This article, we’ll focus on the most popular business structure in India, which is incorporating a Private Limited Company, and explore why it’s so widely preferred.

What is the most common structure for foreign nationals to do business in India?

Incorporating a private limited company is the easiest and fastest way to enter the Indian market, with well-defined laws in place. It is the most used structure for foreign nationals and foreign companies. 100% Foreign Direct Investment (FDI) is allowed under the automatic route, meaning no approval from the Central Government is required in almost all sectors. Therefore, setting up a private limited company as a wholly owned subsidiary or joint venture is the quickest and most convenient entry strategy.

Which sectors allow 100% foreign ownership?

FDI is allowed under the automatic route in over 90% of sectors, meaning no prior government approval is required. Only certain sectors, like defence or broadcasting, require government approval. The automatic route allows foreign investments in activities that aren’t prohibited, making it the easiest way to invest in India.

Prohibited sectors for FDI in India:

  • Lottery Business (including private or government lotteries, online lotteries)
  • Gambling and Betting (including casinos)
  • Chit funds, Nidhi Companies
  • Trading in Transferable Development Rights (TDRs)
  • Real Estate Business (excluding construction of townships, residential/commercial premises, roads, bridges, and Real Estate Investment Trusts)
  • Manufacturing of tobacco products (cigars, cigarettes, cheroots)
  • Activities not open to private sector investment (e.g., atomic energy and railway operations)

Foreign technology collaborations, such as licensing or franchising for lottery businesses, gambling, and betting, are also prohibited.

Are there any specific restrictions on investment from neighbouring countries?

As of April 17, 2020, there are restrictions on FDI from neighbouring countries, such as Pakistan, Bangladesh, and China. Even investments under the automatic route require prior government approval for investors from these countries.

Are companies promoted by non-residents taxed differently?

Once a company is incorporated in India, whether by residents or non-residents, it is treated the same under the Companies Act, Income Tax, GST, and other applicable laws. There’s no distinction in tax treatment between domestic and foreign investors.

Can profits be repatriated outside India?

Yes, all foreign investments are repatriable (net of applicable taxes) unless the investment was made on a non-repatriation basis. Common methods of repatriation include dividends, share buybacks, or the sale of shares, with proceeds freely repatriable after taxes.

What’s the difference between repatriation and non-repatriation investment?

Investments on a repatriation basis allow for the repatriation of sale or maturity proceeds (net of taxes) out of India. Non-repatriation investments are treated as domestic investments, so FDI laws don’t apply. Many Non-Resident Indians (NRIs) prefer non-repatriation investments due to their continued business interests in India.

What are the basics for establishing a Private Company?

  • Legal Objective: The company’s objectives must be legal in India.
  • Name: The name must be unique and end with “Private Limited.”
  • Directors: At least 2 directors, with one being a resident director (living in India for at least 182 days during the financial year).
  • Shareholders: At least 2 shareholders, who can be individuals, body corporates, or a combination of both.
  • Capital: Paid-up capital must be deposited within 180 days of incorporation.
  • Registered Office: The company’s registered office must be finalized within 30 days of incorporation.
  • Statutory Auditors: The first auditor must be appointed within 30 days of incorporation.
  • Bank Account: A company must open a current account, which can be done during incorporation via the SPICE+ form.

What is the process of incorporating a Private Company?

The Indian government has integrated the incorporation process through the SPICE+ form, which also covers other registrations like PAN, TAN, GST, and even opening a bank account.

What is the registration cost for incorporating a Private Company?

Registration fees are minimal. Companies with authorized share capital under INR 15,00,000 (approx. USD 18,000) don’t attract a registration fee, though stamp duty is applicable depending on the state of the registered office.

What licenses and registrations are included with the incorporation?

The SPICE+ form includes mandatory registrations like:

  • PAN and TAN (automatically issued)
  • GSTIN
  • EPFO (Employees’ Provident Fund)
  • ESIC (Employees’ State Insurance)
  • Professional Tax (only in Maharashtra)
  • Bank account opening
  • Shops and Establishment Registration

 

 

Who needs GST registration?

Businesses meeting specific criteria under the GST law need to register for GST. Non-residents are also eligible, and GST registration is automatically processed during company incorporation via Form AGILE-PRO-S.

Can the Company begin its operations right after incorporation?

A company can start operations after filing a declaration (Form INC-20A) within 180 days, confirming the registered address and deposit of capital in the company’s bank account.

Is it too much compliance to run a Private Company?

While there are specific compliances for directors and the company, these are manageable. After incorporation, businesses need to conduct:

  • A minimum of 4 Board meetings per year, with no gap exceeding 120 days.
  • One Annual General Meeting of shareholders per year. Directors and shareholders can attend meetings in person or via audio-visual means.

Can I convert this structure into another type of company later?

Yes, a Private Company can be converted into:

  • A Public Company with shareholder and government approval.
  • A Limited Liability Partnership (LLP) if it meets the criteria under the LLP Act.
  • A One-Person Company (OPC) if it fulfils specific criteria and receives the necessary approvals.

How can I close a Private Company?

The closure process is simplified under the Insolvency and Bankruptcy Code (IBC) of 2016. A company can be closed either through a strike-off or voluntary liquidation. Alternatively, if you prefer to pause operations, you can apply for the status of a “Dormant Company.”