How to start a business in India

India, the largest democracy with a population of 1.4 billion, stands as one of the most vibrant emerging markets globally reaching USD 3.94 trillion in 2023-24.

The government has played a key role in transforming India into new India where there is a wave of entrepreneurship. With the initiatives such as Make in India campaign and liberalization of finance have encouraged more companies and entrepreneurs to enter the Indian market and take the advantage of the immense opportunities.

India’s business environment offers vast opportunities but understanding the specific regulatory and market condition is essential for a successful entry. Below are mentioned some of the foundational considerations that can help businesses maximize their potential and establish a strong foothold in India.

Key Considerations before setting up a Business

1.    Business Idea: Having a business idea is the first and the most essential step in building any business. Developing a unique business idea gives an advantage to the business owners of getting the first move advantage and creating a monopoly in the market.

2.    Target Industry: India is current one of the fastest growing economies and actively competes with China. To reduce its imports, the Indian government has initiated the campaign ‘Make in India’, which promotes manufacturing the products in India by offering incentives and subsidies. It is important to have thorough research to avail ourselves of such benefits.

When selecting an industry, consider key factors such as the sector’s growth potential, outlook and government support through incentives and subsidies e.g. for renewable energy versus limitations (e.g. restriction on advertising alcohol.

3.    Market Study & Feasibility: After identifying a few preferred industries, thorough market research needs to be conducted. This is a critical step to assess the potential for future growth. Performing analyses like a SWOT analysis helps gauge competition, market size, opportunities, innovation potential, and more. With these insights and an adequate feasibility report, you will have clearer direction and greater confidence in your next steps.    

4.    Location: India’s vast and diverse population makes selecting the right location crucial for success. This ideal location depends on your business nature and target market. For example, a business targeting Tier 1 markets should be in a metropolitan city, while one focused on rural needs should consider Tier 3 cities

5.    Government Schemes: Before finalizing the unit location, product facility and target market (export or domestic), it is important to research and understand various schemes offered by the government. Production Linked Incentive (PLI) schemes are one of the prominent schemes offered by the government. These schemes can significantly reduce the operational costs and simplify the business process. For instance, the UP-Electronics Manufacturing Policy 2020 provides incentives and subsidies for setting up a manufacturing unit of any electrical component in Uttar Pradesh.

6.    Secure Funding: When structuring the business plan, it is important to consider all the business aspects that contribute to its success. This includes estimating costs associated with achieving key benchmarks in various areas. A few of the aspects which should be covered are setting up facilities, securing necessary registrations and purchasing assets. Additionally, planning for a runway period of at least 9 to 12 months is important to ensure smooth operation of the business.

Funding sources include bootstrapping, crowd funding, Investors, Business loans from banks and financial institutions and more.  

7.    Investment Structure: Entering the Indian market requires careful planning regarding the investment type. Based on the nature of business and investment size, it is important for the business owners to analyze whether to make a brownfield or a greenfield investment as each has its unique cost implication and strategic benefits.

The Foreign Direct Investment (FDI) policy is important for foreign companies looking to establish a presence in India.

FDI Policy

Over the past two decades, India’s government has relaxed the FDI policy, allowing up to 100% foreign investment in most sectors, including service sector. Under the current FDI policy, all types of investors are allowed to invest in any sector, except for those that are specifically prohibited. Investments in other sectors can be made through two methods:

• Automatic route: No prior government approval is required.
• Government approval route: The relevant Ministry or Department must approve the investment.

8.    Legal Structure: Foreign business owner has several options available to enter the Indian market. Either they can establish a corporate entity which includes establishing the business from start, forming a joint venture with an Indian company and acquiring a domestic company to enter the Indian market or they can set up a non – corporate entity which includes setting up of Liaison Office, Branch Office and Project Office. Each way has its unique advantages and limitations.

Setting up a Corporate Entity

• Private Limited company is one of the most popular and opted business structures. It is a business entity which is privately held with limited liability for its shareholders where shares cannot be publicly traded.
• A public limited company in India is a corporate entity that offers its shares to the public through the issue of IPOs. The Public has the right to sell its shares as they are traded on the stock exchange.
• A limited liability partnership (LLP) is a legal entity which is different from an ordinary partnership, where every partner has a limited personal liability for obligations made on partnership.
• A Joint Venture (JV) is a collaborative partnership between two or more entities to pursue specific projects or business activities, leveraging combined resources and expertise.

Setting up a Non - Corporate Entity

• Liaison office - A Liaison Office is usually set up to represent the parent/group company and to understand the business and investment environment. Its role is limited to aggregation of information and promotion of exports/imports.
• Branch Office – A branch office is opened and controlled by the foreign company to establish and conduct their business in India. Prior to setting up the office, specific approvals are required from the Reserve Bank of India
• Project office – For executing a project in India, the foreign company can set up a project office. No prior approvals are required from the Reserve Bank of India subject to prescribed reporting compliances.

9.    Application and Registration of the Business: Once a business model is selected after analyzing the pros and cons, it is important to consider the registration and licensing policies.

For instance, some sectors may require approval for the investment amount from respective government authorities, also the registration process can vary by state. Therefore, it is important to consider these factors to ensure a smooth process.

Setting up of a Company – Most Common Business Structure in India

A Company is the most common structure opted in India. The company offers its shareholders the right of limited liability to the extent of their investment in the company.

The procedure and scope of our services for setting up a company is briefly explained hereafter:

1.    Name Approval: The first step towards the incorporation of a company in India is the application for approval of a company name.  The company must comply with guidelines of the Ministry of Corporate Affairs for name approval.

2.    First Director(s) and Subscriber(s): Every company is required to have a minimum of Two (2) Directors and Two (2) Subscribers (for a Private Limited Company) and Three (3) Directors and Seven (7) Subscribers (for a Public Limited Company).

3.    Director Identification Number (DIN): Each of the proposed directors is required to obtain the Director Identification Number (DIN).   The applicant is required to submit the DIN Form along with the supporting documents.

4.    Digital Signature Certificate (DSC): A Digital Signature Certificate (DSC) is required to electronically certify the documents that are filed with the Registrar of Companies (ROC) and sometimes even the Tax Authorities, during the lifetime of the Company.

5.    Registered Office: Every company registered in India is mandatorily required to have a place of business in India which is known as registered office. The applicant is required to submit proof of evidence in the case of self-owned property or required to submit the rent agreement in case of lease property.

6.    Constitutional Documents: The memorandum of association may contain a statement of the objects of the company and a list of the powers that could be exercised by the company in achieving those objectives.

7.    Submission and Certificate of Incorporation: An application in the prescribed form along with the prescribed fees require to be filed with the registrar of companies for obtaining the Certificate of Incorporation. The company can commence its business activities after receiving the certificate of incorporation.

8.    Post Incorporation Compliances: Companies need to compliance with secretarial matters under the Companies Act and report to the registrar of companies.

For more information on the incorporation of the company, please refer to the article linked below.

Conclusion

The above-mentioned article gives in a detailed description of how to start a business in India for both nationals and foreign nationals. It is important to adhere to the points mentioned above to build a strong legal foundation for your business. Understanding and selecting the right form of business helps one to achieve the right benefits and increase the longevity of your business.