The Steps involved in setting up an IT/ ITES Company in India can be broadly outlined as follows:
Register the Company
The first thing you need to do to set up a software project or call center, or in fact any business, in India is to form a company. The Companies Act 1956, sets down rules for establishing public and private companies. The most common corporate form is the limited one, and not the unlimited company. It is formed only after registering the Memorandum and Articles of Association with the ROC (Registrar of Companies) of the state in which your company’s main office will be located. These are the most important documents that you will submit to the ROC.
The Memorandum sets out the constitution of the company (name of the company, the nature of liability of its members), and includes its objects (the purpose for the formation of the company, the parameters within which it has to carry out its activities). The company cannot do any act that is outside the object of the company even if all the shareholders approve it unanimously. The Articles of Association are the rules and regulations for managing the company’s internal affairs and for achieving its specified objects and purposes.
Getting the Company Name approved
You then send your company’s name to be approved by the ROC in the state/Union Territory in which you will maintain its registered office. The approval is subject to certain conditions no existing company should have the same name, and the name must incorporate the words Private Ltd at the end, if a private company, and Limited if public.
Pay a registration fee
Next you pay a registration fee, scaled according to the company’s share capital, which is stated in its Memorandum. Once you obtain all the documents described in Step 1 and the registration fee, the ROC grants the certificate of incorporation to you (the applicant).
Inviting Subscription to Share Capital (for public limited companies)
Once you get the certificate of incorporation, if yours is a private company, you can start business. If yours is a public company, you can invite the public for subscription to your share capital. In accordance with the Companies Act, you must issue a prospectus, giving information about your public company. The prospectus must be filed with the ROC before issuance to the public. But if you decide to obtain capital privately, you can file a Statement in Lieu of Prospectus with the ROC. You can start business after attaining a Certificate of Commencement of Business from the ROC.
Seeking FDI and Foreign Technology Collaboration (Optional)
For both private and public companies, you look for FDI (Foreign Direct Investment) and investment from NRIs (Non Resident Indians), including OCBs (Overseas Corporate Bodies), predominantly owned by NRIs, to complement and supplement domestic investment. You also seek foreign technology collaboration agreements. FDI and foreign technology collaboration are are approved either through the automatic route (no prior government approval is necessary) under powers delegated to the RBI (Reserve Bank of India), or the government (government approval is necessary).
Automatic approval FDI
With the government committed to an early implementation of the second phase of reforms and further liberalizing the FDI regime, all items/activities are under the automatic route for FDI/NRI and OCB investment, except the following:
Proposals that require an Industrial Licence, including items requiring Industrial Licence under the Industries (Development and Regulation) Act, 1951; more than 24% foreign investment in the equity capital of units manufacturing items reserved for small-scale industries; and items requiring an Industrial Licence under the locational policy notified by the Government, in the New Industrial Policy, 1991
• Proposals where the foreign collaborator has a previous venture/tie-up in India
• Proposals relating to share acquisition in existing Indian companies, by a foreign/NRI/ OCB investor
• Proposals falling outside the notified sectoral policy/caps or under sectors where FDI is not permitted and/or where the investor chooses the FIPB and not the automatic route.
• Proposals for investment in public-sector units, or EOU/EPZ/EHTP/STP units, would be in the automatic route, subject to the above parameters.
Foreign technology collaboration agreements
The RBI also gives automatic permission for foreign technology agreements in all areas of electronics provided the technology price does not exceed $2 million and royalty payments don’t exceed 5% of domestic sales and 8% of exports.
Payments are subject to an overall ceiling of 8% of total sales, over a 10-year period from the date of agreement, or a 7-year period, from the date of starting production, whichever is earlier. Investment applications under the automatic process are made to the RBI and approved within three weeks.
However, automatic route for technology collaboration is not available to those who have, or had any previous technology transfer/trade-mark agreement in the same or allied field in India.
The FDI/foreign technology collaboration agreement proposals, which don’t conform to the automatic-approval guidelines, require government approval through the FIPB. The government has set up a special FIPB as a fast track mechanism to invite and facilitate foreign investment in large projects, considered beneficial for India, but are not covered by the automatic-approval process and norms under which SIA (Secretariat for Industrial Assistance) is authorized to grant investment approvals.
Investment proposals outside the purview of the RBI
Other proposals including those in the services sector that don�t conform to the guidelines for automatic approval, or seek higher foreign equity investment are approved by SIA (Industry Ministry).
The different rules and regulations pertaining to setting up of an IT / ITES company by
• Indian Company / Individual
• 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.
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.
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.