Tuesday, December 12

A Guide For Foreigners to Start Business in India – Part II (Starting Your Company)

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Part 2 of this series provides detailed guidance for Foreign Nationals with the regard to the procedures involved in starting their own Private Limited Company in India.

Be sure you have read the first part of this article which provides an overview of starting business in India by foreign nationals.

#1 : City or State where your Main Office should be situated.

You have to make the following decision first – ‘In which city or state you want the Registered Office (the main office) of your company to be situated.’

This is important because you have to file your papers only with the ‘Government (Registrar) Office’ situated in that same city/state.

Consider :

  • The cost of living in the chosen city or state,
  • The availability of transportation facilities like airports, railway stations, etc.,
  • The climate of that region (India is a country of varying climates) ,
  • The scope & Availability of work and customers

          And other relevant issues before deciding the city where you want your main office to be situated.

It involves immense procedures and time to change your registered office from one state to another. So make a wise choice in the beginning itself.

Of course, you can open branch office in any other city or state but for all government communications only the main office will be used.

#2 : Find a Professional.

Find a chartered accountant, lawyer or company secretary (now onwards referred to as professional) in India. Without their service you cannot register a company because they have to certify your papers. It is recommended that you find a professional who operates in the same city where you want your main office to be situated.

Make sure you are comfortable with his services because you might require regular and continued service from him, after your company is started. Make a wise choice again.

The professional will provide the following services to register your company roughly in the listed out sequence:

  • Obtain DIN for each of the directors (managers) of the company (takes about 1 ½ weeks)
  • Obtain Digital signature for anyone or all directors of the company. (takes about 2 days)
  • Apply to the government to get its approval for the name of the company. (takes about 1 week)
  • Prepare the documents for the registration of the company (takes about 1 week)
  • Obtain the Registration certificate of your newly formed company.(takes about 1 week)

So it is normal for a company to be formed within 1 month. Sometimes you can push it within two weeks.

The professionals charge around Rs.10,000 (~200 Euros) to Rs.1,00,000 (~1,700 Euros) depending on the city/state, the capital of your company etc.,

#3 : Decide who should be the directors of your company.

The directors are the managers of the company, who manage the day-to-day activities of the company. It is customary to make all the owners as directors in a small private company. A person who is not an owner can also be made as a director. Decide wisely as to who are the directors because they control your company’s operations. There should be a minimum of two directors.

The directors can be removed, appointed and changed at any time by the owners. It involves very few procedures and time for effecting the change.

Obtaining DIN for each of the director:

Each of these directors is required to obtain an unique identification number called DIN from the Government of India. This is a lifetime number. So when you become a director another company, the same number can be used. The professional will apply for and obtain the DIN. Without DIN for all the directors you cannot start a company. You should provide a notarized copy of valid passport, visa etc., as proof for obtaining DIN.

A small Tip : You can obtain DIN for a minimum of 2 directors and start the company. After the company is started you can get DIN for any other person and make him a director. This will save time.

Obtaining Digital Signature for each of the director:

You will be required to obtain a digital signature. Again the professional will obtain it for you. For starting your company you are required to file the documents electronicallywith the government. So your digital signature is required to be affixed in the e-documents. At least one of the directors should have a Digital Signature. All of the directors can have a digital signature but it is not mandatory. It is enough that anyone of the director obtains it.

#4 : Decide the Paid-Up Capital and the Authorized capital of the Company.

Paid-Up capital is the amount you are going to invest in the   company immediately. The minimum paid-up as per the Indian Law is Indian Rupees 100,000 (Roughly Euros 1700). You are not allowed to start a company with a lower capital.

Authorized capital is the maximum amount that that you can invest in  your company. The fees for registering your company depends on the authorized capital. Higher the authorized capital, higher will be the government fees. So keep authorized capital to the minimum unless you are sure that your company will require more funds in the near future.

For example you can start your company with an authorized capital of Indian Rupees.(Rs.) 500,000 after paying a registration fees of about Rs.17,200. You have to invest a minimum of Rs.1,00,000/= immediately into your company. The balance you may or may not invest. You can invest up to Rs.5,00,000/= whenever you want. Say for example after starting your company you have immediately invested Rs.1,50,000/=. After one year due to expansion your company requires more funds. So you invest another Rs. 200,000/=. Another year after you want to invest the balance Rs.1,50,000/=. You cannot invest beyond Rs.5,00,000/= in your company. To invest above Rs.500000 you have increase the authorized capital by paying fees for additional amount.

#5 : Decide the owners of the company and how much they will invest.

Then you have to decide the owners of the company. They are the persons who contribute the capital of the company. There should be at least two owners. It is better to keep the company within a close circle. So a husband and wife, father and son or two close friends can be owners. There can be up to 50 owners. But each of them should contribute some amount to the capital of the company. It can be even Rupee 1. The owners will share the profits and will have voting powers according to their capital contribution.

Profit sharing is as per share of capital invested:

For example there are 5 person

OwnerCapital Invested% of Ownership

  • A : Rs.50,000 (50%)

  • B : Rs. 30,000 (30%)

  • C : Rs. 20,000 (20%)

  • D : Rs. 5,000 (5%)

  • E : Rs. 5,000 (5%)

So if a profit of Rupees 10000 is made,  A will get Rupees 5000, B will get Rupees 3000, C will get Rupees 2000, D will get Rupees 500 and E will get Rupees 500.

Decision making power is as per share of capital invested:

The important decisions in the company are made in a meeting of the owners. A decision is said ‘to be made’, when owners who hold more than 50% of the capital of the company approve it. So in the above case if A & E (55%) approve a decision, then the decision is said to be made. Similarly if B,C & E (55%) approve a decision, then the decision is said to be made.

As per the Indian law some very important decisions can be made only when owners who hold more than 75% of the capital of the company approve it.

So if you are going to bring in an outside as a part-owner it is advised that you hold at least 75% of the capital of the company to have an effective control and decision making power.

#6 : Decide the name of the company.

You have to decide a name of the company.

  • The name should not contain only common nouns. The named should contain at least only proper noun
  • The name should not resemble an existing company’s name or a brand name. (Example : Sony Private Limited)
  • The name should not undesirable (Example : Terrorist Private Limited ; Destroy India Private Limited)

 You are also required to give reason as to why you have chosen that name.

The Professional will submit the name to the government asking its approval for the name. The government will check whether the name is undesirable or whether there is an existing company or brand by the same name.

The government will reply usually within two weeks giving its approval or rejection. The fee you have to pay to the government is Rs.500 for the name approval.

#7 : Preparation of Documents.

After the name is approved, the professional will prepare the following documents for your company.

Memorandum of Association – this is like a Identity card for your company. It sets out the name of the company, the city/state where it is situated, the activities to be carried out by the company (like buy and sell garments, manufacture cars, provide management consultancy service etc.,), the authorized capital of the company and the initial owners of the company.

Articles of Association – this is the list of rules and regulations for the management of the company. It contains rules like who are the directors/managers, when should meetings be held, how decisions should be taken etc.,

Don’t bother much about these documents. They are a jungle of legal terms. The professionals have a standard format into which everyone’s requirement will fit in.

But Be sure to check the following key points :

  • The name of the company is spelled right.
  • The Capital Amount is correct.
  • The activities of your company are correct.
  • The details of owners and directors are correct.

#8 : Signing and Registration.

The owners of the company will have to sign the above two documents and the professional will scan and submit the documents electronically. Then you will have to pay the registration fee which depends on the authorized share capital.

The following is small table of the fee for different authorized share capital amounts:

  • For Capital of Rs. 100,000 – Fees Rs. 4.800

  • For Capital of Rs. 500,000 – Fees Rs. 17.200

  • For Capital of Rs. 1,000,000 – Fees Rs. 27.600

  • For Capital of Rs. 2,500,000 – Fees Rs. 58.000

  • For Capital of Rs. 5,000,000 – Fees Rs.107.000

  • For Capital of Rs. 7,500,000 – Fees Rs.133.000

  • For Capital of Rs. 10,000,000 – Fees Rs.158.000

The government will process the documents filed and issue the certificate of registration usually within a week. With the issue of certificate your company is incorporated.

Stay tuned for :

  • A Guide for Foreigners to start business in India – Part III (Managing your Company)
  • A Guide for Foreigners to start business in India – Part IV (Repatriation Procedures)
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