Company Law India

Indian laws allow foreign companies to set up permanent establishments in the country in the form of companies to run business operations. When a foreign company has wider business plans and does not merely intend to establish its presence in India (through liaison or branch offices), then it would normally opt for incorporating a company in India. This allows a foreign company the flexibility to engage in different business activities in India, exercise due control over the day-to-day affairs of the company, own properties in India and repatriate returns in the form of dividends which are tax-free in the hands of shareholders.

Foreign investors can incorporate companies in India either as a WOS (wholly owned subsidiary) of the parent company (i.e. 100 per cent owned and controlled by the foreign parent company) or a JV (joint venture) company along with an Indian partner. The WOSs and JVs would be governed by the provisions of the CA56, which was enacted half a century ago to oversee the functioning of corporations in India. The CA56 draws heavily from the Companies Act of the United Kingdom. The WOS and JVs incorporated in India are treated on a par with domestic Indian companies and are required to abide by all applicable Indian laws.

Types of companies

In India, a company can be incorporated either as private or public. It can then be further classified as a limited or unlimited liability company. A company can be limited by shares or by guarantee. In the former, the personal liability of members is limited to the amount unpaid on their shares, whilst in the latter the personal liability is limited to a pre-determined amount.

The key distinguishing features of a private company and a public company are:

1. A minimum of seven shareholders (subscribers) are required to form a public company, whereas in the case of a private company only two shareholders (subscribers) can incorporate a company.

2. A private company must have a minimum paid-up capital of 100,000 rupees, whereas a public company must have a minimum paid-up capital of 500,000 rupees.

3. There is no ceiling on the number of shareholders of a public company, whereas in the case of a private company the number of shareholders cannot exceed 50. The joint holders are counted as one shareholder for this purpose.

4. A public company can invite the public to subscribe to its share capital, whereas a private company is prohibited from doing so.

5. The shares of a public company arc freely transferable, whereas transfer of shares of a private company is subject to restrictions provided in its AoA (Articles of Association).

6. A public company can accept/renew deposits from the public, whereas a private company cannot, except from its members, directors or their relatives.

7. A private company can commence business immediately after incorporation but a public company cannot do so till the certificate for commencement of business is granted to it by the RoC (Registrar of Companies).

Procedure for incorporation

A company can be incorporated in India by making certain prescribed filings with the concerned RoC in the state in which the company is to be incorporated. The RoC first approves the proposed name of the company and thereafter allows incorporation of a company after approving its by-laws, ie the Memorandum of Association (MoA's) and Articles of Association (AoA's) of the company.

The incorporation process takes around 30-45 working days. On receiving the Certificate of Incorporation (in the case of a private company) and the Certificate of Commencement of Business (in the case of a public company), the WOS or the JVC (as the case may be) can commence business operations in India.

Thus, a foreign company may consider establishment of a private limited company in India as its WOS or JVC since it has perpetual succession. Unlike a branch or liaison office it does not require any further approval from any other regulatory authority for its continued existence or expansion of its activities.