SETTING UP BUSINESS IN INDIA WITH FOREIGN DIRECT INVESTMENT

India is one of fastest growing economies of the world as well as the most desired place for doing business and as a reason of which India is ranked among top 3 attractive destinations for business investments.

RECENT DEVELOPMENTS

Indian Government has taken many steps to liberalise the laws relating to the foreign investment in India to welcome foreign investors. Some of the most recent initiatives of Indian Government are as under:

-          100% FDI allowed in medical devices.

-          FDI cap in insurance and sub-activities increased from 26% to 49%.

-          Telecom sector is opened for 100% FDI.

-          100% FDI in single brand retail.

-          FDI in sectors like Commodity Exchanges, Stock Exchanges & Depositories, Power Exchanges, Petroleum refining by PSU’s courier Services is now made under Automatic Route from Government Route.

-          Removal of restriction in Tea Plantation sector.

-          FDI limit raised to 74% in Credit Information and 100% in Asset Reconstruction Companies.

-          FDI limit of 26% in Defence Sector raised to 100% under Government Approval Route, Foreign Portfolio Investment up to 24% permitted under automatic route. FDI beyond 49% is also allowed on a case to case basis with the approval of cabinet committee on Security

-          Construction, Operation and Maintenance of specified activities of Railway sector opened to 100% Foreign Direct Investment under automatic route.

ROUTES FOR FDI

1.       Automatic Route- No central government approval is required.

2.       Approval Route- Applications are considered by the Foreign Investment Promotion Board (FIPB).

Any Indian Company receiving FDI under either Automatic Route or Approval Route has to report the receipt of funds and allotment of shares against the same to RBI in prescribed form and time limit.

TYPES OF INVESTORS ALLOWED UNDER FDI ROUTE:

Individual

1.       Foreign Venture Capital Investors

2.       Pension/Provident Funds

3.       Financial Institutions

4.       Non-Resident Indian (NRI’s) / Persons of Indian Origin (PIO’s)

Company

1.       Foreign Trust

2.       Sovereign Wealth Funds

Foreign Institutional Investors

1.       Private Equity Funds

2.       Partnership / Proprietorship Firms

3.       Others

PROHIBITED SECTORS

1.       Lottery business

2.       Gambling and Betting including Casinos

3.       Chit Funds

4.       Nidhi Companies

5.       Trading in Transferrable Development Rights

6.       Real Estate Business (Other than construction development) or constructions of farm houses

7.       Manufacturing of Cigars, Cheroots, Cigarillos and Cigarettes of tobacco and of  tobacco substitutes

8.       Atomic Energy, Railway Transport (Other than as allowed specifically)

9.       Service like legal, book keeping, accounting and auditing.

SECTORS WITH CAPS

SECTOR	CAP
Petroleum Refining by PSU’s	49%
Teleports (setting up of up-linking HUBs/Teleports),Direct to Home (DTH), Cable Networks (Multi-system operators (MSOs) operating at national, state or district level and undertaking upgradation of networks towards digitalization and addressability), Mobile TV and Headend-in-the-Sky Broadcasting Service (HITS)	74%
Cable Networks	49%
FM Radio	26%
Uplinking of news and current affairs TV Channels	26%
Print Media dealing with news and current affairs	26%
Scheduled Air Transport	49%
Non-Scheduled Air Transport	74%
Ground Handling Services – Civil Aviation	74%
Satellites – Establishment and Operation	74%
Private Security Agencies	49%
Public Sector Banking	20%
Commodity Exchanges	49%
Credit Information Companies	74%
Infrastructure Companies in Securities Market	49%
Insurance and sub-activities	49%
Power Exchange	49%
Defence	49% (more than 49% with approval from Cabinet Committee)

SECTORS REQUIRING CENTRAL GOVERNEMENT APPROVAL

SECTOR	INVESTMENT %
Tea sector including plantation	100
Mining and Mineral separation of titanium –bearing minerals and ores	100
Enterprise manufacturing items reserved for Small Scale Sector	100
Defence	49
Defence-With approval from Cabinet Committee for security	Above 49
Teleports, DTH, Cable Networks, Mobile TV, Headed-In-The-Sky (HITS)	Beyond 49 and upto 74
Uplinking and of news and current affairs channel	26
Uplinking and of non-news and current affairs TV channel	100
Terrestrial Broadcasting- FM Radio	26
Publication of facsimile edition of foreign news paper	100
Airports-Brownfields	Beyond 74
Non-scheduled air transport service	Beyond 49 and upto 74
Ground handling services	Beyond 49 and upto 74
Satellites	74
Private Securities agencies	49
Telecom	Beyond 49
Single Brand Retails	Beyond 49
Asset Reconstruction Company	Beyond 49 and upto 100
Banking Private Sector (other than WOS/Branches)	Beyond 49 and upto 74
Banking- Pubic Sector	20
Pharmaceuticals-brownfield	100

All other items not included in above are under automatic route.

BUSINESS STRUCTURES TO BRING IN FDI

Below mentioned form of business can be used to bring in the required FDI into India.

1.       Forming a Company in India

a.       Private Company

b.      Public Company

2.       Limited Liability Partnership

FDI in LLP is allowed only with Government approval in sectors with 100% FDI under Automatic Route

3.       Firm

a.       Sole Proprietorship Firm

b.      Partnership Firm

These structures falls under RBI approval. RBI decides on the application in consultation with Government of India.

4.       Foreign Entities

a.       Liaison Office, Branch Office or Project Office of foreign entities. FDI approvals are granted under Govt. and RBI route. Further, automatic route is available for Branch or Project office meeting certain conditions.

5.       Other Structures

Non-profit organizations etc. – Foreign investment in these structure is also subject to provisions of Foreign Contribution Regulation Act (FCRA)

STEPS INVOLVED IN BRINGING IN THE FDI

-Identify the required business structure

-Incorporation of structure with necessary licenses

-Take central Govt. approval for proposed FDI, if required

-Inflow of funds through eligible instruments

-Compliance with reporting requirements

REPATRIATION OF FUNDS

Dividend- Dividend is freely repatriable without any restrictions after TDS or Dividend Distribution Tax

Capital – AD –Category –I Bank can allow the repatriation of sale proceeds of securities to person outside India, if such securities are issued on repatriation basis after tax clearance certificate from Income Tax Dept. is obtained. Further, it is to be noted that investments in construction development sector is subject to lock-in period of 3 years.

Interest- Interest on fully, mandatorily and compulsory convertible debentures are freely repatriable, net of applicable taxes.

About author:

Dhanaji Shinde is a Practicing Company Secretary at Bangalore and can be reached at 9844494678 or 9663811124 or pcs.dhanaji.shinde@gmail.com

Source: Makeinindia 

SECTION 185 AND INTER-CORPORATE LOANS

Since introduction of Section 185 under the Companies Act, 2013 ‘Inter-corporate loans’ is the biggest concern of India Inc. Let’s examine this section in detail:

Section 295, the erstwhile ‘headache’ of public companies is now transferred to private companies as well, in the form of Section 185 which is not only restrictive but also punitive. A detailed study of Section 185 clears following questions:

Q. What is not allowed?

Directly or Indirectly, giving of any loan, including a loan represented by book debt or giving of guarantee or providing any security in connection with loan taken by Directors or ‘any other person in whom the Director is interested’.

Q. Who are ‘other persons in whom the Director is interested’?

Cl. No.	Definition	Clarification
a)	Any Director of the lending company, or of a company which is its holding company or any partner or relative of any such Director;	Director of Company A     Director of Company B (holding Company of A)      Partner or relative of any Director in Company A or B
b)	Any firm in which any such Director or relative is a partner;	Firm in which Director of Company A or B or relative of either of them is a Partner.
c)	Any private company of which any such Director is a Director or Member;	Private Company in which Director of Company A or B or relative of either of them is a Director of member. It is to be noted that relatives of such Director is excluded from this clause.
d)	Any Body corporate at a general meeting of which not less than twenty five percent of the total voting power may be exercised or controlled by any such Director, or by two or more such Directors, together; or	Body Corporate (which includes private and public co’s incorporated in or outside India) in which any Director of Company A  or B holds 25% or more ‘voting power’ exercised or controlled, either individually or collectively comes under radar of this clause.
e)	Any Body corporate, the Board of Directors, Managing Director or Manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any Director or Directors, of the lending company.	Body Corporate (which includes private and public co’s incorporated in or outside India) or Board of Directors or MD or Manager of such Body Corporate under the Direct influence of lending Company’s Board or any Director or Directors. In simple words, includes Subsidiaries and Associate Companies.

Q. Any exemptions?

1. Yes, any loan to a Managing Director or Whole-Time Director, as a part of the conditions of service extended by the Company to all of its employees or pursuant to any scheme approved by the members by a special resolution is exempt.

It is to be noted that only loan is exempt and not the security and guarantee provided by the Company.

2. ‘A company, which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such Loan loans an interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India’

Is your question, what is ordinary course of business?  Well, no explanation is provided for this very important part of section. But, we have to read the same from the lawmaker’s point of view, if ultimately the regulator had to exempt all the companies who gives loans or guarantees or securities in their ‘respective’ ordinary course of business, then what was the intention behind formulating this section at all?

I am of the opinion that second exemption goes in favour of Banking and NBFC Companies, further, the reference of RBI for controlling the interest rates makes it very clear.

Q. Penalties?

Below is the table depicting the penalties for contravening provisions of Section 185:

Sl. No.	Offence	Penalty
1.	If any loan is advanced or a guarantee or security is given or provided in contravention of the provisions of sub-section (1) by any Company. AND	Minimum fine of INR 5 lakh which may extend to INR 25 lakh
2.	the director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person	Imprisonment which may extend to six months or with minimum fine of INR 5 lakh but which may extend to INR 25 lakh, or with both fine and imprisonment.

In India, most of the businesses are operating under the form of group of private companies having common Directors and shareholders, where giving and taking of inter-corporate loan is a common practice. After introduction of Section 185 it has literally become difficult for these companies to operate as section 185 has taken away all the privileges earlier available to private companies.

It has left no option for such group of Companies but to reshuffle the Board of Directors and initiate transfer of shares to unrelated person to avoid the heat of Section 185.

To conclude, section 185 has brought unnecessary hardship on private Companies where public at large is not involved. In my opinion, this wonderful piece of legislature, meant to curb down the diversion of funds of investors and stakeholders to promoter groups be made applicable only to listed companies and companies which have borrowed funds from Banks and Financial Institution exceeding certain limits.

Your views, comments and suggestions are most welcome.

About author

Dhanaji Shinde is Practicing Company Secretary at Bangalore who can be reached @ 98444 94678 / 96638 11124 or pcs.dhanaji.shinde@gmail.com

START PRIVATE LIMITED COMPANY IN 6 SIMPLE STEPS

Wondering how to start your own Private Limited Company in India? Here are the 6 simple steps for you to understand the basic procedure for incorporating a private Company in India:

Number of minimum Directors and subscribers- 2 (Two)

Minimum capital investment- INR 1 lakh

1.      Digital Signature Certificate (DSC) - As per the provisions of Companies Act, 2013, any person being appointed as Director should have a Director Identification Number (DIN). To apply for DIN you must have a digital signature to certify the form DIN -3 (application for DIN). Documents required to procure DSC are-

a.       Application form duly signed by applicants

b.      Self-attested PAN card and address proof and

c.       One passport size photograph.

2.   Director Identification Number: In second step we will apply for the Director Identification Number (DIN) by filing form DIN-3 with following attachment- Identity proof, address proof and affidavit for verification of applicant with photograph of applicant.

3.   Application for Company name: On receipt of approved DIN’s application to be made for reservation of name proposed for the Company. Before making this application, it is advisable to check the availability of proposed name including any trade marks registrations similar to proposed name, if any. Three names can be given (to avoid delay and repetitive filing) in their chronological order of preference, upon which Registrar of Companies (ROC) will approve the available name.

4.       Filing of Incorporation forms: In this step we will file 3 different forms which are INC-7, INC-22 and DIR-12. INC-7 includes the charter documents of Company which are Memorandum of Association (MOA) and Articles of Association (AOA). MOA defines the business objects of the proposed Company and AOA defines the rules and bye-laws under which the Company will operate. INC-22 is the form filed for providing the office address of proposed company which shall be entered as the Registered Office address in the records of (ROC), this form should be filed with following documents-

a.       Proof of office address, which is conveyance/Lease Deed/Rental Agreement along with rent receipts.

b.      Copies of utility bills (not older than two months) i.e. either of Telephone Bill, Gas Bill, Electricity Bill or Mobile Bill.

c.       NOC from Office premises owner.

d.      The khata certificate or tax paid certificate issued by the respective municipal office depicting the office address.

And DIR-12, which is the form filed for giving particulars of proposed directors of the Company along with declarations signed by each directors.

5.      Application for commencement of business: On completion of step 4 ROC issues a Certificate of Incorporation (CoI) of proposed Company but the Company is not supposed to carry on any business activities until and unless the Certificate of Commence of Business (CCB) is issues by ROC. In this step we shall apply for the same by filing form INC-21 with Specimen signature in form INC-10 and copy of bank account statement as proof of bringing in the initial share capital.

Points to be noted before filing form INC-21: This is the form filed for declaring that the first subscribers (shareholders) of the Company have bought in the initial capital as agreed by them, which is INR 1 Lakh in case of private company hence, it is advisable to open a bank account and bring in the initial capital.

6.   Start your business: On issue of CCB your private company is ready to enter into business transactions and carry on the business as per the objects stated in MOA.

Your views, comments and queries are most welcome!

About author

Dhanaji Shinde is Practicing Company Secretary at Bangalore who can be reached @ 98444 94678 / 96638 11124 or pcs.dhanaji.shinde@gmail.com