India

4 Chapter Incorporation

    • Incorporation

      ■Characteristics of business base and form of advancement

      When you establish a business base in India, usually you need to select business type, either Local corporation, Branch office, Representative office or project office in conformity with India Company Law [Companies Act, 1956] and FEMA [Foreign exchange control law].

      Depending on business base, there are certain restriction on activities. You need to understand the characteristics before you select the business type.

      If you establish branch office or representative office, you need to undergo preliminary survey by Authorized Dealer Category-ⅠBanks and RBI [Reserve Bank of India].

       

      [Form of Advancement]

      Type

      Position of corporation

      *Effective tax rate

      Characteristics

      Local corporation

      Domestic corporation

      32.445%

      ・In principle, 100% investment from foreign capital is possible.

      ・Free activity is possible.

      Branch office

      Foreign corporation

      42.024%

      ・Mainly, it’s acting base as sales company.

      ・Activities such as manufacturing and processing are not allowed.

      ・Local borrowing is not allowed.

      Representative office

      Foreign corporation

      42.024%

      ・Mainly, outbound institutions of headquarters such as information gathering and investigation.

      ・No profitable activities.

      Project office

      Foreign corporation

      42.024%

      ・Mainly, it’s limited project for infrastructure.

      ・Outside of project activities are not allowed.

      *Effective tax rate

      When the income amount is less than 10 million rupees, 30.9% for local company, and 41.2% for branch office, representative office, and project office.

       

       

      ■ Local corporation

       

      Under the India Company Law [Companies Act, 1956], companies are roughly divided into three types, Company Limited by Shares, Company Limited by Guarantee, and Unlimited Company.

      Company Limited by Shares is the most popular form and it corresponds to a “Co.,Ltd.” under the Japanese Corporate Law.

      Company Limited by Guarantee is the company form in which the shareholder's responsibility is limited to the amount prescribed by MOA [Memorandum of association]

      Unlimited Company is the company form in which the corporate creditors take infinite joint and responsibility with the company. And it corresponds to a “A group company” under the Japanese Corporate Law.

       

      ■ Branch office

      Branch office is treated as part of head office [foreign corporation]. It differs from Local corporation in various respects.

      [Activity range of branch office]

      ・Rendering professional or consultancy service.

      ・Carrying out research work, in which the parent company is engaged.

      ・Promoting technical or financial collaborations between Indian companies and parent or overseas group company.

      ・Representing the parent company in India and acting as buying/ selling agent in India.

      ・Rendering service in Information Technology and development of software in India.

      ・Rendering technical support to the products supplied by parent/ group companies.

      ・Foreign airline/shipping company.

      (Article 2, 9 of the Companies Act/ Foreign exchange control regulations concerning the establishment of branch offices and other business bases Article 2, C,2000/ FEMA22 schedule1 May, 2000/ RBI notice/ A.P. (DIR Series) Circular No.23, December 2009)

      [Borrowing and remittance]

      Activity funds must be covered by remittance from headquarters or by private interests of your own business activities. You con not borrow by yourself.

      Remittance the profit to headquarters without the approval of RBI is possible if you prove the profit gained by the operation within the recognized range.

      [Branch representative]

      According to the Indian Company Law, it is necessary to register the name and address of the representative who is resident in India to keep operating in India

      ■ Representative office and Project office

      Representative office is defined as primary business office or a contact point between the head office and customers in India. The recognized range of activities are below.

      ・Representing in India the parent company/ group companies.

      ・Promoting export/ import from/ to India.

      ・Promoting technical/ financial collaborations between parent/ group companies and companies in India.

      ・Acting as a communication channel between the parent company and India companies.

       (Foreign exchange control regulations concerning the establishment of branch offices and other business bases Article 2, E, 2000/ FEMA22 schedule2 May, 2000/ RBI notice/ A.P. (DIR Series) Circular No.23, December 2009)

       

       

      Project office is set up only for the purpose of carrying out limited contracts such as construction and infrastructure development projects. Funds must be covered by remittance from the head office and other foreign countries. You cannot borrow from banks in India.

       

       

      Before you establish a project office, the head office has concluded a contract concerning the project in India. In addition, one of the following must be satisfied.

      ・Funds are financed from remittance from the other foreign countries.

      ・The funds are financed from international financial institutions.

      ・The project has permission from relevant authorities in India.

      ・Regarding the payment of the project, you have contracted loans with repayment deadlines with Indian public entry agencies and banks.

      If the above requirements are satisfied, individual approval from RBI is not required.

       

      ■ Procedure for establishing a local corporation

      Some cases are considered to establish a local corporation in India. Those cases are that you make a direct investment yourself, acquiring shares from an existing Indian company (acquisition), or acquiring shares from a foreign company including Japan that already has direct investment.

      The procedure model when you make a direct investment yourself is below.

      First, you should check you need approval of FIPB or not to establish a local corporation in India. You can check it at HP of Ministry of Commerce and Industry (http://dipp.nic.in/). When you get the approval or you don’t need, carry out the company establishment and application for registration based on the Indian Companies Act. After the establishment of the company and the capital payment is completed, you will report to RBI about the company establishment within 30days.

      Next, there are something you should get.

      ・DSC: Digital Signature Certificate

      Procedure for establishing a local corporation is done through the web site of MCA [Ministry of Company Affairs].

      ・PAN: Permanent Account Number

      It must be stated in the application form of income tax.

      ・DIN: Director Identification Number

      It is assigned to identify company directors by number.

      After you get DSC and DIN, apply for the title of local corporation of India. You should submit “Form1-A” to the Company registration office. Describe the name of organizer, distinction between public and private, business objective, desired name of the new company, shareholder composition, authorized capital amount and etc., should be in “Form1-A”. Apply for the title, you submit “Form1-A”, Board of Directors Meeting for of company establishment, Power of Attorney to delegate company establishment, and a consent form that there is no objection to the use of similar verification to Company registration office.

      After you get the title, you should get Certificate of Incorporation from Company registration office.

      Apply for establishment registration, you need to submit three application forms [Form1, Form18, Form32]. You will submit business articles of constitution MOA and AOA with “Form1”. Documents for applying the company name and pottery address established is “Form18”. “Form32” is for registering information of the directors. Applying for establishment registration should be done within 60days from when you get the title.

      Those application forms will be judged by Company registration office, and the establishment certificate will be issued from ROC. After the certificate is issued it became possible to open a bank account of commercial bank in India and you can pay the capital.

       

      Matters described in the articles of incorporation

      For the Basic

      Title/ The state of the registration office belongs/ Business objective/ Shareholders are limited liability/ Capital and Authorized Capital Amount/ Name and Address of founders, Number of shares held

      For the Affiliation

      Definition/ Stocks and shareholder rights/ General meeting of shareholders/ A director/ Manager or secretary/ Company signature/ Dividend and reserve/ Calculation/ Liquidation/ Disclaimer

       

       

      ■ Procedure for after establishing a local corporation

       

       

      After establishing a local corporation, you should get a Permanent Account Number of new corporation and Tax Deduction Account Number. Other things which you should get are below.

      ・IEC: Importer-Exporter Code

      ・STC: Service Tax Code Number

      ・VAT: Value Added Tax Number

      And you should resister Excise Duty for manufacturing.

       

      1st Board of Directors should be held within 30days from established, and appoint an auditor [Article 224, 5 of the Companies Act]

      Opening a bank account is needed to pay the capital. After you confirm the capital payment, you submit KYC [Know Your Customer]. It has to be done within 30days from the payment. You also need to issue share certificates to shareholders within 180days from the payment and submit “FC-GPR” within 30days from issued shares.

       

      ■ Founding scheme with Indians as the founder

      The basic establishment flow is the same as direct investment scheme. Most of the establishment procedure is done in India, so there is an advantage that it is possible to shorten the establishment days compared with direct investment scheme. Many of the certification procedures are also unnecessary, which also has the merit of reducing stamp duty and other expenses. Disadvantage is that it takes time and effort to change the directors and shareholders after establishing the establishment.

       

      ■ Branch office/ Representative office

      On 30th December 2009, RBI announced a notification concerning the establishment procedure of branch office and representative office.

      Requirements for establishing branch office and representative office are shown the table below.

       

       

      Branch Office

       

       

      Representative Office

      Profit standard

      Being profitable for the last 5 years

      Being profitable for the last 3 years

      Net asset standard

      $ 100,000 equivalent

      $ 50,000 equivalent

      Exception

      Collateral with letter from parent company

      Collateral with letter from parent company

       

       

      You will submit “Form FNC” with attached document to the bank of categoly1 and be judged. When you establish the project office you still need to be judged from RBI in principal. You can actually act as a branch office or representative office after registering to the company registration office and acquiring the establishment certificate from the company registration office. DSC, PAN, and TAN are also needed.

       

       

       

       

       

      ■ Limited Liability Partnership [LLP]

       

      LLP became possible by Limited Liability Partnership Act and Rules from 2009. Under the LLP, External Commercial Borrowing is not allowed. However, there is no limit on statutory funds when the time of calculating the dividend dispersion and DDP is not imposed.

      Unlike in Japan, the tax is imposed on LLP itself in India. The effective tax rate for LLP is 30.9%.

      The type of business that has the merit of establishing LLP are:

      ・Experts in accountants and company secretaries

      ・Invest with high risk that is like venture capital and investment union we need knowledge and expertise

      ・Small company and companies in the field of handicraft industry

       

       

      The minimum number of partner for establish LLP in India is two, and there is no upper limit according to Article 6 of the LLP Act. However, one of the partner has to be Indian residents.

       

      To establish LLP, you need to get DSC and DPIN just as you establish corporation.

      In the case of LLP, it is necessary to prepare a limited liability partnership agreement rather than the articles of incorporation. At the LLP agreement, following things are decided.

      ・Name

      ・Partner name

      ・Partner's responsibilities and rights

      ・Business contents

      ・Purpose of investment by partners

      ・Lifetime

      ・Effective date of the contract

      ・Dispute resolution

       

       

      ■ Company liquidation and withdrawal

       

      There are two types of liquidation of local company, “Liquidation by court” and “Arbitrary liquidation” according to Article 425 of the company law of India.

      “Liquidation by court” is the way that the court will order, and principally liquidate the company. “Arbitrary liquidation”, even if there are no particular reasons, the company resolves at the general shareholders' meeting and liquidates the company according to the resolution.

       

      Procedure to close and withdraw of Representative Office is below.

      ・Sale of assets

      ・Repayment of debt

      ・End of contract relationship as a representative office

      ・Employee dismissal

      ・Preparation of financial statements of the closing date of the representative office

      ・Application for confirmation of remaining money and permission to remit money to head office to the RBI

      ・Close bank account

      ・Notice of close of representative office to company registration office

       

       

      Procedure to close and withdraw of Branch Office is almost same way as Representative office. However, branch office has more employees, so there is higher risk when dismissing employees.

       

       

      Procedure to close and withdraw of Project Office is basically same as above two. However, project office is established on the premise that withdraws after over the project, so the procedure is easier than others.

       

      The Sick Industrial Companies Act is enacted in 1985, and it is applicable when the loss of each fiscal year exceeds the net asset for the company that has been in existence for 5 years or more after its establishment.

    • Branch Office

      ■General Criteria

       

      A body corporate incorporated outside India (including a firm or other association of individuals), desirous of opening a Liaison Office (LO) / Branch Office (BO) in India have to obtain permission from the Reserve Bank under provisions of FEMA 1999.

       

      ■Minimum Requirement for Establishing Branch Office

      ·         Track Record

      For Branch Office — a profit making track record during the immediately preceding five financial years in the home country.

      ·         Net Worth 

      Net Worth [total of paid-up capital and free reserves, less intangible assets as per the latest Audited Balance Sheet or Account Statement certified by a Certified Public Accountant or any Registered Accounts Practitioner by whatever name].

       

      For Branch Office — not less than USD 100,000 or its equivalent.

       

      ■Permissible Activities by Branch Office

      Companies incorporated outside India and engaged in manufacturing or trading activities are allowed to set up Branch Offices in India with specific approval of the Reserve Bank. Such Branch Offices are permitted to represent the parent / group companies and undertake the following activities in India:

      1.       Export / Import of goods.

      2.       Rendering professional or consultancy services.

      3.       Carrying out research work, in areas in which the parent company is engaged.

      4.       Promoting technical or financial collaborations between Indian companies and parent or overseas group company.

      5.       Representing the parent company in India and acting as buying / selling agent in India.

      6.       Rendering services in information technology and development of software in India.

      7.       Rendering technical support to the products supplied by parent/group companies.

      8.       Foreign airline / shipping company.

       

      ■Activities Not Allowed to be Done by Branch Office

      1.       Retail trading activities of any nature is not allowed for a Branch Office in India.

      2.       A Branch Office is not allowed to carry out manufacturing or processing activities in India, directly or indirectly.

       

      ■Documents Required for Forming a Branch Office

      Currently as per the RBI Requirement the application for the branch office and BRANCH office is submitted through the Authorized dealer. The authorized dealer means the various institution having banking licenses.

      The following filings are required to open a branch office in India:

      1. Form FNC 1

      2. Letter from the principal officer of the Parent company to RBI.

      3. Letter of authority from the parent company in favor of Local Representative.

      4. Letter of authority/ Resolution from parent company for setting up BRANCH office in India.

      5. Comfort letter from the parent company intending to support the operation in India.

      6. Copies of the English version of the Certificate of Incorporation, Memorandum & Articles of association (Charter Document) of the parent company duly attested by the Indian embassy or notary public in the country of registration.

      7. Certification of Incorporation - Translated & Duly Notarized and properly authenticated.

      8. The Latest audited Balance sheet and annual accounts of parent company duly Translated notarized for past Three years and properly authenticated

      9. Name, Address, email ID and telephone number of the authorized person in Home Country.

      10. Details of Bankers of the Organization the Country of Origin along with the bank account number

      11. Details Relating to address of the proposed local office, number of persons likely to be employed, number of Foreigners among such employees and address of the head of the Local office, if decided

      12. Details of Activity carried out in Home Country by the applicant organization in brief about the product and services of company in Brief.

      13. Bankers Certificate

      14. Latest Proof of identity of all the Directors - Properly Certified by Banker in Home Country and duly authenticated

      15. Latest Proof of address all of Directors - Properly Certified by Banker in Home Country and duly authenticated

      16. Details of the Individuals / Company holding more 10% of Equity

      17. Structure of the Organization and its Shareholding pattern

      18. Complete KYC of Shareholders holding more than 10% Equity in the Applicant Company

      19. Resolution for Opening up Bank Account with the Banker

      20. Duly Signed Bank Account Opening Form for Indian Bank

      21. Any other document that RBI asks.

       

      ■Business Licenses Applicable for Branch Office

      After Incorporation, the following requirements are also necessary for a branch office:

      1.       Permanent account number - PAN

      2.       Tax deduction number - tan number Shop & establishment

      3.       Registration Service Tax Registration  if the:

      a.       Branch provides any services in India

      4.       VAT & CST Registration if the Branch carries out trading activities in India

       

       

      ■Annual Compliances by Branch Office

      ·         Maintenance of books of accounts. Audit is also required.

       

      ·         Filing of Annual Return, Financials with ROC

       

      ·         Filing of form 49C with Director General of Income Tax

       

      ·         All new entities setting up BO shall submit a report containing information, as per format provided in Annex 3 within five working days of the BO becoming functional to the Director General of Police (DGP) of the state concerned in which BO has established its office; if there is more than one office of such a foreign entity, in such cases to each of the DGP concerned of the state where it has established office in India.

       

      ·         Branch Offices have to file Annual Activity Certificates (AAC) (Annex 4) from Chartered Accountants, at the end of March 31, along with the audited Balance Sheet on or before September 30 of that year. In case the annual accounts of the BO are finalized with reference to a date other than March 31, the AAC along with the audited Balance Sheet may be submitted within six months from the due date of the Balance Sheet to the designated AD Category I bank, and a copy to the Directorate General of Income Tax (International Taxation), New Delhi along with the audited financial statements including receipt and payment account.

       

      ·         A copy of the report in Annex 3 shall be filed with the DGP concerned on annual basis along with a copy of the Annual Activity Certificate, and also with the AD concerned.

       

      ■How to Close a Branch Office

      Generally a branch office licenses is given for three years. If at any time a Company plans to close the branch office setup in India it shall file the necessary documents with the RBI through its Authorized Dealer.

      The application for the closure generally includes the followings:

      1. Copy of the Reserve Bank's permission/ approval from the sectoral regulator(s) for establishing the BO / LO.

      2. Auditor's certificate:  i) indicating the manner in which the remittable amount has been arrived at and supported by a statement of assets and liabilities of the applicant, and indicating the manner of disposal of assets; ii) confirming that all liabilities in India including arrears of gratuity and other benefits to employees, etc., of the Office have been either fully met or adequately provided for; and iii) confirming that no income accruing from sources outside India (including proceeds of exports) has remained un- repatriated to India.

      3. No-objection / Tax Clearance Certificate from Income-Tax authority for the remittance/s.

      4. Confirmation from the applicant/parent company that no legal proceedings in any Court in India are pending and there is no legal impediment to the remittance.

      5. A report from the Registrar of Companies regarding compliance with the provisions of the Companies Act, 2013, in case of winding up of the Office in India.

      6. Any other document/s, specified by the Reserve Bank while granting approval.

    • Liaison Office

       ■Definition

      'Liaison Office' means a place of business to act as a channel of communication between the Principal place of business or Head Office by whatever name called and entities in India but which does not undertake any commercial /trading/ industrial activity, directly or indirectly, and maintains itself out of inward remittances received from abroad through normal banking channel.

       

      ■Minimum Requirement for Establishing Liaison Office

      ·         Track Record

      For Liaison Office — a profit making track record during the immediately preceding three financial years in the home country.

      ·         Net Worth 

      Net Worth [total of paid-up capital and free reserves, less intangible assets as per the latest Audited Balance Sheet or Account Statement certified by a Certified Public Accountant or any Registered Accounts Practitioner by whatever name].

       For Liaison Office — not less than USD 50,000 or its equivalent.

       

      ■Permissible Activities by Liaison Office

      A Liaison Office can undertake the following activities in India:

      1.       Representing in India the parent company / group companies.

      2.       Promoting export / import from / to India.

      3.       Promoting technical/financial collaborations between parent/group companies and companies in India.

      4.       Acting as a communication channel between the parent company and Indian companies.

       

      ■Business Licenses Applicable for Liaison Office

      1.       Permanent Account Number Pan Number

      2.       Tax deduction number tan number

      3.       Shop & establishment registeration

       

      ■Annual Compliances by Liaison Office

      ·         Maintenance of books of accounts. Audit is also required.

      ·         Filing of Annual Return, Financials with ROC

      ·         Filing of form 49C with Director General of Income Tax

      ·         All new entities setting up LO shall submit a report containing information, as per format provided in Annex 3 within five working days of the LO becoming functional to the Director General of Police (DGP) of the state concerned in which LO has established its office; if there is more than one office of such a foreign entity, in such cases to each of the DGP concerned of the state where it has established office in India.

      ·         Liaison Offices have to file Annual Activity Certificates (AAC) (Annex 4) from Chartered Accountants, at the end of March 31, along with the audited Balance Sheet on or before September 30 of that year. In case the annual accounts of the LO are finalized with reference to a date other than March 31, the AAC along with the audited Balance Sheet may be submitted within six months from the due date of the Balance Sheet to the designated AD Category I bank, and a copy to the Directorate General of Income Tax (International Taxation), New Delhi along with the audited financial statements including receipt and payment account.

      ·         A copy of the report in Annex 3 shall be filed with the DGP concerned on annual basis along with a copy of the Annual Activity Certificate, and also with the AD concerned. 

       

      ■Closure of Branch / Liaison Offices

      Generally the Liaison office licenses is given for three years , if at any time the Company plans to close the Liaison office setup in India it shall file the necessary documents with the Authorized Dealer , and the application for the closure shall be forwarded by the Authorised Dealer.

      ·         Copy of the Reserve Bank's permission/ approval from the sectoral regulator(s) for establishing the BO / LO.

      ·         Auditor's certificate- i) indicating the manner in which the remittable amount has been arrived at and supported by a statement of assets and liabilities of the applicant, and indicating the manner of disposal of assets; ii) confirming that all liabilities in India including arrears of gratuity and other benefits to employees, etc., of the Office have been either fully met or adequately provided for; and iii) confirming that no income accruing from sources outside India (including proceeds of exports) has remained un-repatriated to India.

      ·         No-objection / Tax Clearance Certificate from Income-Tax authority for the remittance/s.

      ·         Confirmation from the applicant/parent company that no legal proceedings in any Court in India are pending and there is no legal impediment to the remittance.

      ·         A report from the Registrar of Companies regarding compliance with the provisions of the Companies Act, 1956, in case of winding up of the Office in India.

      ·         Any other document/s, specified by the Reserve Bank while granting approval.

       

       

    • Project Office

      ■ General Permission

      Reserve Bank has granted general permission to foreign companies to establish Project Offices in India, provided they have secured a contract from an Indian company to execute a project in India, and

      i.       the project is funded directly by inward remittance from abroad; or 

      ii.      the project is funded by a bilateral or multilateral International Financing Agency; or 

      iii.      the project has been cleared by an appropriate authority; or 

      iv.      a company or entity in India awarding the contract has been granted Term Loan by a Public Financial Institution or a bank in India for the project. However, if the above criteria are not met, the foreign entity has to approach the Reserve Bank of India, Central Office, for approval.

      Setting up of Project Offices by foreign Non-Government Organisations/Non-Profit Organisations/Foreign Government Bodies/Departments, by whatever name called, are under the Government Route. Accordingly, such entities are required to apply to the Reserve Bank for prior permission to establish an office in India, whether Project Office or otherwise.


      ■Reporting Requirements

      i) All new entities setting up Project Offices shall submit a report containing information, as per format provided in Annex 3 within five working days of the PO becoming functional to the Director General of Police (DGP) of the state concerned in which PO has established its office; if there is more than one office of such a foreign entity, in such cases to each of the DGP concerned of the state where it has established office in India.

      ii) The foreign company establishing a Project Office in India is to furnish report through the concerned AD branch, to the concerned Regional Office of Reserve Bank of India under whose jurisdiction the Project Office is set up, incorporating the following details.

      a.      Name and address of the Foreign Company.

      b.      Reference Number and date of letter awarding the contract referred to in clause (ii) of Regulation 5 of Notification No. FEMA 22/2000-RB dated May 3, 2000 

       

      c.       Particulars of the authority awarding the projects / contract.

      d.      The total amount of contract.

      e.      Address / e-mail address / telephone number / fax number of the Project Office.

      f.        Tenure of Project Office.

      g.       Brief details of the Project undertaken.

      h.      AD branch with whom the account has been opened and the foreign currency in which the account is opened.

      i.         An undertaking to the effect that the Project Office is eligible to avail of the General Permission under Regulation 5(ii) to RBI Notification No.22/2000 – RB dated May 3, 2000 read with Notification No. FEMA 95 dated July 2, 2003 showing the reason thereof.

      This Report shall be forwarded through the AD branch to the Regional Office concerned of the Reserve Bank of India within 2 months of establishment of the Project Office.

      iii) The Project Office shall also submit to the AD branch on an annual basis, a Certificate from a Chartered Accountant showing the Project Status and certifying that the accounts of the Project Office has been audited and the activities undertaken are in conformity with the General / Specific permission given by the Reserve Bank.

      ADDITIONAL REPORTING REQUIREMENTS: 

      A copy of the report in Annex 3 shall be filed with the DGP concerned on annual basis along with a copy of the annual certificate, and also with the AD concerned.