Notes when setting up a company in India

India, with its booming economy and huge market size, is a promising destination for international businesses to invest in. To ensure a smooth and effective investment process, businesses need to pay special attention to a number of key issues. Viet An Law would like to guide customers to some notes when establishing a company in India through the article below.

Notes on representation when setting up a company in India

Why is there a minimum of two directors?

The requirement of at least two directors is to ensure transparency and accountability in the company’s operations. With the two directors, there will be a division of responsibilities and mutual supervision, which will help prevent illegal acts and ensure that the company’s operations are run effectively.

Director’s residency requirements

Requiring at least one director to be an Indian resident has the following purposes:

• Compliance with Local Laws: Ensure the company complies with Indian legal regulations.
• Operating operations in India: It is more convenient for a director to reside in India to run and manage the company’s operations in this market.
• Communication and interaction with authorities: It will be easier for the Director to reside in India to communicate and work with government agencies and stakeholders in India.

Who is considered an “Indian resident”?

Under the Indian Income Tax Act, 1961, an individual is considered an Indian resident if one of the following conditions is met:

• Be present in India for at least 182 days during the financial year.
• Be present in India for at least 60 days in a financial year and 365 days in the 4 consecutive years preceding that financial year.

Notes on the shareholders of the company of the Subsidiary

Similar to the requirement of two directors, the requirement of at least two shareholders is to ensure:

• Legality: Under Indian law, a Private Limited Company, a common form of choice for foreign subsidiaries, requires a minimum of two shareholders to be incorporated.
• Division of ownership: With two or more shareholders, the ownership of the company is divided, providing the basis for the management and distribution of profits.

Who can be a shareholder?

• Individual: Any individual, including foreigners (with certain restrictions), can be a shareholder of an Indian subsidiary.
• Organizations (legal entities): Companies, corporations, investment funds, or any other legal entity can also be shareholders. This is especially important for foreign parent companies that want to set up a subsidiary in India. The parent company will be one of the shareholders of the subsidiary.
• A combination of both: A subsidiary can have both individual shareholders and institutional shareholders.

Shareholding ratio

There is no minimum shareholding ratio per shareholder, unless the parent company wants to maintain control. In case the parent company wants to take control of the subsidiary, the parent company usually holds more than 50% of the total shares.

Notes on Director Identification Number when incorporation of a company in India

What is DIN?

DIN is a unique 8-digit identification number issued by India’s Ministry of Corporate Affairs (MCA) to any individual who wishes to be appointed as a director of a company. DIN is like a personal tax identification number (TIN) for company directors.

Why DIN?

• Track and manage directors’ information: Help MCA keep track of the history and information of directors in different companies.
• Fraud prevention: Minimize the situation of one person holding a director position in multiple companies with unclear or fraudulent purposes.
• Increase transparency: Ensure transparency and accountability in the operations of companies.

How to apply for a DIN

DIN applications are made online through the MCA portal. The process includes:

• Submit the DIR-3 form: This is the application form for a DIN.
• Provide identification documents: Including ID cards, passports, residential addresses, etc.
• Validate Information: MCA will validate the information provided.
• Receive DIN: Once approved, the individual will receive a DIN.

Duration of DIN

DIN is a unique number and is valid for life. An individual only needs to apply for a DIN once.

DIN Usage

DIN is used in all records and papers related to the company of which the individual is a director. For example, in annual reports, board resolutions, etc.

Some Related Questions When Setting Up a Company in India

Is the director required to be a shareholder of the company?

It is not mandatory for the director to be a shareholder of the company. A director can be a person hired to run the company’s operations without owning shares. However, in many cases, major shareholders are also directors to be able to directly participate in the management and administration of the company.

What are the legal consequences if the company has only one director who is not an Indian resident?

If the company has only one director and this person is not an Indian resident, the company will not comply with the provisions of the law and may face difficulties in the registration and operation process. In this case, the company needs to appoint an additional director who is an Indian resident to meet the requirements of the law.