreign Exchange Regulations, Income-tax laws, etc.
Incorporation of private Company by a non-resident shareholder
The process of company incorporation is online and it practically takes few weeks to complete the whole process in case of foreign investors. The preparatory activities comprising of drafting the charter documents and authentication of the prescribed documents generally takes some time.
The documentation requirements include copy of passport along with utility bill or driving license of the subscriber to charter documents, i.e. proposed shareholders.
In case of a body corporate subscriber, a resolution passed by the body corporate along with trademark of the proposed name, if any, is required. The Companies Act has specific requirements with respect to authentication of prescribed documents where the proposed shareholders are non-residents. For instance, where the subscriber is from one of the Commonwealth countries (e.g. Singapore, Malaysia, the UK, Canada, etc.), the documents are required to be authenticated by the Notary in the respective jurisdiction. In case of non-resident shareholders from countries which are signatory to The Hague Convention and other jurisdictions, the documents are required to be apostilled, in addition to notarization.
The proposed business activity, which the entity would carry out in India is another key consideration.
The foreign direct investment (FDI) policy under the aegis of the department of industrial policy and promotion, Government of India, provides guidance vis-à-vis sectors / areas open for foreign investment into India. While most sectors are open to foreign investment without any requirement of a prior regulatory approval (popularly known as automatic route sectors), foreign investment in certain sectors is subject to a prior government approval - such as multi-brand retail trade, and FDI exceeding prescribed limits in sectors such as defence, telecom, broadcasting and aviation. Accordingly, persons resident outside India would need to ensure that the conditions specified under the FDI guidelines are complied with.
Another important consideration at the planning stage is determining the fund requirements of the legal entity and the mode of funding. An Indian company with foreign shareholders can be funded by way of equity investment or debt funding or a mix of both. Debt funding from non-residents is subject to certain restrictions like maturity period, all in cost ceiling, etc. The end-use of funds’ in general debt from overseas lenders is not permitted for acquiring real estate, acquisition of shares and for working capital purposes (in the latter case, certain exceptions are carved out where loan is raised from a foreign equity holder). Further, for certain businesses, mainly in the service sector, a prior approval from the Reserve Bank of India is required to obtain foreign debt funds, as specified. Other initial compliance requirements for companies include appointment of a resident director, issue of share certificates, appointment of auditors and obtaining tax registrations.
Incorporation of LLP with a non-resident partner
Similar to a private company, setting up of an LLP is also an online process. An LLP with foreign partners can be set up in few weeks, with a greater part of time involved in preparation and authentication of requisite documents. Government has recently introduced ‘Form FiLLiP’, with an aim to substantially reduce the incorporation timelines. Newly incorporated LLPs are required to submit their partnership agreement with the Registrar within the prescribed time frame to complete the setup process. Authentication process applicable for the relevant documents for setting up an LLP is similar to that of a company as mentioned above.
Foreign investment is permitted under the automatic route in LLPs operating in sectors where 100% FDI is allowed under the automatic route and where there are no FDI-linked performance conditions. With regard to funding of an LLP, it should be noted that currently LLPs are not allowed to raise debt funds from overseas.
Other initial requirements applicable to LLP include appointment of one resident designated partner, obtaining tax registrations and obtaining other applicable regulatory registrations.
Thus, depending upon the business requirements, non-resident investors can opt for a particular legal entity, incorporate/register the same and participate in the huge business opportunity in one of the fastest growing economies in the world.
1. What is the minimum number of member(s)/ partner(s) prescribed for private company/ LLP?
At least two members are required in case of a private limited company. Similarly, at least two partners are required to set up an LLP.
2. What are the requirements of conducting the meetings for private companies/ LLPs/?
In case of a company, the directors shall meet at least four times in a calendar year and the time gap between two meeting shall not be more than 120 days, barring few exceptions. Further, companies are required to hold an annual members’ meeting every year which shall take place in India. There is no such statutory requirement of holding meetings by LLPs.
3. What is the minimum number of directors/ designated resident partners required in a private company/ LLP?
At least two individual directors are required in a private company, at least one of whom should be a resident in India. An LLP is required to have at least two individual designated partners and at least one of the designated partners should be a resident in India.
4. Who is considered as ‘Resident in India’ for appointment of resident director/ designated partner under the Companies Act and LLP Act?
Under the Companies Act, 2013, every company shall have at least one director who stays more than 182 days in India in the financial year. As per the LLP Act, a resident means a person who stayed in India more than 182 days in immediately preceding financial year. A foreign national who satisfies these residency conditions can be also a director or designated partner.
Rohit Kashyab has contributed to this article.
Vikas Vasal is national leader tax–Grant Thornton India LLP. You can send your queries to firstname.lastname@example.org