What You Need to Know Before Investing in or Setting Up a Business in India

India is a great place to invest, even though China is leading in Economy now. India's growth has fallen so the Indian Government has lessened its corporate tax from 35% to 25% as well as has begun investing ferociously on several fronts. It has also started privatisation bid on several public industries. As such, it is the best time to invest in the country.

Okay, so considering the recent spurt of outsourcing all over the world, I wanted to talk about whether you should invest or set up businesses in other countries than USA such as India and China (the biggest business destinations in the world) as well as other countries.

In this post and some of my subsequent posts, I will share with you some key stuff you must know about, before you set up business in India.
So, I am inclined to call this and some of my later posts part of an Investing in India series! Don’t worry, before every such Investing In India series, I will make sure to notify you at the top.

And also, I will make other Investing in series which will be similarly comprehensive in terms of the business statistics, economics and laws of the countries which I will talk about.

In this Investing in India series, I will share with you the Business Economics of India and some must-know laws in very simple terms so that you get a basic understanding of what can come when you invest in the country or set up a business here.

Why Set Up Business or Invest in India in the First Place!?

India is the fastest growing economy in the world and even though China is about to become the world’s largest economy, it is forecasted that India due to its stable and sustainable growth rate shall overcome China in the near future.

That said, Indian markets present a very great opportunity for American and other business owners to invest in or even set up their own businesses due to several liberalisation ventures by its present Prime Minister, Narendra Modi.

Although the economy’s GDP growth rate has suffered and demand is receding, officials are introducing several (and some of them are crazy good for industries) measures to boost demand and make investment conditions more favourable, the most recent of them being, the corporate tax cut from 35% to 25% which is at par with several of the world’s leading economies. 

Opening up a business or branch or franchise in India has never been this easy.

The Indian Government has also started investing in several industrial fronts and has begun a privatisation bid on several of its leading private industries. Therefore, now is the best time to invest in India.

In this post, I shall share with you, how to set up a business in India and how to invest in India as well as, and more importantly what are the most important factors that you should pay attention to before setting up a business in India.

Present Stats on the Indian Economy (that You as an Investor Should Know)

India has a GDP of around $3 trillion. However, its GDP growth rate has fallen from over 8% in 2018 to around 4.5% because of the move of the Government to demonetise INR 500 and 1000 bills and replacing them with INR 2000 and 200 bills in an effort to curb the increasing black economy.

Moody further predicts the Indian economy growth rate for the year 2019-20 to fall to 5.8% from its earlier prediction of 6.2%. Although this presents a gloomy picture, the fact of the matter is that the Government is presenting a slew of economic reforms to boost demand and make investment conditions even more favourable.

Plus, India being a democracy, its economy is much more stable than its Chinese counterpart. That said, Indian GDP per capita is expected to reach $2500 by the end of this quarter and $3200 by the end of 2020.

The unemployment rate is at 6.1% and the inflation rate is at a very low (for developing countries) 3.18%.

Although India has a ton of IT and Business Process Outsourcing industries, it is receiving a ton of push by its Government to boost its manufacturing industries. Plus, the Government is also privatising several of Government owned industries in an effort to boost investment in the country.

The country also ranks second worldwide in farm output and is about to become third in terms of purchasing power parity in the world.

Having a stable government, businesses face little risk in setting up of manufacturing hubs in the country.

Here’s a video outlining the future possible GDP growth rates of several countries including India-

How Can You Invest in India

First, you need to register yourself with the Securities and Exchange Board of India to entitle yourself to invest in the Indian market.
Hang On!

First, you need to register yourself with the Securities and Exchange Board of India to entitle yourself to invest in the Indian market.

If you are from USA, you could invest through U.S listed exchange-traded funds (ETFs), which would allow you to get past the legal implications of ADRs or American Depository Receipts. 

But, investing through ADR is the more traditional way of managing your stocks. Therefore, you could invest via Indian Stock Exchange services such as the Bombay Stock Exchange (BSE) and National Stock Exchange of India (NSE).

The Balance.com has a list of popular Indian ETFs as follows:

  1. WisdomTree India Earnings Fund ETF (NYSE: EPI) 
  2. iPath MSCI India Index ETN (NYSE: INP) 
  3. Invesco India Portfolio ETF (NYSE: PIN) 
  4. iShares S&P India Nifty 50 Index Fund (NASDAQ: INDY) 
  5. Market Vectors India Small Cap Index ETF (NYSE: SCIF)

There are three level of ADRs:

Level 1 are traded over the counter and have minimal requirements from the Securities and Exchange Commission.

Level 2 are traded on NASDAQ and consist of much of the tech companies in India.

Level 3 are the best in class listing and are equivalent to a full public offering.

The advantage of choosing an ADR is that it protects you from local currency fluctuation while at the same time, giving you an easy access into the Indian markets.

How Can You Set Up Your Business in India

  • First, you need to get a Director Identification Number (DIN) – You need to file the application form DIN-1 online. You will then be given a provisional DIN. You need to then print your application form, sign it and send it to the Ministry of Company Affairs along with a proof of your ID and address. If all that you submitted was correct, you will get a permanent DIN. 
  • Get a Digital Signature Certificate from one of the six private agencies authoried by MCA-21.
  • Now you need to reserve your company name online using the MCA-21 website.
  • Send over the unsigned copies of the Memorandum and Articles of Association (MAA), and the payment receipt to the Superintendent along with a request for stamping them. When it is stamped and returned, get it signed among the promoters of the company (if more members than one).
  • You need to electronically file the e-form 1; e-form 18; and e-form 32 on the Ministry of Company Affairs website. Don’t forget to attach the scanned copies of the consent of the initial directors, and also of the signed and stamped form of the MAA. Finally, send over one copy of the Memorandum and Articles of Association, Form 1, Form 32, Form 18 and the original name approval letter, consent of directors and stamped power of attorney to the Registrar of Companies.
  • Read: How You Can Create a Perfect Memorandum of Association for Your Company in India
  • Create a seal for your company –  You will need this when you issue share certificates and other documents. However, I guess a recent Company Act amendment, makes this provision optional and it can be done away by using the Directors’ or Company Secretary’s Signature.
  • Get yourself a Permanent Account Number (PAN) – You can get this by filing a PAN application through Form 49A online.
  • Get yourself a Tax Account Number using Form 49B.
  • You need to send over your or your manager’s names and the establishment’s name, postal address, and category to the local shop inspector with the applicable fees within 30 days of opening your business.
  • You need to register yourself for Goods and Service Taxes and Profession Tax at the Profession Tax Office as well as with the Employees’ Provident Fund Organisation.
  • LAST, but not least, you need to register for medical insurance for your employees.

Laws That Every Business Owners or Investors Must be Aware of (So Do You!)

First up, you need to know how to set up a business in India and what are the rules and regulations, a business has to follow.
Don’t worry, you won’t need to go through all that!

First up, you need to know how to set up a business in India and what are the rules and regulations, a business has to follow.

If you want to start a business in India, check out these articles too-

Secondly, if you want to open a business chain, or even invest in a biz, you need to know how trade unions operate in the country, Some businesses are great at handling trade unions which creates an amazing work culture with very little influence from trade unions while some businesses sink under pressure from several trade unions.

  • In order to handle them with expertise, you have to have a good understanding of the Indian Trade Union Act. In the upcoming post, I will get into the depths of how trade unions operate in India.

That said, you also need to know how industrial disputes between the management and the workers are resolved here, because industrial peace plays a great influence on business productivity.

  • Industrial Disputes Act and The Industrial Employment (Standing Orders) Act takes care of these. While the first law shows how disputes are taken care of in India, the second law helps broker discipline between the workers and the employers by providing for some conditions of employment to be written down by the businesses so as to promote uniformity. More on that in the upcoming post.

You also need to know the several laws regulating business conduct in India-

  1. Here’s All You Need to Know about Professional Tax in India
  2. Is Your Business Aware of the Indian Copyright Law? Here’s Why You Should Be.

Funding Your Business

While there are several funding tactics like bootstrapping that are common in different countries; however, some such as equity financing are restricted by regulatory bodies.

Just like SEC regulates equity financing in USA, in India the work is done by SEBI.

This in-depth guide shows all about funding your business in India.

Unique Businesses in India

There are tons of opportunities in terms of unique forms of businesses that you can open in India.

For starters, you could open an NBFC, which is much like a bank, but with a lot less regulation.

There are also several different types of NBFCs, which makes it an exciting business structure in India. One of  the types of NBFCs is a Nidhi company, which is the easiest and cheapest NBFC to form.

Hope you liked it. If you did, be sure to give it a share. 

I’d love to hear your thoughts too, so do drop a comment!

For any queries or help with your startup, feel free to book a free consultation with usYou may also check out our list of services if you need any help with your business efforts.  

author avatar
Adhip Ray
Adhip Ray is the founder of WinSavvy. He has a legal, finance and data analytics background and has provided marketing consultancy to startups for over 5 years. He has been featured at multiple publications in multiple niches including HubSpot, Addicted2Success, Manta, FitSmallBusiness, Databox, IndiaCorpLaw, Bar and Bench and more!

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