Setting Up An IT Company In India

by Satish Talim on January 20, 2007

Serene Pune

Now-a-days many small (20-40 people) sized companies working with Ruby on Rails in the US and Australia are planning to set-up their own software units in Pune, India.

I have been helping some of these and I have penned down some of my experiences.

I am assuming that the foreign company has already worked out and finalized their budgets and that they do not have a local presence.

Here are the steps involved:

  • First, appoint a local consultant (LC) experienced in the entire process. Then make sure he has some business cards. This is essential as that person knows the local terrain and the rules and regulations of the city where the software unit is planned to be set-up.
  • There are many parallel activities that one needs to do. Today, let’s start talking about one of them, namely the process of incorporating the local company (normally a private limited company).

A foreign company planning to set up business operations in India can do so as under:

  • As a foreign company through a Liaison Office / Representative Office, Project Office or a Branch Office
  • As an Indian company through a Joint Venture or a Wholly Owned Subsidiary
  • Foreign Company is one that has been incorporated outside India and conducts business in India. These companies are required to comply with the provisions of Companies Act, 1956

For more details, refer the Nasscom site

Amongst the various ways of achieving the objective of setting up an IT company in India, I am suggesting one possible way:

  • Through your LC, appoint a local CPA (CA as they are known here).
  • To register a private company, you need a minimum of two resident Indians as Directors. If you know the LC well or have enough trust in him/her, appoint the LC as one of the Indian Directors.
  • The proposed Directors must have their DIN and DSC. This is in line with mandatory e-filing of all documents with the office of Registrar of Companies (ROC). The Ministry of Company Affairs’ site gives the full details. All the intending Directors have to obtain the Director Identification Number (DIN). The CPA can get a provisional DIN for you on the net within 10 minutes. Having done so, the CPA will save the provisional DIN form as a .pdf file, download it and then print the same. On the first page of the printed form, a photograph is to be affixed at the place provided and the proposed Director has to sign at two places, i.e. one below the photograph and the other at the bottom of the next page. Next, the CPA will take a photo-copy of the proposed Director’s proof of identity and proof of residence and send the printed form with the attached photo-copies to the Central DIN Processing Cell at NOIDA. The proposed Director will normally get the DIN approval letter within 15 days.(*)
  • The Information Technology Act, 2000 provides for use of Digital Signatures on the documents submitted in electronic form in order to ensure the security and authenticity of the documents filed electronically. This is the only secure and authentic way that a document can be submitted electronically. As such, all filings done by the companies under MCA21 e-Governance programme are required to be filed with the use of Digital Signatures by the person authorized to sign the documents. For this purpose a Digital Signature Certificate (DSC) is required. This process again could take between 10-15 days. The approximate cost for DIN and DSC is Rs 3500-00 (Use currency converter, if required). The DSC is normally valid for 2 years.

It is very likely that one of the foreign national (FN) in the parent company would like to become a Director in the local private company. The FN also needs to get his DIN approved as per the process described above.

(*) The FN needs to take out photo-copies of his/her passport for proof of residence, get those photo-copies notarized in the USA and then a certification of those notarized copies is to be obtained from the official of the Indian Embassy in the USA. It’s advisable that the FN send all the necessary documents along with the notarized and certified documents to the CPA, who in turn can submit to the Central DIN Processing Cell at NOIDA.

  • The next step is getting the name of the proposed company approved from the office of ROC, which I will discuss in one of my next blog posts.

What has been your experience? Do you find the process very cumbersome and time consuming? Are there any suggestions?


Part 2: Company Name Approval
Part 3: Locating Office Space

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Posted by Satish Talim

{ 22 comments… read them below or add one }

Vasudev Ram January 26, 2007 at 7:51 pm

That’s a useful post.
Thanks
Vasudev Ram
http://www.dancingbison.com

Reply

Ashish Pandey January 28, 2007 at 11:47 am

Blog that most of the IT people with desire to set up a company in present or future would like to read.Very precise and informative.
Great Job!!!

Ashish Pandey

Reply

hspgj January 28, 2007 at 12:48 pm

good

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Ayush January 31, 2007 at 3:26 pm

Thanx for all the info. It was very helpful.

Reply

Sachin Joshi February 2, 2007 at 12:20 pm

Thanks a lot! This is very useful, many time people search for this type of information and read it from these sites; thanks for documenting it together, for everybody.

Thanks a Lot

Reply

Sheetal February 27, 2007 at 6:44 am

I would like to knw how can one set up a branch /company of a foreign entitiy in India offering business and tax consultancy services.

Reply

satish February 27, 2007 at 7:18 am

Sheetal, my experience has been in setting up IT companies only. However, having said that, I guess that the procedure is more or less the same. The only change would be when it comes to various registrations like STPI etc which will not be required by a company offering business and tax consultancy services.

Reply

sharath March 12, 2007 at 12:34 pm

Hello,
I have lost my DSC , which has been given to the ROC.
can we apply for a duplicate , or is there any way i can get it back

thanks

Reply

Sri March 14, 2007 at 10:12 am

Satish,

I help companies setting up branches too. Found your article very interesting and useful.

BTW, do you know any good team in Pune with experience in ROR? One of our clients is looking to outsource some jobs.

Any help is appreciated.

Thanks,
Sri

Reply

tsureshkumar March 23, 2007 at 10:43 pm

excellent post. thanks

Reply

Srinivasa Murthy.B October 4, 2007 at 4:22 am

Hai

Thank you its very useful those who like IT industrie but creat a bench mark for all other like mechatronics professionals,,,thank you

Reply

Sivaram October 24, 2007 at 4:34 pm

Good article.

Seamless incorporation in India — when my collegue told me this a month back I counld not believe this. But now that I have lost the bet with him I agree. Formation of a company in India today is fast and there are no hiccups like those which I faced the last time I got in India in 2003. Great.

For those of you who are looking up on incorporation I also recommend http://4indianbusiness.blogspot.com/2007/10/starting-business-in-india.html which provides a practical insight.

Reply

Jidesh Kumar March 27, 2008 at 5:15 pm

Setting Up a Company in India

MCA 21 envisages electronic filing of documents and paperless administration and pertains to Registrar of Companies offices as stipulated in the Indian Companies Act, 1956 (the Act). One can get a complete understanding of the MCA 21 from the MCA portal. The key benifits envisioned by the MCA 21 are as under:

(a) Online incorporation of companies
(b) Simplified and easy mode of filing of Forms/ Returns
(c) Registration as well as verification of charges anytime and from anywhere
(d) Inspection of public documents of companies anytime from anywhere
(e) Corporate‐centric approach
(f) Building up a centralized database repository of corporates operating in India
(g) Enhanced service level fulfillment and customer relationship building
(h) Total transparency through eGovernance (i) Timely redressal of investor grievances (j) Availability of more time for MCA employees for qualitative analysis of corporate information

All the ROC’s have virutally become back offices and several facilitaion centers have been set-up know as Registrar’s Front Offices (RFOs).

Armed with this knowledge, I proceeded to incorporating the company. For MCA21, the following four types of users are identified as users of Digital Signature Certificates (DSCs).
(a) MCA (government) employees ; b) Professionals (Chartered Accountants, Company Secretaries, Cost accountants ) who interact with MCA and companies in the context of the Companies Act, 1956.; (c) Authorized Signatories and Directors of Companies ; (d) Representatives of Banks and Financial Institutions
I had already solicited the help of my collegue Vinod [who works with us ] who also happens to be a CA.

The first step – OBTAIN A DIN /Director Identification Number

Process

An existing Director/ person intending to become a Director are required to make an application to MCA for allotment of a unique identification, namely, Director Identification Number (DIN). It is intended to be a lifetime number. For obtaining DIN, form DIN1, requiring personal details such as name, address, and email ID of the person making an application, is required to be filled in. There is a fee of Rs. 100/ for application for allotment of DIN. On submission of of form DIN1 online, applicant shall be allotted a provisional DIN and then he/ she is required to pay the requisite fees with reference to the provisional DIN obtained. The applicant shall be required to take a printout of the submitted eForm and will have to attach proof identity, proof of residence, proof of father’s name, proof of date of birth and photograph. The applicant shall be required to sign the physical copies of the form and get these documents duly notarzed/ attested by an approved authority. The applicant shall be required to send these documents along with the proof of payment made for DIN application to MCA DIN Cell at Noida. On receipt of these documents, the application will be scrutinised and on approval, the DIN shall become active. The outcome of application (approval / rejection) shall be communicated to the user through email. Also the applicant can enquire the application status by quoting provisional DIN allotted at MCA portal.

Comment:

DIN is a mandatory process for foreign directors too and is required while applying for Form 1A [Name Availability Form]. A provisional DIN number is allotted instantly upon uploading the required information on the MCA portal. Eureka, it works..

The process of obtaining a permanent DIN however takes approximately 4 weeks subject of course to documents being in order. Form DIN-2 needs to be submitted to the MCA along with the approved number of all companies of which they hold a director position. DIN-3 attested by Company Secretary is required to be submitted to the concerned Registrar of Companies (ROC).

The Second step – DSC/ Digital Signature Certificate

The Digital Signature Certificate (DSC) is another requirement that is now required to be accomplished. I suggest that the DSC be applied parallel alongside applying for Name Availability since the process of incorporation can be accomplished that much more faster. The DSC can be obtained from six private agencies authorized by MCA 21 (Ministry of Corporate Affairs 21st century).

For the purpose of using the new electronic filing system under MCA 21 Project the applicant needs to obtain a Class II Digital Signature Certificate. Company directors submit the prescribed application form along with proof of identity and proof of address. Each agency has its own fee structure which ranges from INR 400 to INR 2650.

Comment:

The process was remarkably smooth with the process taking around 2 days, although Vinod did share with me that he had encountered problems previously. If the directors are foreign in origin, valid address proofs in the form of passport duly notarised and photographs would need to be provided. It is advisable therefore that several copies [I had around 5 copies] of the address proof of the directors be notarised since this saves valuable time. A good CA is very necessary to ensure that there are no undue delays.

Step three – Applying for Name Availability

Perceived to be a simple step, this can at several instances be time consuming. It is therefore advisable to go in for professional consultation before one applies for name availability. Clients often feel that their chosen names would be made available to them as a matter of course. This of course is from from reality. There are a few tips to get your name of choice.

Firstly, caution must be exercised that the chosen name is not generic., in the sense the name must not be too general. For example Wipro technologies – while the name Wipro is just fine, the Registrar of Companies (ROC) would take objection to the usage of ‘technologies’. This is because the ROC is guided by an internal circular to the effect which has come into effect post incorporation of most MNC’s who tend to have generic names.

Secondly, a good CA would always suggest you to check informally at the ROC whether a choice of name would be available. This is quite critical to hasten the process.

Thirdly, in case of a wholly owned subsidiary, if the choice of name bears the name of the parent entity, it is always advisable to obtain an NOC from the parent entity to the effect that it has no objection in the Indian subsidiary using the same name. This is particularly so if the parent entity is a well known name eg., Walmart

Fourthly, it is necessary to provide six names in the order of preference. It is necessary to make an intelligent choice of names since the ROC is likely to grant the second choice if the first does not fit the bill.

Comment:

We were able to obtain the desired name with not much difficulty since we had done our homework of checking with the name with the ROC well in advance. Officially, the ROC accomplishes this taks in 7 days and I must say that more often than not this timeline is often exceeded. It amazes me as to how much can be accomplished with bureaucrats in India with the right connections.

Step four -Memorandum & Articles to be stamped

Once a name is approved, the Memorandum of Association and Articles of Association together with miscellaneous documents have to be filed within six months of the approval. In practice, if the proposed name is available the same is granted within 2 or 3 days.

The application should be accompanied necessarily by the following: (i) Unsigned copies of the Memorandum of Association and Articles of Association. (ii) Payment receipt. Ensure that the copies submitted to the Superintendent of Stamps or to the bank for stamping are unsigned and no promoter or subscriber has written anything on it by hand. The Superintendent returns the copies, one of which is duly stamped, signed and embossed evidencing the payment of the requisite stamp duty. The rate of stamp duty varies from State to State. According to Article 10 and 39 of the Indian Stamp Act,1899, stamp duty payable on memorandum of association and articles of association for a company to be incorporated in Mumbai, Maharashtra is: AOA: Rs. 1000/- for every Rs.500,000/- capital or part thereof subject to a maximum of Rs.50,00,000.00. Stamp duty for the MOA is Rs.200.00 Once the Memorandum and the Articles of Association of the Company have been stamped, the same is required to be signed by the Promoters of the Company including commencing with the name and description, father’s name, address, occupation and the number of shares subscribed for in their own handwriting which is duly witnessed. After signing the documents are to be dated. Declaration form 1: On Rs 100 stamp paper

Comment:

It took us around 2 working days to get the stamping done. The process was however delayed since we had to get the overseas directors to sign off on the Memorandum and Articles.

Final Steps – Documents to be presented to obtain the Incorporation Certificate

After the stamping of the MOA and AOA, 3 copies along with the following documents are required to be scanned and uploaded on the MCA-21 Portal: – The stamped copies of the MOA and AOA – Copy of the Form-32 along with the consent letters of the Directors of the Company, who are appointed therein. – Form-1 – application and declaration for incorporating of a Company and printed on non judicial Stamp paper worth INR 20. – Form 18-evidencing the address proof of the Company. – Form-1A-evidencing the name approval. – Copy of challan evidencing the fee with respect to above mentioned forms. – Power of Attorney from the subscribers in favor of any person for making corrections on their behalf in the documents and papers filed for registration .This must be on nonjudicial stamp paper of INR 100. – Identification of the subscribers by way of copy of driving license, passport, voters identity or ration card. These documents, in addition to their online uploading, are also to be filed in original with the ROC. Once the documents are uploaded and confirmation of payment of fee is received from the Bank by the ROC, it processes the papers in order of their receipt. A software ensures that the queue can not be jumped by ROC. The fees paid to the Registrar for registration are scaled according to the amount of the authorized share capital of a company as stated in its memorandum.

Comment:

The process of issuing a certificate of incorporation normally takes seven working days. Pursuant to incorporation, TAN and other necessary registrations as required can be obtained.

Concluding remarks

In all the process of inorporating of a private limited company in India can be a smooth process if the right tools of approach are adopted. We took around 18 working days to obtain the certificate of incorporation. I must make a special mention that that the government has made an honest attempt to smoothen the rough edges that one encountered in incorporating a company. This is not to say that the present system is fullproof as one can still find old barks of wood at the ROC reminding one that it may take a while before things are up to speed of this digital era.

H/P: +91 9811620150

Jidesh Kumar.M.D
Managing Partner
King, Stubb & Kasiva
Advocates & Attorneys
E-66, 2nd Floor, Kalkaji
New Delhi- 110019
India

Ph : +91 11 – 41032969, 41318190, 41318191
Fax: +91 11 – 41329569
Web: http://www.ksandk.com
E-mail: jidesh@ksandk.com

Reply

Ram April 29, 2008 at 11:29 pm

Hi
I want to know if we can apply for name availability by using the provisional DINs generated by the MCA website.
If possible please let me know some details about name availability application.

Thanks and Regards
Ram

Reply

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bs srinivas June 27, 2008 at 1:38 pm

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Reply

Joseph Mathew December 2, 2008 at 9:52 pm

Guys,
Look at this site http://companiesinn.com. They provide online Company registration in few clicks and you can make online payment too.

Looks interesting..

Reply

Sandeep Verma February 23, 2010 at 7:35 am

Good article with all information at single place. Really appreciated.

Reply

faizal March 10, 2011 at 11:33 am

Thanks for your valuble information . For more information about
Best software company in trichy

Reply

Victor Casper July 25, 2011 at 6:27 am

I used eLagaan to register my company in India and was painless !

Reply

Vikram September 25, 2011 at 8:47 pm

Hello Satish,

I am working on a website project of my own. Can you guide me with few basic questions?

1) Do I need to have a company registered in order to receive advertisement revenue from my website?
2) If so, what is the minimum with which I have to begin as a company?
3) Otherwise, will having no company but just a website fetch me financial results?

Thanks!

Reply

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