Frequently Asked Questions

(The answers to FAQs below are drafted keeping in mind the requirements for private limited companies.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation)

 

Qus. 01
What are the entry vehicles for foreign companies to operate in India?

Answer
There are generally the following entry vehicles for foreign companies to operate in India:

• Establishing a wholly-owned subsidiary
• Entering into a Joint Venture with an Indian resident
• Establishing a Branch Office
• Establishing a Liaison Office
• Establishing a Project Office.

The choice of the entry vehicle would depend upon the objectives of the foreign investment in India and also could depend upon the nature of activities intended to be carried out in India.

Qus. 02
Do I require prior Government approval before investing in India?

Answer
The Foreign Investment Policy of the Government of India has been considerably relaxed over the past decade and allows 100% investment without any prior approval in a majority of sectors. However, some sectors are still subject to caps on investment limits whilst there is a small list of sectors where investments are prohibited. In some sectors, there are minimum capitalisation norms. Hence it would be advisable for a foreign enterprise to carefully understand its position under the Indian Foreign Investment Policy before setting up any operations in India.

Qus. 03
Which is the law that governs companies in India?

Answer
The companies incorporated in India are governed by the Companies Act, 1956 and the Registrar of Companies (RoC) is the relevant statutory authority.

Qus. 04
What are the categories of companies in India?

Answer
In India, companies are private companies and public companies. Private companies generally enjoy a relatively high freedom in fixing its own internal procedures, are subject to lesser disclosure and reporting requirements, have more flexibility operationally such as freedom to fix managerial remuneration, etc.

Qus. 05
Do I require a minimum capital for incorporating a private company in India?

Answer
Yes. There is a requirement of a minimum paid-up share capital of Rs. 1 lakh i.e. Rs. 100,000.

Qus. 06
What is the minimum number of shareholders required for incorporation of a private company in India?

Answer
There is a requirement of having atleast two shareholders for incorporating a private company. There are no minimum shareholding criteria and hence a shareholder can hold as less as one share in a company.

Qus. 07
What is the minimum number of directors required for a private company in India?

Answer
There should be a minimum of two directors in a private company.

Qus. 08
Can all the shareholders of an Indian company be based outside India?

Answer
Yes. All shareholders of an Indian company could be based outside India. This is however subject to the foreign investment restrictions, if any.

Qus. 09
Can all directors of an Indian company be based outside India?

Answer
Yes. All directors of an Indian company could be based outside India. Sometimes it may be advisable to appoint a director in India for paperwork and taking care of the routine compliances.

Qus. 10
What is the process of becoming a director of an Indian company?

Answer
A director would need to obtain a ‘Director Identification Number’ (DIN) before he is appointed as a Director. For obtaining the DIN, he is required to submit proof of address and residence. This requirement is also applicable to the foreign directors. Once the director has obtained his DIN, the company can appoint the director by passing a resolution in their Board Meeting. At least one director should hold a valid digital signature, which should be obtained under the Companies Act, 1956.

Qus. 11
Are there any rules governing the name of the Indian company?

Answer
Yes. There are certain rules governing the names of the Indian company. Certain words in the name can be used only upon a certain level of authorised share capital. Granting of the name is at the discretion of the RoC. The general requirement is that it should reflect the activity of the company and should not be same or similar to a name of an already existing company. Further, the name of the company should not be misleading.

Qus. 12
What are the constitutional documents of an Indian company?

Answer
The constitutional documents of the company are its Memorandum of Association and Articles of Association. The former documents the share capital, objects and the shareholders while the latter documents the internal governing rules such as holding of meetings, appointment of directors, etc. However, these are subject to the overall provisions of the Companies Act, 1956.

Qus. 13
Which is the legal document evidencing the registration of the Indian company?

Answer
The legal document evidencing the registration of an Indian company is the Certificate of Incorporation issued by the RoC.

Qus. 14
What are the regulatory compliances needed to be carried out immediately upon registration of the Indian company?

Answer
Immediately upon registration, the company should open a bank account, apply for registration with the income-tax authorities, apply for an Import-Export Code if it proposes to import or export and undertake registrations under other applicable statutes. It should then put an accounting system in place. Under the Indian laws, the accounting records should be maintained at the registered office of the company. If the accounting records are intended to be maintained at a place other than a registered office, then there is a filing requirement with the RoC for such other place.

Qus. 15
What are the audit requirements for the Indian company?

Answer
An Indian company needs to be compulsorily audited once a year by a practising Chartered Accountant/s, who will issue an audit report as per a pre-defined format in the Companies Act, 1956. The statutory auditors are generally appointed in the annual shareholders meeting. The company is free to determine its financial year. An annual audited Balance Sheet and Profit & Loss Account alongwith the audit report needs to be filed with the RoC.

Under certain conditions, there is a requirement for a compulsory internal audit. For certain industries, there is a mandatory cost audit / excise audit / VAT audit contemplated under the respective statutes.

If annual turnover crosses Rs. 4 million, then there is a compulsory requirement for a tax audit under Income-tax Act, 1961.

Qus. 16
What are the various types of taxes relevant to a business set-up in India?

Answer
There are generally the following types of major taxes in India:

• Taxes on income
• Taxes on sale of goods, services, manufacture or import.

Some of the taxes are federal taxes whilst some are state level taxes. Besides the above, there could be industry specific additional taxes.

Qus. 17
Which are the various types of taxes under the Income-tax Act? What are the income-tax rates in India?

Answer
Under the Income-tax Act, there is the Corporate tax on profits and a Fringe Benefit Tax (FBT) on certain specified expenses. Besides this, there is a dividend distribution tax (DDT).

The corporate tax rate in India is 30.9% and could go upto 33.99% depending upon the level of taxable income. It is levied on ‘net income’ basis.

There are three slabs for FBT viz., approx. 1.5%, 7 % and 17% on the value of expense, depending upon the characterisation of expenses. DDT is approx. 17% of the dividend value.

Qus. 18
Is there a withholding tax regime in India? What is its scope and applicability?

Answer
India has extensive withholding tax regime. It is applicable to salary payments and payments made to contractors, professionals, brokers, owners of property and equipment, etc. Specific rates are applicable to each category of payments and with different thresholds for the applicability.