SETTING UP A COMPANY


The Steps involved in setting up an IT/ ITES Company in India can be broadly outlined as follows:

  • Register the Company
  • Getting the Company Name approved
  • Inviting Subscription to Share Capital (for public limited companies)
  • Seeking FDI and Foreign Technology Collaboration (Optional)

The different rules and regulations pertaining to setting up of an IT / ITES company by

  • Overseas Company / Individual
 INDIAN COMPANY / INDIVIDUAL

An Indian citizen can set up IT software and services operations in India through the following.
  • As an Individual / Proprietor
  • As a Partnership / Firm / Trust
  • As a Company registered under the Companies Act, 1956
No prior permission of the Government of India is required to set up IT / software units in India.

OVERSEAS COMPANY / INDIVIDUAL

A foreign company or individual planning to set up business operations in India can do so as:
  • a foreign company through a Liaison Office / Representative Office, Project Office or a Branch Office
  • an Indian company through a Joint Venture or a Wholly Owned Subsidiary
  • Register the Company
Liaison Office / Representative Office

A liaison office is not allowed to undertake any business activity in India and earn any income here. The role of such offices is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers. The Foreign Exchange Regulation Act (FERA) regulates the opening and operation of such offices. Also, approval of Reserve Bank of India (RBI) is required for opening of such offices. These offices have to ensure the following:
  • Expenses of such offices are met entirely through inward remittances of foreign exchange from Head Office abroad.
  • These offices do not undertake any trading or commercial activities. Commercial activities should be limited to collecting and transmitting information between its overseas Head Office and potential Indian customers.
  • Liaison offices should not charge any commission or receive other income from Indian customers for the provision of liaison services.
  • Permission for such offices is initially granted for a period of three years and may be extended from time to time.
Project Office

Foreign companies planning to execute specific projects in India can set up temporary project / site offices in India with the approval of RBI. Such approval is generally accorded in respect of Government approved projects.

Branch Office

Foreign companies engaged in manufacturing and trading activities abroad may set up Branch offices in India, with the permission of RBI, for the following purposes:
  • To represent the parent company / other foreign companies in various matters in India e.g. acting as a buying / selling agents in India.
  • To conduct research work in the area in which the parent company is engaged provided the results of the research work are made available to Indian companies.
  • To undertake export and import trading activities.
  • To promote possible technical and financial collaborations between Indian companies and overseas companies. A branch office is not permitted to carry out manufacturing activities on its own but is permitted to sub-contract these to Indian manufacturers.
As an Indian Company

A foreign company can commence operations in India through incorporation of a company under the provisions of Indian Companies Act 1956. Foreign equity in such Indian companies can be up to 100 percent depending upon the business plan of the foreign investor, prevailing investment policies of the Government and on receipt of requisite approvals.

Joint Venture with an Indian Partner

Foreign companies can set up their operations in India by forming strategic alliances with Indian partners. Setting up of operations through a Joint Venture may provide the following advantages to a foreign investor:
  • Already established distribution / marketing set up of the Indian partner.
  • Available financial resources of the Indian partner.
  • Already established contacts of the Indian partner that help ease the process of setting up operations. Foreign investments are approved through two routes as under:
  • Automatic Route: Approvals for foreign equity up to 50 percent, 51 percent and 74 percent are given on an automatic basis subject to fulfilment of prescribed parameters in certain industries as specified by the Government. RBI accords automatic approval to all such cases.
  • Government Approval: Approval from Foreign Investment Promotion Board (FIPB) in all other cases where the proposed foreign equity exceeds 50 percent, 51 percent or 74 percent in the specified industries or if the industry is not in the specified list.
Wholly Owned Subsidiary

The foreign investor has the option of setting up a wholly owned subsidiary, wherein the foreign company owns 100 percent of the Indian company. All such cases are subject to prior approval from the FIPB. Some of the criteria for setting up wholly owned subsidiary include:
  • Only a "holding" operation is involved and all subsequent / downstream investments need prior approval of the Government.
  • Where proprietary technology needs to be protected or sophisticated technology is to be brought in.
  • At least 50 percent of the production is to be exported.
  • Proposals for consultancy.
  • Proposals for infrastructure like roads, industrial model towns, industrial parks or estates.