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9. Starting A New Venture In India

9.1 Step by Step Procedures to Start a New Company

Incorporation of a Company
Incorporation of a company in India is governed by the Companies Act,
1956. Part II of the Act deal with the incorporation of a company and
matters related thereto.

Private Company
Private company means a company which has a minimum paid-up
capital of Rs 1,00,000/- or such higher paid-up capital as may be
prescribed, and by its articles,
(a) Restricts the rights to transfer its shares, if any;
(b) Limits the number of its members to fifty, not including
(c) Persons who are in the employment of the company; and persons
who, having been formerly in the employment of the company, were
members of the company while in that employment have continued to
be members after the employment ceased; and
(e) Prohibits any invitation to the public to subscribe for any shares in,
or debentures of, the company;
(f) Prohibits any invitation or acceptance of deposits from persons
other than its members, directors or their relatives.
Public Company
A public company is a company which is not a private company, has a
minimum paid-
up capital of Rs,5,00,000/-or such higher paid-up capital, as may be
prescribed; is a private company which is a subsidiary of a company
which is not a private company.
Formation of a Private Limited Company
A private Company can be formed either by
i. Incorporation of a new company for doing a new business, or
ii. Conversion of existing business of a sole proprietary concern or
partnership firm into a company.
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Name of Company
The name of a Company is the symbol of its existence. Any suitable
name may be selected for registration subject to the following
guidelines:
a. The promoters should select three to four alternative names, quite
distinct from each other.
b. The names should include, as far as possible, activity as per the
main objects of the proposed company.
c. The names should not too closely resemble with the name of any
other registered company.
d. The official guidelines issued by the Central Government should be
followed while selecting the names. Besides, the names so selected
should not violate the provisions of the Emblems and Names
(Prevention of Improper Use) Act, 1950.
e. Apply in form 1-A to the Registrar of Companies having jurisdiction
along with a filing fee of Rs. 500.

Memorandum of Association
An important step in the formation of a company is to prepare a
document called Memorandum of Association. It is the charter of the
company and it contains the basic conditions on which the company is
incorporated.

The Memorandum contains the name, the State in which the registered
office is to be situated, main objects of the company to be pursued by
the company on its incorporation and objects incidental or ancillary to
the attainment of the main objects, liability of the members and the
authorized capital of the company. The main purpose of the
memorandum is to state the scope of activities and powers of the
company.

Articles of Association
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Articles of Association of the company contain rules, regulation and
bye-laws for the general management of the company. It is
compulsory to get the Articles of
Associations registered along with the Memorandum of Association in
case of a private company.
The Articles are subordinate to the Memorandum of Association.
Therefore, the Articles should not contain any regulation, which is
contrary to provisions of the Memorandum or the Companies Act. The
Articles are binding on the members in relation to the company as well
as on the company in its relation to members.

Steps to incorporate Public Limited Company

1. Select, in order of preference, a few suitable names, not less than
four, each of which should indicate as far as possible the main object
of the proposed company.
2. Out of the four proposed names as above one name will be the main
and other three to be mentioned in order of preference.
3. Avoid names which resemble too closely or are the same as the
names of any other company already registered and also avoid names
with the words “Stock Exchange” as part of the name.
4. Names starting with small alphabets can be used but before using
such names it should be ensured that such names do not have
phonetic or visual resemblance to the name of a company in existence.
5. Follow the guidelines issued by the Central Government for
availability or otherwise of certain names.
6. See that the name chosen does not violate the provisions of
Emblems and Names
(Prevention of Improper Use) Act, 1950.
7. Also see that the name chosen does not contain words like “mutual
funds” forming part of your proposed company unless it is going to be
incorporated actually as a mutual fund company.
8. Apply to the Registrar of Companies to ascertain which of the names
selected by you is available.
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9. An application in Form No. 1A is prescribed in this regard by the
companies (Central Government's) General Rules and Forms, 1956 and
a fee of Rs. 500/- is payable with each application
10. See that one of the promoters is kept as the subscriber to the
memorandum and articles of association of the proposed company.
11. Pay the fee for the application for availability of name in cash to
the Registrar of Companies.
12.The Registrar of Companies will ordinarily inform within a period of
seven days from the date of submission of your application whether
any of the names applied for is available or not.
13. If the same is not made available, apply again to the Registrar of
Companies selecting fresh names with required application fee.
14. Get the memorandum and Articles of Associations suitably drafted.
(a) The Articles of Association need not necessarily be prepared and
registered
in the case of public companies limited by shares as in that case, Table
'A' of schedule I shall apply, but in practice, they are invariably
prepared and registered to suit individual requirement;
(b) While drafting ensure that Memorandum and Articles of Association
are divided into paragraphs numbered consequently;
15. Ensure that the authorized share capital of the proposed public
company is or more than Rs. 5 lakhs or such higher amount as may be
prescribed to be the minimum paid up capital for a public company
16. Before finally printing the Memorandum and Articles of Association
get proper guidance from the concerned Registrar of Companies, so
that at their time of registration there are less corrections and
alterations.
17. Keep in mind that computer printed Memorandum and Articles of
Association will be accepted and taken on record by all the Registrar of
Companies from now on.
18. Get both the Memorandum and Articles of Association stamped as
per the Indian. Stamp Act or the relevant State Act and the
notifications there under in force in your state.
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19. Get both the Memorandum and Articles of Association after
being stamped and duly signed by at least seven subscribers, each of
whom will also write in his own hand, his father's name, occupation,
address and the number of shares subscribed for.
20. There will be at least one witness to these signatures as mentioned
above who will sign and write in his own hand his father's name,
occupation and address.
21. The aforesaid two documents may be signed on behalf of the
subscriber by their agents duly authorized by power of attorney.
22. Both these documents will then be dated.
23. See that the date given on these two documents is any date after
the date of stamping of them and not before that date.
24. Submit these documents along with the registration fee to the
Registrar of Companies (RoC) where the company is being
incorporated. The registration fee depends on the Authorized Capital
with which the company is proposed to be registered. For example, if
the Authorized Capital (5 lakh shares @ Rs.10/- each) of the proposed
private limited company as mentioned in the Memorandum of
Association is Rs. 50,00,000, then the Registration fee will be Rs,
1,08,000 (inclusive of documents filing fee of Rs. 2,000/)

On registration a public company cannot commence business so long it

does not obtain Certificate of Commencement of Business. Please note
that if you propose to incorporate a private company as a subsidiary of
a public company, it will be treated as a public company.
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9.2 Business Registration Procedure – Flowchart
The flow chart below shows the broad steps to be taken to register the
company before commencing the business operations:-

Start

Obtaining approval for the proposed name of the

company form the Registrar of Companies

Drawing up the Memorandum of Association

Drawing up the Articles of Association.

Getting the appropriate persons to subscribe to the Memorandum

(a minimum of 7 for a public company and 2 for a private company)

Payment of registration fee to the Registrar of Companies

Receipt of Certificate of incorporation

Obtain a certificate of commencement of business

from ROC in case of a public company

End
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9.3 Entry Strategies for Foreign Investors
A foreign company planning to set up business operations in India has
the following options
As An Indian Company
A foreign company can commence operations in India by incorporating
a company under the Companies Act, 1956 through
a) Wholly Owned Subsidiaries; or
b) Joint Ventures
Foreign equity in such Indian companies can be up to 100% depending
on the requirements of the investor, subject to equity caps in respect
of the area of activities under the Foreign Direct Investment (FDI)
policy. Details of the FDI policy, sectoral equity caps & procedures can
be obtained from Department of Industrial Policy & Promotion,
Government of India (http://www.dipp.nic.in ).
Option 1 A foreign company can set up a wholly owned
Wholly owned subsidiary company in India for carrying out its
subsidiary activities.
Company Such subsidiary is treated as an Indian resident
and an Indian company for all regulations (incl.
Income Tax, Companies Act), despite being foreign
owned.
At least two and seven shareholders are mandatory
for a private
limited and public limited company respectively

Private Limited Company

Formed between 2 to 50 members. it prohibits
invitation to public for capital issues. Many
provisions of the Companies Act are not applicable.
Also, there is a restriction on transfer of shares
and the taxation rates are higher

Public Limited Company

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It must have at least 7 shareholders. A public
company is not authorized to start business upon
the grant of the certificate of incorporation. In
order to be eligible to commence business as a
corporation, it must obtain another document
called "trading certificate". It must publish a
prospectus or file a statement in lieu of a
prospectus before it can start transacting business.
A public company is required to have at least 3
directors. It must hold statutory meetings and
obtain government approval for the appointment of
the management.

Option 2 Though a wholly owned subsidiary has been the

Joint venture most preferred option, foreign companies have also
with an Indian been setting up shop in India by forging strategic
partner alliances with Indian partners. The trend in this
preferably with respect is to choose a partner who is in the same
majority equity field/area of activity and has sufficient experience
participation and expertise in the relevant line of activity

Incorporation of Company
For registration and incorporation, an application has to be filed with
Registrar of Companies (ROC). Once a company has been duly
registered and incorporated as an Indian company, it is subject to
Indian laws and regulations as applicable to other domestic Indian
companies. For details please visit the website of Department of
Company Affairs under Ministry of Finance at http://dca.nic.in

As A Foreign Company
Foreign Companies can set up their operations in India through
• Liaison Office/Representative Office
• Project Office
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• Branch Office
Such offices can undertake any permitted activities. Companies have
to register themselves with Registrar of Companies (ROC) within 30
days of setting up a place of business in India.
Option 1: Liaison Office/Representative Office
Liaison office acts as a channel of communication between the principal
place of business or head office and entities in India. Liaison office
cannot undertake any commercial activity directly or indirectly and
cannot, therefore, earn any income in India.
Its role is limited to collecting information about possible market
opportunities and providing information about the company and its
products to prospective Indian customers. It can promote
export/import from/to India and also facilitate technical/financial
collaboration between parent company and companies in India.
Approval for establishing a liaison office in India is granted by Reserve
Bank of India (RBI).
Option 2: Project Office
Foreign Companies planning to execute specific projects in India can
set up temporary project/site offices in India. RBI has now granted
general permission to foreign entities to establish Project Offices
subject to specified conditions. Such offices can not undertake or carry
on any activity other than the activity relating and incidental to
execution of the project. Project Offices may remit outside India the
surplus of the project on its completion, general permission for which
has been granted by the RBI.
Option 3: Branch Office
Foreign companies engaged in manufacturing and trading activities
abroad are allowed to set up Branch Offices in India for the following
purposes:
(i) Export/Import of goods
(ii) Rendering professional or consultancy services
(iii) Carrying out research work, in which the parent company is
engaged.
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(iv) Promoting technical or financial collaborations between Indian
companies and parent or overseas group company.
(v) Representing the parent company in India and acting as
buying/selling agents in India.
(vi) Rendering services in Information Technology and development of
software in India.
(vii) Rendering technical support to the products supplied by the
parent/ group companies.
(viii) Foreign airline/shipping company.
A branch office is not allowed to carry out manufacturing activities on
its own but is permitted to subcontract these to an Indian
manufacturer. Branch Offices established with
the approval of RBI, may remit outside India profit of the branch, net
of applicable Indian taxes and subject to RBI guidelines Permission for
setting up branch offices is granted by the Reserve Bank of India
(RBI). Branch Office on “Stand Alone Basis” Such Branch Offices would
be isolated and restricted to the Special Economic zone (SEZ) alone
and no business activity/transaction will be allowed outside the SEZs in
India, which include branches/subsidiaries of its parent office in India.
No approval shall be necessary from RBI for a company to establish a
branch/unit in SEZs to undertake manufacturing and service activities
subject to specified conditions.
Application for setting up Liaison Office/Project Office/ Branch Office
may be submitted
in form FNC 1 (available at RBI website at www.rbi.org.in )

9.4 Foreign Direct Investment (FDI) Policy

The Indian government has recognized the importance of foreign direct
investment as an important factor in the economic growth of the
nation. This will help to supplement as well as complement the
domestic investment in India. Foreign direct investment in India is
allowed freely in all sectors, except a small number of sectors, where
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specific guidelines do not allow foreign direct investment beyond a
limit.
Under the current FDI framework, foreign investment is permitted
from all categories of investors and in all sectors except –
• From the citizens/entities of Pakistan and Bangladesh
• From the certain sectors, namely :
ƒ Atomic Energy
ƒ Lottery Business/ Gambling & Betting
ƒ Agriculture (excluding floriculture, horticulture, seed
development, animal husbandry, pisciculture and
cultivation of vegetables, mushrooms etc.)
ƒ Plantations (excluding Tea plantation)
ƒ Retail Trading

For other sectors, there are two approval routes for foreign
investment in India:
• Automatic route under delegated powers exercised by the
Reserve Bank of India (RBI)
• Approval by the Government through the Foreign Investment
Promotion Board (FIPB) under the Ministry of Finance

9.4.1 Automatic Route of Investment

No prior approval is required for FDI under the Automatic Route. Only
information to the RBI within 30days of inward remittances or issue of
shares to Non Residents is required. RBI has prescribed a new form,
Form FC-GPR (instead of earlier FC-RBI) for reporting shares issued to
the Foreign Investors by an Indian company. FDI under automatic
route is now allowed in all sectors, including the services sector,
except a few sectors where the existing and notified sectoral policy
does not permit FDI beyond a ceiling.
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9.4.2 Government Approval - Foreign Investment Promotion

Board (FIPB) Route

Foreign Investment not covered under the ‘Automatic Route’ is

considered for Government approval on the recommendations of the
Foreign Investment Promotion Board (FIPB).
The proposal for foreign investment is decided on a case-to-case basis
depending upon the merits of the case and in accordance with the
prescribed sectoral policy. Preference is given to projects in high
priority industries, infrastructure sector, those having export potential,
large-scale employment opportunities, linkages with agriculture and
food processing sector, projects focused on North Eastern region of
India, project having social relevance or relating to infusion of capital
and induction of technology.

9.4.3 Foreign Direct Investment Norms for the investors

Foreign Direct Investment (FDI) is permitted as under the

following forms of investments:
‰ Through financial collaborations
‰ Through joint ventures and technical collaborations
‰ Through capital markets via Euro issues
‰ Through private placements or preferential allotments

100% Export Oriented Units/ Export Processing Zones/ Special

Economic Zones
100 per cent Export Oriented Units (EOUs) and units in the Export
Processing Zones (EPZs)/Special Economic Zones (SEZs), enjoy a
package of incentives and facilities, which include duty free imports of
all types of capital goods, raw material, and consumables in addition to
tax holidays against export. 100% FDI is permitted under automatic
route for setting up of industrial park/industrial model town/special
economic zone in the country.
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FDI up to 100% for new and existing companies/joint ventures /firms,

is permitted under the automatic route (i.e. without requiring prior
approval) for the following items/activities:
• Most manufacturing activities
• Non-banking financial services
• Infrastructure such as roads and highways, ports and harbours,
electricity generation transmission and distribution, mass rapid
transit systems, LNG projects, etc.
• Drugs and pharmaceuticals that do not attract compulsory
licensing or involve use of recombinant DNA technology
• Hotels and tourism
• Food processing
• Electronic hardware
• Software Development
• Film industry
• Advertising
• Hospitals
• Oil refineries
• Pollution control and management Exploration and mining of
minerals other than diamonds and precious stones
• Management consultancy
• Venture capital funds/ companies
• Setting up/ development of industrial park/ industrial model
town/ SEZ
• Government route
• Airports (beyond 74%)
• B2B e-commerce
• Trading companies within notified policy
• Drugs and pharmaceuticals not falling under the automatic route
• Integrated township development
• ISPs without gateways, electronic mail and voice mail beyond 49
per cent
• Courier services other than distribution of letters
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• TV software production for Broadcasting

FDI upto100% is allowed through the automatic route for all

manufacturing activities in
Special Economic Zones (SEZs), except for the following activities:
• Arms and ammunition, explosives and allied items of defense
equipments, defense aircraft and warships;
• Atomic substances;
• Railways;
• Narcotics and psychotropic substances and hazardous chemicals;
• Minerals;
• Postal Service
• Distillation and brewing of alcoholic drinks; and
• Cigarettes/cigars and manufactured tobacco substitutes.

9.4.4 Sector specific guidelines for Foreign Direct Investment

(FDI)

The results of Sector specific guidelines for FDI in India has been that
it has made it easy for the foreign investors to make investments in
the different sectors of the country and this in its turn has led to huge
inflows of foreign direct investment in India.
FDI in Hotel & Tourism sector in India

100% FDI is permissible in the sector on the automatic route.

The term hotels include restaurants, beach resorts, and other tourist
complexes providing accommodation and/or catering and food facilities
to tourists. Tourism related industry include travel agencies, tour
operating agencies and tourist transport operating agencies, units
providing facilities for cultural, adventure and wild life experience to
tourists, surface, air and water transport facilities to tourists, leisure,
entertainment, amusement, sports, and health units for tourists and
Convention/Seminar units and organizations.

For foreign technology agreements, automatic approval is granted if

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i. up to 3% of the capital cost of the project is proposed to be
paid for technical and consultancy services including fees for
architects, design, supervision, etc.

ii. up to 3% of net turnover is payable for franchising and

marketing/publicity support fee, and up to 10% of gross
operating profit is payable for management fee, including
incentive fee.

FDI in Private Sector Banking in India

Non-Banking Financial Companies (NBFC)

49% FDI is allowed from all sources on the automatic route subject to
guidelines issued from RBI from time to time.

a. FDI/NRI/OCB investments allowed in the following 19 NBFC

activities shall be as per levels indicated below:

i. Merchant banking

ii. Underwriting

iii. Portfolio Management Services

iv. Investment Advisory Services

v. Financial Consultancy

vi. Stock Broking

vii. Asset Management

viii. Venture Capital

ix. Custodial Services

x. Factoring

xi. Credit Reference Agencies

xii. Credit rating Agencies

xiii. Leasing & Finance

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xiv. Housing Finance

xv. Foreign Exchange Brokering

xvi. Credit card business

xvii. Money changing Business

xviii. Micro Credit

xix. Rural Credit

b. Minimum Capitalization Norms for fund based NBFCs:

i) For FDI up to 51% - US$ 0.5 million to be brought upfront

ii) For FDI above 51% and up to 75% - US $ 5 million to be

brought upfront

iii) For FDI above 75% and up to 100% - US $ 50 million out of

which US $ 7.5 million to be brought upfront and the balance in
24 months

c. Minimum capitalization norms for non-fund based activities:

Minimum capitalization norm of US $ 0.5 million is applicable in respect

of all permitted non-fund based NBFCs with foreign investment.

d. Foreign investors can set up 100% operating subsidiaries

without the condition to disinvest a minimum of 25% of its equity to
Indian entities, subject to bringing in US$ 50 million as at b) (iii) above
(without any restriction on number of operating subsidiaries without
bringing in additional capital)

e. Joint Venture operating NBFC's that have 75% or less than 75%
foreign investment will also be allowed to set up subsidiaries for
undertaking other NBFC activities, subject to the subsidiaries also
complying with the applicable minimum capital inflow i.e. (b)(i) and
(b)(ii) above.
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f. FDI in the NBFC sector is put on automatic route subject to
compliance with guidelines of the Reserve Bank of India. RBI would
issue appropriate guidelines in this regard.

FDI in Telecommunication sector

i. In basic, cellular, value added services and global mobile

personal communications by satellite, FDI is limited to 49%
subject to licensing and security requirements and adherence by
the companies (who are investing and the companies in which
investment is being made) to the license conditions for foreign
equity cap and lock- in period for transfer and addition of equity
and other license provisions.

ii. ISPs with gateways, radio-paging and end-to-end bandwidth,

FDI is permitted up to 74% with FDI, beyond 49% requiring
Government approval. These services would be subject to
licensing and security requirements.

iii. No equity cap is applicable to manufacturing activities.

iv. FDI up to 100% is allowed for the following activities in the

telecom sector :

a. ISPs not providing gateways (both for satellite and

submarine cables);

b. Infrastructure Providers providing dark fiber (IP Category

1);

c. Electronic Mail; and

d. Voice Mail

The above would be subject to the following conditions:

e. FDI up to 100% is allowed subject to the condition that

such companies would divest 26% of their equity in favor
of Indian public in 5 years, if these companies are listed in
other parts of the world.
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f. The above services would be subject to licensing and
security requirements, wherever required.

Proposals for FDI beyond 49% shall be considered by FIPB on case to

case basis.

FDI In Power Sector in India

Up to 100% FDI allowed in respect of projects relating to electricity

generation, transmission and distribution, other than atomic reactor
power plants. There is no limit on the project cost and quantum of
foreign direct investment.

FDI In Real Estate Sector in India

Further the Sector specific guidelines for FDI in India for the sectors of
townships, built- up infrastructure, housing, and construction
development projects is that foreign direct investment up to 100% is
allowed in all the sectors.
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Drugs & Pharmaceuticals

FDI up to 100% is permitted on the automatic route for manufacture

of drugs and pharmaceutical, provided the activity does not attract
compulsory licensing or involve use of recombinant DNA technology,
and specific cell / tissue targeted formulations.

FDI proposals for the manufacture of licensable drugs and

pharmaceuticals and bulk drugs produced by recombinant DNA
technology, and specific cell / tissue targeted formulations will require
prior Government approval.

Roads, Highways, Ports and Harbors

FDI up to 100% under automatic route is permitted in projects for

construction and maintenance of roads, highways, vehicular bridges,
toll roads, vehicular tunnels, ports and harbors.

FDI in other Manufacturing sectors:

• Most Manufacturing sectors are on the 100% automatic route.

Foreign equity is limited only in production of defense equipment
(26%) and 5 specific industries where an Industrial License (IL)
is mandatory.

• Most mining sectors are similarly on the 100% automatic route,

with foreign equity limits only on atomic minerals (74%), coal &
lignite (74%) and diamonds and precious stones (74%).

• 100% equity is also allowed in non-crop agro-allied sectors

(agro-processing) and crop agriculture under controlled
conditions (e.g. hot houses).
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Pollution Control and Management

FDI up to 100% in both manufacture of pollution control equipment

and consultancy for integration of pollution control systems is
permitted on the automatic route.

Call Centers in India / Call Centres in India

FDI up to 100% is allowed subject to certain conditions.

Business Process Outsourcing BPO in India

FDI up to 100% is allowed subject to certain conditions.

Some other sectors, where partial or full FDI is allowed, have been
indicated in the tables below:-
 258
i) Automatic route for specified activities subject to Sectoral cap and
conditions.

Sectors Cap

Airports
• Existing 74%
• Greenfield 100%

Air Transport Services

• Non Resident Indians 100%
• Other 49%

Alcohol distillation and brewing 100%

Banking (Private Sector) 74%

Coal and Lignite mining (specified) 100%

Coffee, Rubber processing and warehousing 100%

Construction and Development (Specified 100%

projects)

Floriculture, Horticulture and Animal Husbandry 100%

Specified Hazardous chemicals 100%

Industrial Explosives Manufacturing 100%

Insurance 26%

Mining (Precious metals, Diamonds and stones) 100%

Non banking finance companies ( conditional) 100%

Petroleum and Natural gas

• Refining (private companies) 100%
• Other areas 100%
Power generation, transmission, distribution 100%
Trading
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• Wholesale cash and carry 100%
• Trading of Exports 100%
SEZ’s and Free Trade Warehousing Zones 100%

ii) Prior Approval from FIPB for the Sectoral cap for various activities
listed below.

Sectors* Cap

Existing Airports 74% to 100%

Asset reconstruction companies 49%

Atomic Minerals 74%

Broadcasting

• FM Radio 20%
49%
• Cable network, Direct-To-Home
26%
(DTH), Setting up hardware facilities
100%

• Up linking news and current affairs

• Up linking non-news, current affairs

TV channel

Cigarette manufacturing 100 %

Courier services other than those under 100 %

the ambit of Indian Post Office Act, 1898

Defense production 26 %

Investment companies in infrastructure / 49 %

service sector (except telecom)

Petroleum and natural gas refining (PSU) 26 %

Tea Sector – including Tea plantation 100 %

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Trading items sourced from Small scale 100 %
sector

Test marketing for equipment for which 100 %

company has approval for manufacture

Single brand retailing 51 %

Satellite establishment and operations 74 %

Print Media

• Newspapers and periodicals dealing 26 %

with news and current affairs 100 %

• Publishing of scientific magazines /

specialty journals periodicals

* New Investment by a foreign investor in a field in which the investor

already has an existing joint venture or collaboration with another Indian
partner. New investment sought to be made in manufacture of items
reserved for Small Scale Industries

Special Facilities and Rules for NRI's (Non Resident

Indians) and OCB's (Overseas Corporate Bodies)

NRI's and OCB's are allowed the following special facilities:

1. Direct investment in industry, trade, infrastructure etc.

2. Up to 100% equity with full repatriation facility for capital and

dividends in the following sectors:

i. 34 High Priority Industry Groups

ii. Export Trading Companies

iii. Hotels and Tourism-related Projects

iv. Hospitals, Diagnostic Centers

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v. Shipping

vi. Deep Sea Fishing

vii. Oil Exploration

viii. Power

ix. Housing and Real Estate Development

x. Highways, Bridges and Ports

xi. Sick Industrial Units

xii. Industries Requiring Compulsory Licensing

xiii. Industries Reserved for Small Scale Sector

3. Up to 40% Equity with full repatriation: New Issues of Existing

Companies raising Capital through Public Issue up to 40% of the
new Capital Issue.

4. On non-repatriation basis: Up to 100% Equity in any Proprietary

or Partnership engaged in Industrial, Commercial or Trading
Activity.

5. Portfolio Investment on repatriation basis: Up to 1% of the Paid

up Value of the equity Capital or Convertible Debentures of the
Company by each NRI. Investment in Government Securities,
Units of UTI, National Plan/Saving Certificates.

6. On Non-Repatriation Basis: Acquisition of shares of an Indian

Company, through a General Body Resolution, up to 24% of the
Paid Up Value of the Company.

7. Other Facilities: Income Tax is at a Flat Rate of 20% on Income

arising from Shares or Debentures of an Indian Company.

9.5 Repatriation of Profits from India & Employment

of Expat Workers
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One of the biggest concerns for foreign investors is how to get
dollars out of India? Historically, it is not a problem to repatriate
investments and profits from India. The Overseas Private Investment
Corporation ("OPIC"), a U.S. government backed insurer of foreign
commercial dealings, has never had to pay a claim due to India's
failure to provide foreign exchange. Dividends, capital gains, royalties
and fees can be repatriated easily with the permission of the Reserve
Bank of India. In a short, specified list of consumer goods industries,
dividend balancing is required against export earnings.
In case of an exit decision, the overseas promoter can repatriate his
share after discharging tax and other obligations. He can also disinvest
his share either to his Indian partner, to another company, or to the
public. Even during the so-called worst period no foreign company left
India without proper and due compensation. Problems do arise when
people and businesses try to go around the rules or from inexperience.
Rupee, the Indian currency, is convertible for the current account. It
means that the repatriation of foreign exchange at the existing market
rates has become easier. Exporters can retain 25% of total receipts in
foreign currency accounts to meet requirements such as travel,
advertising, etc. Foreign exchange will be available at market rates for
all imports except specified essential items. Foreign exchange
requirements for private travel, debt servicing, dividend or royalty
payments and other remittances may also be obtained from banks or
exchange dealers at the current market rate. The system has the
advantages of completely bypassing bureaucratic controls and freeing
importers from delays and inefficiencies.
As far as employment of expat workers is concerned, there is not any
rule that governs any ratio of the employment of expat employees to
the employees from India. This solely depends upon the requirement
of the particular company and the norms and benefits prescribed by
‘Ministry of Labour’ for various classes of employees. The expat
workers must comply with the work-visa rules set down by
Government of India.
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9.6 Taxation Rules for the Organizations
Corporate tax
The taxability of a company's income depends on its domicile. Indian
companies are taxable in India on their worldwide income. Foreign
companies are taxable on income that arises out of their Indian
operations, or, in certain cases, income that is deemed to arise in
India. The royalty, interest, gains from sale of capital assets located in
India (including gains from sale of shares in an Indian company),
dividends from Indian companies and fees for technical services are all
treated as income arising in India. The current rates of corporate tax
are:-
Tax rate
Company/ Tax (Inclusive of applicable
surcharge and cess)

Domestic Company

(i)Regular Tax

(a) Where total Income is more than Rs.10 33.99%

million

(b) Where the total Income is equal to or 30.90%

less than Rs. 10million.

(ii) Minimum Alternate Tax

(a) Where total Income is more than Rs. 11.33% of the book profits
10 million

(b) Where the total income is equal to or 10.30% of book profits

less than Rs.10 million.

(iii) Dividend Distribution Tax 16.995%

(iv) Fringe Benefit Tax 33.99%

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Foreign Company

(i) Regular Tax

(a) Where total income is more than Rs. 42.23%

10 million

(b) Where the total income is equal to or 41.20%

less than Rs. 10 million

(ii) Minimum Alternate Tax

(a) Where total income is more than Rs. 10.5575% of book profits
10 million

(b) Where the total income is equal to or 10.30% of book profits

less than Rs.10 million.

(iii) Fringe Benefit Tax 31.6725%

Minimum Alternative Tax (MAT)

Normally, a company is liable to pay tax on the income computed in
accordance with the provisions of the income tax Act, but the profit
and loss account of the company is prepared as per provisions of the
Companies Act. There were large number of companies who had book
profits as per their profit and loss account but were not paying any tax
because income computed as per provisions of the income tax act was
either nil or negative or insignificant. In such case, although the
companies were showing book profits and declaring dividends to the
shareholders, they were not paying any income tax. These companies
are popularly known as Zero Tax companies. In order to bring such
companies under the income tax act net, section 115JA was introduced
w.e.f assessment year 1997-98.
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Fringe Benefit Tax (FBT)

The Finance Act, 2005 introduced a new levy, namely Fringe Benefit
Tax (FBT) contained in Chapter XIIH (Sections 115W to 115WL) of the
Income Tax Act, 1961. Fringe Benefit Tax (FBT) is an additional income
tax payable by the employers on value of fringe benefits provided or
deemed to have been provided to the employees. The FBT is payable
by an employer who is a company; a firm; an association of persons
excluding trusts/a body of individuals; a local authority; a sole trader,
or an artificial juridical person. This tax is payable even where
employer does not otherwise have taxable income. Fringe Benefits are
defined as any privilege, service, facility or amenity directly or
indirectly provided by an employer to his employees (including former
employees) by reason of their employment and includes expenses or
payments on certain specified heads.

The scope of Fringe Benefit Tax is being widened by including the

employees stock option as fringe benefit liable for tax. The fair market
value of the share on the date of the vesting of the option by the
employee as reduced by the amount actually paid by him or recovered
from him shall be considered to be the fringe benefit. The fair market
value shall be determined in accordance with the method to be
prescribed by the CBDT.

Dividend Distribution Tax (DDT)

Under Section 115-O of the Income Tax Act, any amount declared,
distributed or paid by a domestic company by way of dividend shall be
chargeable to dividend tax. Only a domestic company (not a foreign
company) is liable for the tax. Tax on distributed profit is in addition to
income tax chargeable in respect of total income. It is applicable
whether the dividend is interim or otherwise. Also, it is applicable
whether such dividend is paid out of current profits or accumulated
profits.
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The tax shall be deposited within 14 days from the date of
declaration, distribution or payment of dividend, whichever is earliest.
Failing to this deposition will require payment of stipulated interest for
every month of delay under Section115-P of the Act.

Rate of dividend distribution tax to be raised from 12.5% to 15% on

dividends distributed by companies; and to 25% on dividends paid by
money market mutual funds and liquid mutual funds to all investors.

Banking Cash Transaction Tax (BCTT)

The Finance Act 2005 introduced the Banking Cash Transaction Tax
(BCTT) w.e.f. June 1, 2005 and applies to the whole of India except in
the state of Jammu and Kashmir. BCTT continues to be an extremely
useful tool to track unaccounted monies and trace their source and
destination. It has led the Income Tax Department to many money
laundering and hawala transactions.

BCTT is levied at the rate of 0.1% of the value of following "taxable

banking transactions" entered with any scheduled bank on any single
day:

• Withdrawal of cash from any bank account other than a saving bank account; and

• Receipt of cash on encashment of term deposit(s).

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The value of taxable banking transaction that attract BCTT is as
under

In case of Amount (Rs.)

An individual or HUF 50,000 or more

Assessee other than an individual or HUF 1,00,000 or more

However, Banking Cash Transaction Tax (BCTT) has been withdrawn

with effect from April 1, 2009.

Securities Transaction Tax (STT)

Securities Transaction Tax or turnover tax, as is generally known, is a

tax that is levied on taxable securities transaction. STT is levied on the
taxable securities transactions with effect from 1st October, 2004 as
per the notification issued by the Central Government. The surcharge
is not levied on the STT.

STT is levied on the value of taxable securities transactions as under:

Transaction Purchase/sale of Sale of equity shares, Sale of Sale of unit

equity shares, units units of equity Derivatives of an equity
of equity oriented oriented mutual fund oriented fund
mutual fund (non-delivery based) to the Mutual
(delivery based) Fund

Rates 0.125 % 0.025 % 0.17 % 0.25 %

Paid by Purchaser/Seller Seller Seller Seller

Rebate available on the STT paid by an assessee -

Rebate on STT is available to assessee, whose income from the taxable

securities transaction is charged to tax as a business income. However,
such rebate can be claimed only if the following conditions are
satisfied:

(a) The rebate can be claimed only against the tax computed on the
income from the taxable securities transaction;

(b) The evidence of payment of STT should be attached with the

Return of Income;
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(c) The deduction allowable will be maximum to the extent of tax on
such income.

Tax Rebates for Corporate Tax

The classical system of corporate taxation is followed in India

• Domestic companies are permitted to deduct dividends received

from other domestic companies in certain cases.

• Inter Company transactions are honored if negotiated at arm's

length.

• Special provisions apply to venture funds and venture capital

companies.

• Long-term capital gains have lower tax incidence.

• There is no concept of thin capitalization.

• Liberal deductions are allowed for exports and the setting up on

new industrial undertakings under certain circumstances.

• There are liberal deductions for setting up enterprises engaged in

developing, maintaining and operating new infrastructure
facilities and power-generating units.

• Business losses can be carried forward for eight years, and

unabsorbed depreciation can be carried indefinitely. No carry
back is allowed..

• Dividends, interest and long-term capital gain income earned by

an infrastructure fund or company from investments in shares or
long-term finance in enterprises carrying on the business of
developing, monitoring and operating specified infrastructure
facilities or in units of mutual funds involved with the
infrastructure of power sector are proposed to be tax exempt.

Capital Gains Tax

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A capital gain is income derived from the sale of an investment. A
capital investment can be a home, a farm, a ranch, a family business,
work of art etc. In most years slightly less than half of taxable capital
gains are realized on the sale of corporate stock. The capital gain is the
difference between the money received from selling the asset and the
price paid for it. Capital gain also includes gain that arises on "transfer"
(includes sale, exchange) of a capital asset and is categorized into
short-term gains and long-term gains.

The capital gains tax is different from almost all other forms of
taxation in that it is a voluntary tax. Since the tax is paid only when an
asset is sold, taxpayers can legally avoid payment by holding on to
their assets--a phenomenon known as the "lock-in effect."

The scope of capital asset is being widened by including certain items

held as personal effects such as archaeological collections, drawings,
paintings, sculptures or any work of art. Presently no capital gain tax is
payable in respect of transfer of personal effects as it does not fall in
the definition of the capital asset.
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Short Term and Long Term capital Gains

Gains arising on transfer of a capital asset held for not more than 36
months (12 months in the case of a share held in a company or other
security listed on recognised stock exchange in India or a unit of a
mutual fund) prior to its transfer are "short-term". Capital gains arising
on transfer of capital asset held for a period exceeding the aforesaid
period are "long-term".

Section 112 of the Income-Tax Act, provides for the tax on long-term
capital gains, at 20 per cent of the gain computed with the benefit of
indexation and 10 per cent of the gain computed (in case of listed
securities or units) without the benefit of indexation.

Double Taxation Relief

Double Taxation means taxation of the same income of a person in

more than one country. This results due to countries following different
rules for income taxation. There are two main rules of income taxation
i.e. (a) Source of income rule and (b) residence rule. As per source of
income rule, the income may be subject to tax in the country where
the source of such income exists (i.e. where the business
establishment is situated or where the asset / property is located)
whether the income earner is a resident in that country or not. On the
other hand, the income earner may be taxed on the basis of the
residential status in that country. For example, if a person is resident
of a country, he may have to pay tax on any income earned outside
that country as well.

Further some countries may follow a mixture of the above two rules.
Thus, problem of double taxation arises if a person is taxed in respect
of any income on the basis of source of income rule in one country and
on the basis of residence in another country or on the basis of mixture
of above two rules.

In India, the liability under the Income Tax Act arises on the basis of
the residential status of the assessee during the previous year. In case
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the assessee is resident in India, he also has to pay tax on the
income, which accrues or arises outside India, and also received
outside India. The position in many other countries being also broadly
similar, it frequently happens that a person may be found to be a
resident in more than one country or that the same item of his income
may be treated as accruing, arising or received in more than one
country with the result that the same item becomes liable to tax in
more than one country. Relief against such hardship can be provided
mainly in two ways: (a) Bilateral relief, (b) Unilateral relief.

Bilateral Relief

The Governments of two countries can enter into Double Taxation

Avoidance Agreement (DTAA) to provide relief against such Double
Taxation, worked out on the basis of mutual agreement between the
two concerned sovereign states. This may be called a scheme of
'bilateral relief' as both concerned powers agree as to the basis of the
relief to be granted by either of them.
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Indirect Taxation

Central Sales Tax (CST)

Central Sales tax is generally payable on the sale of all goods by a

dealer in the course of inter-state trade or commerce or, outside a
state or, in the course of import into or, export from India.

The ceiling rate on central sales tax (CST), a tax on inter-state sale of
goods, has been reduced from 4 per cent to 3 per cent in the current
year.

Value Added Tax (VAT)

VAT is a multi-stage tax on goods that is levied across various stages

of production and supply with credit given for tax paid at each stage of
Value addition. Introduction of state level VAT is the most significant
tax reform measure at state level. The state level VAT has replaced the
existing State Sales Tax. The decision to implement State level VAT
was taken in the meeting of the Empowered Committee (EC) of State
Finance Ministers held on June 18, 2004, where a broad consensus was
arrived at to introduce VAT from April 1, 2005. Accordingly, all
states/UTs have implemented VAT.

Excise Duty

Central Excise duty is an indirect tax levied on goods manufactured in

India. Excisable goods have been defined as those, which have been
specified in the Central Excise Tariff Act as being subjected to the duty
of excise. There are three types of Central Excise duties collected in
India namely

Basic Excise Duty

This is the duty charged under section 3 of the Central Excises and Salt
Act,1944 on all excisable goods other than salt which are produced or
manufactured in India at the rates set forth in the schedule to the
Central Excise tariff Act,1985.
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Additional Duty of Excise

Section 3 of the Additional duties of Excise (goods of special

importance) Act, 1957 authorizes the levy and collection in respect of
the goods described in the Schedule to this Act. This is levied in lieu of
sales Tax and shared between Central and State Governments. These
are levied under different enactments like medicinal and toilet
preparations, sugar etc. and other industries development etc.

Special Excise Duty

As per the Section 37 of the Finance Act,1978 Special excise Duty was
attracted on all excisable goods on which there is a levy of Basic excise
Duty under the Central Excises and Salt Act,1944.Since then each year
the relevant provisions of the Finance Act specifies that the Special
Excise Duty shall be or shall not be levied and collected during the
relevant financial year.

Customs Duty

Custom or import duties are levied by the Central Government of India

on the goods imported into India. The rate at which customs duty is
levied on the goods depends on the classification of the goods
determined under the Customs Tariff. The Customs Tariff is generally
aligned with the Harmonised System of Nomenclature (HSL).

In line with aligning the customs duty and bringing it at par with the
ASEAN level, government has reduced the peak customs duty from
12.5 per cent to 10 per cent for all goods other than agriculture
products. However, the Central Government has the power to
generally exempt goods of any specified description from the whole or
any part of duties of customs levied thereon. In addition,
preferential/concessional rates of duty are also available under the
various Trade Agreements.

Service Tax
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Service tax was introduced in India way back in 1994 and started
with mere 3 basic services viz. general insurance, stock broking and
telephone. Today the counter services subject to tax have reached
over 100. There has been a steady increase in the rate of service tax.
From a mere 5%, service tax is now levied on specified taxable
services at the rate of 12% of the gross value of taxable services.
However, on account of the imposition of education cess of 3%, the
effective rate of service tax is at 12.36%.
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9.7 Investment Facilitation Bodies
There are various regulatory bodies, which act as a first point of
contact between the investors and Indian Government. To name a
few:
• Secretariat For Industrial Assistance (SIA)
• Foreign Investment Promotion Board (FIPB)
• Reserve Bank Of India (RBI)
• Securities and Exchange Board Of India (SEBI)

Secretariat For Industrial Assistance (SIA)

The SIA, functioning within the Department of Industrial Policy and

Promotion, Ministry of Commerce and Industry, acts as a gateway to
industrial investment in India. It provides a single window clearance
for Entrepreneurial Assistance and facilitates the processing of
investors' applications requiring Government approval
Broadly SIA performs the following functions: -
• Assists entrepreneurs and investors in setting up projects and
further
monitoring the implementation of these projects;
• Liaisons with State Governments and other governmental bodies
for seeking
necessary clearances;
• Notifies all Government policy relating to investment and
technology

SIA, in providing such functions, acts through its specialized divisions

like Foreign Investment Promotion Board, Foreign Investment
Promotion Council, and Foreign Investment Implementation Authority
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Foreign Investment Promotion Board (FIPB)
The FIPB is the nodal agency for all matters concerning foreign direct
investment as well as its promotion into the country
The main functions of FIPB, among others, include:
• Ensuring expeditious clearance of the proposals for foreign
investment;
• Reviewing periodically the implementation of the proposals
cleared by the Board;
• Reviewing the general and sectoral policy guidelines and in
consultation with Administrative Ministries, incorporate a set of
transparent rules for each of these sectors;
• Undertaking investment promotion activities including
establishment of contact with and inviting selected international
companies to invest in India in appropriate projects.
• The FIPB (functioning under the Ministry of Finance), in its
approach to granting approvals, maintains flexibility of
purposeful negotiations with investors and considers project
proposals in totality, free from parameters, with a view to
maximizing foreign direct investment into the country
• The Board meets once every week ensuring speedy disposal of
applications
• In addition to SIA’s office, applications can also be submitted
with Indian Missions abroad who will forward them to the SIA for
further processing
• Foreign investment proposals received in the SIA are placed
before the Foreign Investment Promotion Board (FIPB) within 15
days of its receipt
• The Board has the flexibility of purposeful negotiation with the
investors and considers project proposals in totality in order to
ensure optimum foreign direct investment into the country

The recommendations of FIPB in respect of project proposals involving

a total investment of up to Rs. 6 billion are considered and approved
by the Industry Minister. Projects with a total investment exceeding
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Rs. 6 billion are submitted to the Cabinet Committee on Foreign
Investment (CCFI) for decision.

Reserve Bank Of India (RBI)

The RBI, India's Central Bank, was established on April 1, 1935. RBI
has been delegated the authorities Under the Automatic Route, to
allow companies for Foreign Direct Investment In India. The following
functions have been outlined for RBI to reach its desired objective:
‰ Prescribing broad parameters of banking operations within
the country's banking and financial system
functions
‰ Administering external trade and payment, thus promoting
orderly development and maintenance of foreign
exchange market in India
The RBI also acts as a banker to Central/State Governments,
commercial banks, state cooperative banks and some financial
institutions. It plays a potent role in maintaining the exchange value of
the Rupee and acts as an agent of the Government in respect of
India's membership of International Monetary Fund
Securities and Exchange Board Of India (SEBI)
SEBI was established with the prime objective of protecting the
interests of investors in securities, promoting the development of, and
regulating, the securities market and for matters connected therewith
or incidental thereto. Its primary functions include:
• Promoting fair dealing in issue of securities
• Ensuring that the capital markets function efficiently,
transparently an economically in the better interests of both the
issuers and the investors
• Safeguarding the interests of investors from unethical practices
• Coordinating and monitoring the working of stock exchanges
across the nation and intermediation with stock brokers
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9.8 Useful Addresses
Department of Industrial Policy Reserve Bank of India (RBI)
and Promotion Foreign Investment Division,
Joint Secretary, Shaheed Bhagat Singh Road,
Secretariat for Industrial Mumbai-400 001, INDIA
Assistance (SIA), Tel.: + 91-22-2266 1603
Ministry of Commerce & Industry, Fax :+ 91-22-2266 5330
Udyog Bhavan, New Delhi-110 011 Web site: http://www:rbi.org.in
,INDIA
Tel.: +91-11-23011983
Fax : +91-11-23011034
Website: http://dipp.nic.in
Registrar of Companies Details regarding taxes in India
Department of Company Affairs, Ministry of Finance,
Ministry of Finance, Government of India,
‘B’ Block, IInd Floor, Paryavaran North Block, New Delhi – 110 001
Bhawan Web site: http://finmin.nic.in/
C.G.O. Complex, New Delhi-110 003,
INDIA
Tel.: +91-11-24362708
Website: http://dca.nic.in