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Legal Challenges faced by Foreign Nationals in Setting-Up their Corporations in India: Best FDI Attorney Legal Advice in India

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Legal Challenges faced by Foreign Nationals in Setting-Up their Corporations in India: Best FDI Attorney Legal Advice in India

“Foreign Direct Investments in India or FDI in India is a very challenging and time consuming process wherein a lot of corporate laws, business laws, RBI policies and foreign exchange related compliances have to be met. Setting up of a Corporation in India involves submission of documents which are duly apostilled and/or verified by the Indian embassy. Further, the Government fees and charges also varies depending upon the influx of capital.  The entire process should be handled by the best FDI Attorney in India who has vast experience in deal with foreign investments respectively.”

As the world’s fastest growing economy India holds the potential for corporations across the world. But before entering into the Indian market one needs to know about business culture in India and challenges that one could face here while setting-up their business in India. So, in this article we would be disclosing the legal challenges faced by Foreign Nationals while setting-up their business in India.

Legal Challenges faced by Foreign Nationals in Setting-Up their Corporations in India: Best FDI Attorney Legal Advice in India
Listed below are the key challenges faced by Foreign Nationals in Setting-Up their Corporations in India-
Time-Consuming Registration Process- The first step to enter into the India market is to set up Private Limited Company by foreign nationals in India. Companies Act, 2013 under the Ministry of Corporate Affairs (MCA) and Companies Incorporation Rules, 2014 governs the Incorporation of Private Limited Company. So, the foreign nationals have to abide by the rules and regulations of Companies Act,2013. This is the very first challenge as the registration process under the Companies Act is very time consuming and one needs to go through several Application Forms, lots of paperwork just to get the company registered.
While registering the company under the Companies Act,2013 it is required by the Foreign National to propose a minimum of two names for the position of Directors as it is a mandatory requirement to have at least two directors in the company. But the main problem faced by foreign nationals is to give the name of at least one director who must be Indian Citizen and India Resident both. In other words, out of two mandatory directors one of them must be the Indian National. So, if the foreign national does not have the connections or relations in India or a trusted Indian National in mind to become a director in his/her company then it’s a big problem because obviously the foreign national is not going to provide a random Indian National’s name to be on the position of director of his/her company and without having the Indian National as director the company cannot be registered.

The next challenge encountered by the Foreign Nationals while registering their corporation under the Companies Act, 2013 is that there must be a minimum of two shareholders and only one Shareholder cannot own all the shares of the company. Simply stated, hundred percent of shares of private limited companies established by foreign nationals cannot be owned by one single person.
According to Companies Act, 2013 the foreign national wanting to set up their corporation in India needs to have mandatorily a valid address which further helps in deciding the jurisdiction of the company. So, the option of virtual address is not there and one needs to have a valid address for registering their company.

Strict Tax Laws- India does not impose strict entry barriers for foreign investors or can rather say that Indian flexible rules and regulations attract large amounts of Foreign Direct Investment (FDI) but we can’t say the same about the Indian Tax Laws as they are stringent/inflexible. Prior to the now effective Goods & Services Tax (GST), Indian Tax structure was fragmented with different taxes on the company’s turnover which caused a higher rate of tax imposition but now after the effective date of GST India’s Tax structure is uniform but still GST tax reform is considered as one of the most complex and having highest rate in Asia.
Corporate Tax Rate in case where taxable income exceeds INR10 million for a foreign company in India is 40% plus surcharge of 2% and education cess of 3% which is comparatively much higher than that of Corporate Tax Rate for a domestic company which is 30% plus surcharge of 5% and education cess of 3%. In case where taxable income does not exceed INR 10 million, Corporate Tax Rate for a foreign company in India is 40% plus education cess of 3% which is again comparatively much higher than that of domestic company’s tax rate which is 30% plus education cess of 3%.

Inadequate Knowledge of Labour Laws- India being the second most populated country in the world has skilled human resources and this is one of the most prominent reasons which attracts FDI as the foreign nationals or companies get skilled labour at cheap prices. It reduces the cost of production and adds up the revenues but what most people aren’t aware about is Labour Laws of India.
Foreign nationals or others setting-up their business in India needs to comply with Laws regarding to minimum wages, weekly holidays, gratuity, PF payment, maternity leave, sexual harassment and laws regarding payment of bonus. It also includes the challenge of knowing the regional sentiments as India is a secular country with diversity in race, cast, religion etc. so, there are many national holidays on the occasions such as Christmas, Buddha Jayanti, Good Friday, Diwali, Id-ul-Zuha, Guru Nanak’s Birthday, Holi, Muharram, and Mahavir Jayanti. There are also holidays on occasions of national importance. So, one needs to be aware about all of this before setting up their business in India and if these laws are not complied with then the business set-up would not be approved in the eyes of Indian Laws.

Obtaining Business Licenses & Permits- It is a legal document that permits the business to operate. Besides registering of business, the licenses required for particular business according to sectors have to be obtained. Some licenses are sector-specific. For example, licenses pertaining to food safety & adulteration have to be obtained by an entity which is involved in food business or licenses for environment and waste management have to be obtained by the waste- producing industries. Now, the problem is that the conditions for obtaining these licenses are mentioned in different statutory acts as according to the departments or ministries and to be strictly complied with and one needs to have knowledge about these rules and regulations and abide by these rules. Failure to do so can lead to penalties and Legal action can be taken against the company and that can severely affect the prospects of the startup.

Lack of Enforcement of Intellectual Property Rights (IPRs)- Foreign Nationals looking to do Business in India are no doubt aware about the importance of Intellectual Property Rights (IPR) but unfortunately Indians are still lagging behind in the matter of protecting their IP even though India is a signatory to the General Agreement on Trade and Tariff (GATT) and also signatory to Trade Related Aspects of Intellectual Property Rights (TRIPS) agreement, has been complying with the obligations by the mode of enacting required statutes which governs the rules and regulations relating to Copyrights, Trademarks, Geographical indications, Patents and Industrial designs.

Lack of knowledge of Listing Requirements- The Security and Exchange Board of India (SEBI) regulates the Indian Capital Market. Foreign nationals have to comply with the rules and regulations of SEBI, if they are interested in listing its securities in a stock exchange. There are conditions which have to be filled by the companies/entities prior to the listing of securities and these are about the disclosures that are to be made by the entity and other conditions. Most of the Foreign Nationals are unaware about it and failed to comply with these regulations leading them to penalties and strict legal actions against them.

Red Tape Restrictions- Foreign Nationals wanting to set up their business in India should be beforehand aware about Red Tape Restrictions in India. The amount of red tape a new entity has to deal with in India is not a hidden fact and hence, it serves as one of the challenges faced by the foreign national in Setting-Up their Corporations in India. For example, under India legal framework there are only a few ways of raising foreign capital for the purpose of investment in Indian subsidiaries. There are several government procedures which are time- consuming and not to forget the corruption in Government. Hence, it can be frustrating for foreign nationals dealing with them.

Multi-Window Clearances- There is no single window clearance process for setting-up business in India. Only in cases of Special Economic Zones (SEZs), the single window clearance process is applicable other than that the process is too long and require multiple applications for whole process of setting up the business and it become hard for foreign nationals to follow up with that as the process is confusing, it takes too much time to respond to those applications that results in loss of precious time and money. In other words, in India there are no provisions that result in a linear procedure of incorporation of a company.

There are a number of foreign nationals who have succeeded in India. Every Foreign Nationals in setting-up their business faces these challenges but there are solutions to get past these by going through legal compliances and corporate governance requirements.
Authored By: Adv. Anant Sharma & Anjali Swami

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