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BACKGROUND:

India is a preferred destination for investment from NRIs, Foreign Nationals and Foreign Companies due to its booming economy and wealth of resources. India is among the fastest growing economies in the world, slated for tremendous growth over the coming decades with plenty of business opportunities. Foreign investment into India is at an all-time high and is pegged to grow even higher with regulatory reforms and an investor friendly climate. In this context, we look at the process and procedure for a NRI or Foreign National or Foreign Company to invest or start, manage and grow a business in India.

This article is intended for those companies or startups that have registered their companies outside India and want to operate in India as part of a foreign company. A company can be registered as private limited or public limited. A private limited company is a closely held company and enjoys the privileges given by the Companies Act, 2013. A public limited company is a company where public is interested and it is required to comply with lot of rules and regulations framed by the Companies Act, 2013. Generally foreign Companies incorporate Private limited Company in India.

What are the forms in which business can be conducted by a foreign company in India?

A foreign company planning to set up business operations in India may:

a. Incorporate a company under the Companies Act, 2013, as a Joint Venture or a Wholly Owned Subsidiary.(Discussed Below)

b. Set up a Liaison Office / Representative Office or a Project Office or a Branch Office of the foreign company which can undertake activities permitted under the Foreign Exchange Management (Establishment in India of Branch Office or Other Place of Business) Regulations, 2000. (Discussed In another Article)

What is Foreign Company?

As Per Section 2 (42) of Companies Act, 2013

Foreign company is a company or body corporate incorporated outside India which

(a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and

(b)  conduct any business activity in India in any other manner

Simple definition give understanding that even a company incorporated outside India, has simple electronic present, which may be used for business in India is a foreign company

As Per Section 379

Where not less than 50% (fifty percent) of the paid-up share capital, whether equity or preference or partly equity and partly preference, of a foreign company is held by

- one or more citizens of India or
- by one or more companies or bodies corporate incorporated in India, or
- by one or more citizens of India and one or more companies or bodies corporate incorporated in India,

Whether singly or in the aggregate,

Such company shall comply with the provisions of Chapter- XII and such other provisions of this Act as may be prescribed with regard to the business carried on by it in India as if it were a company incorporated in India.

Example:

A company that is incorporated outside India (i.e. in a foreign country) is called Foreign Company. For example ABC Inc. USA.

BOARD OF DIRECTORS

Companies Act, 2013 permits NRIs, PIOs, Foreign Nationals and Foreign Residents to act as a Director of an Indian Company. To become a Director of an Indian Company, the person must first obtain a Director Identification Number (DIN) after obtaining Digital Signature Certificate.

A private limited company must have a minimum of two Directors and can have a maximum of fifteen Directors. It is recommended that at least one Director be an Indian Citizen and Indian Resident, while the other Board members can be of any nationality or residency.

PROCESS OBTAINS A DIGITAL SIGNATURE CERTIFICATE:

The foreign national or NRI must submit a copy of Passport size photograph, self-attested and notarized copy of his/her Passport and an address proof (Drivers License, Utility Bill, and Residency Card). Once, the digital signature certificate is obtained, DIN can be obtained for the foreign national or NRI and he/she maybe added to the Board of Directors during incorporation.

PROCESS TO OBTAIN DIN OF FOREIGN NATIONAL:

Whether PAN is mandatory for DIN of a Non Resident (NR)? How does a NRI provide an affidavit for DIN? As fathers’ name is mandatory for DIN, what if fathers’ name is not mentioned in the Passport? Does an NRI need to provide any documentary proof for fathers’ name? Similar queries pop in at the time of applying for the DIN of a NRI.

We have tried to summaries various requirements of DIN application of a foreign national applicant.

1. PAN is mandatory to obtain new DIN for all Indian Nationals. It is not mandatory for foreign national.

2. Passport is a mandatory requirement for proof of identity. Certified copy of the passport should be attached.

3. Proof of identify enclosed with e-Form DIR-3 should also contain the date of birth of the applicant and the same should match the date of birth indicate the Date of Birth then additional proof of Date of Birth, duly certified/ attested, should be attached

4. Address proof should not be older than 1 year from the date of filing of the e-Form.

5. Proof of father’s name is not required in the case of foreign nationals

6. Current occupation and Educational Qualification is required as per new notification dated 24th Dec, 2012. No documentary proof required.

7. In case, the country selected is other than India, and you do not have PIN Code, enter ‘NA’. In case of foreign nationals, state can be mentioned in address/ city.

8. In case of proofs which are in languages other than Hindi / English, the proofs should be translated in Hindi / English from professional translator carrying his details (name, signature, address) and seal. In the case of foreign nationals, translation done by the notary of home country is also acceptable.

9. Photo ID Proof (Any government license or document containing name in full, photo and date of birth. Document must be certified by Indian Consulate).

10. In case, the director is residing outside India, then the attached supporting documents like passport, etc should be attested by the following:

a. Consulate of the Indian Embassy,

b. Foreign public notary or

c. Company secretary in full time employment / CEO / Managing director of the Indian company in which he / she proposed to be a director.

SHAREHOLDING

The shareholding of the Indian Company can be held by a foreign national or foreign entity, subject to the FDI norms in India. Companies Act, 2013 requires that a Private Limited Company have a minimum of two shareholders and a maximum of two hundred shareholders. Since, Reserve Bank of India allows 100% FDI in many of the sectors in India under the automatic route, the process for ownership of shares of an Indian Company by a Foreign National or Foreign Entity is simple.

WHAT IS WHOLLY OWNED SUBSIDIARY COMPANY?

A Wholly Owned Subsidiary company is an entity of which 100 per cent shares are held by another company. For example, if ABC Pvt. Ltd. owns 100 per cent shares of XYZ Pvt. Ltd. Then XYZ Pvt. Ltd. becomes a wholly owned subsidiary company of ABC Pvt. Ltd.

WHAT IS WHOLLY OWNED SUBSIDIARY COMPANY IN INDIA BY FOREIGN COMPANY?

When a foreign company makes 100 per cent FDI (Foreign Direct Investment) in India through an automatic route, the Indian company becomes the Wholly Owned Subsidiary Company of that Foreign Company. Let’s say ABC Inc. USA owns 100 per cent shares in XYZ Pvt. Ltd. Then XYZ Pvt. Ltd. becomes the Subsidiary Company.

This is possible where 100 per cent FDI is permitted and no prior approval of Reserve Bank of India is required.

A WOS can be defined as an entity whose entire share capital is held by foreign corporate bodies. A WOS can be formed as a private, limited by shares or guarantee, or an unlimited liability company. Considering the various exemptions available to a private company limited by shares (a “private company”) under India’s Companies Act, 2013 (the “Act”), it is recommended that a WOS be established as a private company.

Key advantages of a private company:

a. Minimum Paid up capital only Rs. 100,000/-

b. Minimum 2 Director and 2 Shareholders.

c. Quorum of General Meeting only 2 Shareholders.

d. Section 185 will not attract: There is no restriction on giving Loan or Guarantees or Security by Holding Company to its Wholly Own Subsidiary (WOS) Company.

Benefits:

a. Maintenance of effective control over its subsidiaries.

b. Transaction costs including the cost of negotiating and transferring information and capability to another firm, cost of personnel training, cost of losing the opportunity to having direct sales or getting the full amount of profit and the threat of creating a competitor in markets beyond the purview of the agreement might be avoided.

It minimizes the dissemination risk

Drawbacks:

Involves highest level of risk and commitment by the foreign investing companies

Key features of WOS:

a. Wholly own Subsidiary is regulated by Indian Law; Companies Act, 2013.

b. Where 100% FDI is permitted no prior approval of Reserve Bank of India (RBI) is needed.

c. It is treated as domestic company under Income Tax Law and is eligible for all exemptions, deductions benefits as applicable to any other Indian Company,

d. Funding can be made in the form of Share Capital and Loan.

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Category Corporate Law, Other Articles by - CS Divesh Goyal 



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