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Setting Up of Business in India

India got ranking on the World Bank’s Doing Business Report, India has improved from 142nd position in 2014 to 63rd position in 2020. The ease of doing business index of India has been improved over the past few years.

To set up business in India needs diverse process and procedures, which should be adhered to so your business can run with ease and result in maximum profits with smooth compliances.

These are the guidelines which every entrepreneur need to consider before the setting up business in India:-

  1. Whether your proposed business falls under Automatic Route or approval route
  2. Procedure of choosing of types Business establishment which suits best for your business
  3. Business Registration Process & commencement of Business along with the costing of the same
  4. Requisite Approvals and Registration.
  5. Essential Compliance under different Act.
  6. Winding up of Business.

In this article, we will study about the essential legal factors that should be kept in mind for starting the business in India.

1. Prohibited Business for FDI in India

These sectors falls under prohibited business in India for FDI purpose:

  • Lottery Business including govt. lottery or private lottery, online lotteries;
  • Gambling and Betting including casino;
  • Trading in Transferable Development Rights (TDR);
  • Cigars, cheroots, cigarillos and cigarettes Manufacturing, tobacco or of tobacco substitute;
  • Chit Funds;
  • Nidhi Company;
  • Real Estate Business or farm houses construction*;
  • These Sectors not open to private sector investment like
    • Atomic energy,
    • Railway operations (apart from permitted activities mentioned under the Consolidated FDI policy).

*Important point- the “Real Estate Business doesn’t include development of residential/commercial premises, township construction, roads or bridges”.

Now, once you got clarity on allowed and prohibited businesses in India, let us further re-classify the same under Automatic Route and Government approval Route.

Automatic Route

Under the Automatic Route, the non-resident investor or the Indian company does not need any approval from GoI for the investment.

Government Route

Under the Government Route, prior to investment, approval from the GoI is essential. Proposals for FDI under Government route, are considered by respective Administrative Ministry and then only investment under the same is allowed. The same is applicable to some businesses and investments from some countries like China, Pakistan, etc. as well.

Important point to note that the word investment falls under the category of automatic or approval route but loans in the form of ECB (external commercials borrowings) are allowed in any sector and there is no bifurcation of automatic approval and government approval as such except that the prescribed compliances for external commercials borrowings are required to be done.

2. Process of Selecting Of Form of Business Establishment 

The process of choosing the form of business is compulsory factor that should be done in accordance with the types of business, number of investors, duration of business in India, etc.

In the case when client wants to continue with the business form of foreign Company only, then the these options are available:

Liaison Office –

To represent the parent company in India who basically act as a communication channel between the parent foreign Company and Indian entities.

Eligibility Criteria: The Foreign Entities should have a profit-making track record during the immediately preceding 3 FY in the home country and net worth of not less than $ 50,000 or their equivalent.

Branch Office –

Basic Purpose: To undertake activities like Export, Import, research, consultancy, etc.

Eligibility Criteria: The Foreign Entities should have a profit-making track record during the immediately preceding 5 FY in the home country and net worth of not less than $ 100,000 or their equivalent.

Project Office (PO)-

The PO Office can be set up to execute specific projects in India. Apart from this cannot undertake or carry on any activity other than the activity relating and incidental to the execution of the project.

However, in case the client wants to run business in India as Indian Company, which is recommendable as well in case of long and standing business plans, the following options are available:

  • JV with Indian Partner,
  • Indian Company, whether subsidiary or not; and
  • LLP (Limited Liability Partnership)

Once the entity is formed, the details about the foreign investment needs to be informed to the RBI in prescribed formats and in a defined way.

3. Other Approvals and Registration

Trademark/ Brand Registration

Trademark registration endows legal right of exclusivity for the use of mark to the owner of the mark and it is always mandatory to take trademark registration well in advance before the product/service comes into market.

GST Registration

Any business which have turnover exceeds the threshold limit, as may be prescribed, will need to get itself registered under GST.

Importer Exporter Code (IEC)

Import Export Code is a registration needed for persons importing or exporting goods & services from India. Import Export Code is issued by the DGFT i.e. Directorate General of Foreign Trade, Ministry of Commerce & Industries, Government of India.

MSME Registration

SME registration is not yet essential but there are a lot of merits of MSME registration and hence, the same is recommendable.

  • EPF and ESI Registration
  • Professional Tax Registration
  • Copyright, Patent, Design and other registrations related with  Intellectual Property Rights

Any business needs other approvals and license as well in accordance with their business formation and objective like – Factory Layout Plan Approval, Pollution Board Approval, Registration under Contract Labor Act 1970, Environment, Forest and Wildlife Clearance, Factory Registration, etc.