”A Q&A with our Company Secretary and Head of Legal Sarita YadavSarita yadaHead of Legal, svod advisory
Sarita Yadav, our Company Secretary and Head of Legal guides you in this Q&A through the intricacies of expanding your business in India. With a deep understanding of Indian regulations, Sarita offers practical answers and valuable recommendations to entrepreneurs and companies alike. Whether you’re a seasoned player or a budding startup, her expertise will help you navigate the Indian legal landscape, and will ensure that you enter the Indian market successfully.
1. As a foreign company looking to establish operations in India, what are the key legal considerations to conduct business smoothly and comply with local regulations?
When establishing operations in India as a foreign company or entity, there are several important legal considerations to keep in mind to ensure smooth business operations and compliance with local regulations. Here is a concise and comprehensive overview of these vital considerations:
Choose the appropriate business structure that aligns with your goals, such as sole proprietorship, partnership, limited liability partnership (LLP), one-person company (OPC), private limited company, or public limited company.
Select a unique and unclaimed business name that reflects your venture’s values. Register the organization’s name at the state level to obtain a domestic trademark and purchase a relevant domain name for your online presence.
Draft a comprehensive Founder’s Agreement to define the rights, responsibilities, ownership, and dispute resolution mechanisms in case of disagreement within the founding team. This agreement establishes a solid foundation and serves as a reference point.
Licenses and Registrations
Obtain the necessary licenses and registrations to authorize your business operations. It typically includes the legally required registrations such as GST, PAN, Tax Account Number, bank account, and shop and establishment license. Additional specialized registrations may be requested based on the organization’s business activities.
Taxation and Accounting
Understand the applicable tax regime, including central, state, and local taxes. Stay updated on tax exemptions and initiatives like the Startup India program. Maintain proper accounting records and ensure compliance with taxation rules.
Comply with labor laws about minimum wages, gratuity, provident fund (PF), weekly holidays, maternity benefits, sexual harassment prevention, and payment of bonuses. These regulations apply irrespective of your organization’s size.
Intellectual Property (IP) Protection
Safeguard your intellectual property assets by registering patents, trademarks, or copyrights as necessary. Familiarize yourself with intellectual property laws and explore initiatives like the Scheme for Startups Intellectual Property Protection (SIPP).
Develop a clear and comprehensive business policy that guides your employees and management. This policy ensures focus and facilitates targeted growth.
Consider obtaining appropriate business insurance to protect your venture and its assets beyond personal liability protections. Explore options such as general liability insurance, product liability insurance, and commercial property insurance.
Understand the legal procedures for winding up a company if necessary. Be aware of the court or tribunal route, voluntary closure/fast-track exit mode, and the steps involved in informing stakeholders.
It is crucial to adhere to these legal considerations and seek professional advice to ensure compliance and mitigate legal risks to enter the Indian market. By navigating these requirements, you can establish a strong foundation for your business in India, facilitating smooth operations and growth.
2. Intellectual property rights (IPR) are critical to conduct business activities in India. What are the existing legal protections for IPR and the steps foreign companies or entities should take to safeguard their intellectual property assets in the Indian market?
India has a robust legal framework for IPR protection, governed by instrumental regulations such as the Patents Act, Copyright Act, Trade Marks Act, Geographical Indications of Goods Act, Designs Act, Protection of Plant Varieties and Farmers’ Rights Act, and Semiconductor Integrated Circuit Layout Designs Act. These laws guarantee protection for patents, copyrights, trademarks, geographical indications, designs, plant varieties, and semiconductor integrated circuit layout designs. Foreign companies or entities should follow these steps to protect their IPRs in India:
- Register their IPRs with the relevant Indian government agency.
- Use clear and distinctive trademarks for their goods and services.
- Maintain well-organized documentation of their IPRs.
- Actively monitor the market for potential infringements.
- Take legal action in the occurrence of copyright infringement.
In addition to these legal safeguards, foreign companies can implement additional measures to safeguard their IPR assets in the Indian market. These include conducting due diligence on partners and suppliers, implementing confidentiality and non-disclosure agreements, providing employee training on IPR matters, and implementing security measures for IPR assets.
By following these steps and taking additional measures, foreign companies or entities can minimize the risk of IPR infringement in India. That way, they can fully benefit from their investments in the Indian market.
3. Are there any specific regulatory restrictions or compliance requirements that foreign companies or entities should know when engaging with highly regulated industries, such as pharmaceuticals, technology, or financial services?
The foreign companies that engage within these industries must consider regulatory restrictions and compliance requirements. Here’s a concise overview:
To set up operations in India, the organization must obtain a license from the Drug Controller General of India (DCGI). They must comply with quality control standards and good manufacturing practices (GMP).
The organization must request a license from the Department of Telecommunications (DoT) and meet security, privacy, and other relevant requirements.
The Reserve Bank of India (RBI) is responsible for banking licenses and ensuring that the newly incorporated organization complies with capital adequacy and liquidity requirements.
Foreign organizations willing to expand to the Indian market must address general considerations such as FDI regulations that apply to specific industries. They also need to take into account compliance with competition laws, adherence to labor laws protecting workers’ rights, and compliance with environmental laws. Seeking legal advice and staying updated on evolving regulations is essential to ensure successful incorporation in India.
4. Tax considerations are often significant for foreign companies or entities operating in India. Can you give an overview of the existing tax obligations to conduct operations in India or establish a Joint-Venture?
When a foreign organization engages in business activities, acquires assets, or establishes joint ventures in India, they need to be mindful of the significant tax considerations. Here are the essential tax obligations and implications they should be aware of:
Foreign organizations benefiting from the permanent establishment (PE) in India pay income tax on their global income. The applicable tax rate is 30%.
Foreign companies or entities distributing dividends to shareholders in India are subject to dividend tax.
When foreign companies or entities process payments in favor of Indian residents, such as salaries, rent, or interest, they must deduct withholding tax at the source. The rate of withholding tax varies depending on the nature of the payment.
Goods and Services Tax (GST)
The GST is a value-added tax levied on most goods and services in India. Foreign companies or entities that supply goods or services within India must register for GST and collect GST from their customers.
Imported goods are subject to customs duty, a tax imposed during importation. Foreign companies or entities importing goods into India must fulfill their customs duty obligations.
When it comes to taxation, foreign entities must consider the following point:
Double Taxation Treaties
India has established double taxation treaties with numerous countries, aiming to prevent or alleviate double taxation of income subject to tax in India and abroad.
India offers various tax incentives to foreign organizations with subsidiaries in the country. These incentives include tax holidays, accelerated depreciation, and tax rebates.
Any organization planning to set up business operations in India should hire a tax advisor. It will help to comprehend the complexity of the domestic tax system and its implications. Note that the tax landscape in India is subject to change, and it is advisable to consult professionals or refer to updated tax regulations for accurate information.
5. What are the common challenges or pitfalls when setting up operations in India? How to navigate them?
Expanding your organization abroad means that you will face legal obstacles and learn regulations that do not exist in your home country.
Here are a few legal specificities and strategies to challenge them:
Complex Regulatory Environment
India has a diverse regulatory framework specific to different industries and sectors. To effectively navigate this complexity, foreign companies should seek legal guidance from experienced Indian lawyers. They will help interpret and comply with the relevant laws and regulations.
Bureaucracy and Delays
India’s bureaucratic processes can be slow and inefficient, delaying permits and license obtention. Foreign companies should anticipate these challenges and work closely with legal professionals to streamline the process, ensure timely submissions, and proactively address any issues that may arise.
Intellectual Property Rights (IPR) Protection
Protecting intellectual property rights in India can be challenging. Hence it is vital to take proactive measures to safeguard your organization’s intellectual property.
To do so, a foreign organization should take proactive measures to safeguard their intellectual property. It can involve filing for patents, trademarks, and copyrights; enforcing their rights through legal means when necessary. Collaborating with local legal experts specializing in intellectual property can provide valuable guidance.
Cultural Differences to be aware of to enter the Indian market
India’s diverse culture and customs can present challenges in conducting business. To navigate these differences, foreign companies should invest in understanding the local culture, norms, and business practices. Building relationships with local partners and stakeholders can help bridge cultural gaps and foster successful collaborations.
In addition to these strategies, foreign companies should consider the following tips:
Conducting comprehensive research on the Indian market, including economic trends, consumer behavior, and competitor analysis. It is essential for informed decision-making and effective market entry strategies.
Local Talent Acquisition
Hiring local talent with knowledge of the Indian market and its cultural specificities can contribute to smoother operations and help build strong local connections.
Resilience and Long-term Commitment
Maintaining resilience in the face of challenges and adopting a long-term perspective is crucial for success in the Indian market. Building trust, adapting strategies, and consistently delivering value essential in every country to establish a sustainable presence and build your business reputation.
By employing these strategies and tips, foreign companies can enhance their ability to navigate the Indian business landscape effectively and mitigate potential legal risks. However, like everywhere in the world, legal requirements and practices continuously evolve, and seeking ongoing legal advice and staying updated with regulatory changes is essential.
6. Are there any recent legal developments or changes in the Indian legal landscape that foreign companies or entities should be aware of when considering business activities in the country?
Foreign companies or entities have several legal structures available to establish a presence in India and enter the Indian market, each with its key features and considerations:
A liaison office is the central communication channel between the subsidiary and Indian organizations. It is not permitted to engage in commercial activities and can only undertake limited activities such as market research, promotion, and facilitation of business relationships.
A branch office is perceived as an extension of the foreign company and allows commercial operations in India. It can engage in activities similar to the parent company and is subject to Indian tax regulations. However, you should consider compliance requirements and possibly higher tax liabilities.
For a specific project, you can set up a project office. Hence, you will only be allowed to undertake activities related to the project. Project offices come with restrictions. They must close after the completion of the project or the execution of the contract.
Establishing a wholly-owned subsidiary involves incorporating a separate legal entity in India. It provides the foreign company with complete control and ownership with the ability to engage in a wide range of business activities. However, compliance with company law, tax regulations, and other regulatory requirements is necessary.
Foreign companies should carefully evaluate their business objectives, operational requirements, tax implications, and compliance considerations when selecting a legal structure for their presence in India. Seeking guidance from legal professionals specializing in Indian corporate law is advisable.
7. Can you provide examples of successful partnerships or transactions involving foreign companies or entities in India and share insights on the legal strategies that contributed to their success?
Acquiring an existing business or entering into joint ventures in India as a foreign company involves specific considerations and legal requirements:
A thorough due diligence will tremendously enable assessing the financial, legal, and operational aspects of the target company or joint venture partner. During the due diligence procedure, we will review contracts, assets, liabilities, intellectual property, licenses, permits, and compliance records to ensure everything is in order.
Regulatory Approvals to enter the Indian market
Certain acquisitions or joint ventures may require regulatory approvals from government bodies or sector-specific regulators. Compliance with competition law and foreign direct investment regulations is essential.
Share Purchase Agreement (SPA) or Joint Venture Agreement (JVA)
Negotiating and executing a well-drafted SPA or JVA is critical. It should address key aspects such as ownership structure, rights and obligations for both parties, governance, exit mechanisms, dispute resolution, and intellectual property rights.
Analyzing the tax implications of the acquisition or joint venture is instrumental. It includes assessing capital gains tax, transfer pricing, withholding tax, and indirect taxes. We always recommend seeking tax expertise to optimize tax efficiency and ensure compliance.
Transferring employees, complying with labor laws, and addressing employee benefits or liabilities should be carefully managed during the acquisition or joint venture process.
After the acquisition or joint venture, foreign companies must ensure compliance with ongoing legal and regulatory requirements, such as corporate governance, taxation, and labor laws.
Engaging experienced legal advisors who specialize in mergers and acquisitions and joint ventures in India can provide valuable guidance throughout the process. They can help navigate legal requirements, mitigate risks, and ensure a successful and compliant transaction to enter Indian market.