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Setting up a business in India as an NRI: Key considerations
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Know if NRIs can establish a business or start-up in India
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Key considerations for setting up different kinds of legal entities in India
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Understand NRIs investment options in India, repatriation of funds and tax implications
The below content is purely for informational purposes and is not intended to constitute advisory of any kind. Please note, these are in-depth articles which are best viewed on large screen devices like laptops, desktops and tablets. The position reflected in this article has been updated as of October 31, 2024
India is one of the fastest-growing economies in the world, offering ample opportunities for entrepreneurs, including Non-Resident Indians (NRIs), to start their businesses in India. This article discusses various legal aspects of setting up a legal entity/startup/business in India, and managing and transferring funds for starting a business in India as an NRI. An NRI investing in India could consider from any of the below mentioned avenues as his/her investment option.
Setting up business and entity types
One of the first steps to setting up a business in India is to choose a legal entity type. Popular legal entity types in India include:
Sole proprietorship: This is the simplest form of legal entity in which a single person owns and operates the business. It requires minimal formalities to set up and manage the business. This means that the proprietor has unlimited liability and is responsible for all the debts and obligations of the business. To understand the tax implications and compliances to be carried out in India as a sole proprietor, you should reach out to a tax advisor.
Partnership: A partnership is a business entity in which two or more individuals/companies share ownership of the business. In a traditional partnership (set up pursuant to the Partnership Act, 1932), every partner would be jointly and severally liable for all acts of the firm done while he/she is a partner.
Limited Liability Partnership: A Limited Liability Partnership (LLP) is set up in accordance with the provisions of the Limited Liability Partnership Act, 2008. An LLP is a body corporate and a legal entity separate from its partners. The liability of partners is limited to the relevant partner’s agreed contribution. Further, no partner would be liable on account of any independent or unauthorised acts of other partners.
Private Company or Public Company: You can incorporate a company in accordance with the Companies Act, 2013. A company has a separate legal identity from its owners (called shareholders). A company may be set up as a private company or a public one. A public company may be listed on stock exchanges or choose to be unlisted.
Each entity type has its own advantages and disadvantages. The choice of a legal entity type will depend on various factors, such as the nature of the business you propose to operate, the number of partners/shareholders involved, financial resources available, etc.
Amongst others, the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 and the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 (together, the NDI Rules) set out the guidelines for investment by NRIs and Overseas Citizens of India (OCIs). To know more about qualifying as a OCI or an NRI as per FEMA click here. In light of the above, it would be prudent to consult legal and tax advisors on the type of structure and approach that an NRI may want in order to start a business in India.
Did you know?
In the event an NRI proposes to invest in India, the relevant provisions of FEMA come into the picture. It is therefore important that you consult your legal counsel and other experts at the time of making the investment to ensure compliance with the necessary regulations.
What qualifies as a startup in India?
Any eligible private limited company or a registered partnership firm or an LLP can get recognised as a startup by Department for Promotion of Industry and Internal Trade (DPIIT). The Government of India launched the Startup Action India Plan to promote entrepreneurship and innovation in India by providing various incentives to startups such as tax exemptions, funding opportunities, mentorship, etc.
As per the Startup Action India Plan, an entity would be considered a startup if*:
Up to a period of 10 years from the date of incorporation/registration, it is incorporated as a private limited company or registered as a partnership firm or a limited liability partnership; and
Turnover of the entity for any of the financial year (April-March) since incorporation/registration has not exceeded ₹100 crore; and
The entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.
Please keep in mind that an entity formed by splitting up or reconstruction of an existing business is not to be considered a startup.
*Notification dated February 19, 2019, issued by Ministry of Commerce and Industry, DPIIT
Key legal considerations for investing in a business entity in India
Foreign investments in India are generally governed by the Consolidated Foreign Direct Investment (FDI) Policy effective from October 15, 2020, issued by DPIIT and the NDI Rules. You can invest in an entity in India in such shares and securities as prescribed thereunder*. Some of the key aspects you may want to consider while investing include:
*The FDI Policy provides that investments can be made in equity shares, fully, compulsorily and mandatorily convertible debentures or fully, compulsorily and mandatorily convertible preference shares
Entry routes: It is important to determine whether the proposed business or investment falls under the:
Automatic route where prior approval of the Reserve Bank of India (RBI) and other regulatory authorities is not required or;
Governmental route where approval of RBI and relevant government authorities is required prior to the investment.
For instance, for e-commerce activities, FDI up to 100% is permitted through automatic route whereas for telecom services, FDI up to 49% is permitted through automatic route and beyond 49%, government approvals are required for investment. The FDI policy and the NDI Rules set out the conditions for investment in India including sectoral caps and entry routes for foreign investment in various sectors.
Licenses and registrations: Prior to commencement of the business, you would need to obtain the appropriate permits and licenses from applicable authorities to comply with various legislation including taxation, environmental and employment laws.
Reporting requirements: Depending on the nature of the business, the relevant business/startup would require complying with various reporting requirements including those under FEMA, employment laws, environment laws, tax laws etc.
Inward remittance requirements: All transactions relating to foreign investment in India are required to be undertaken through banking channels in India. For example, a startup company issuing convertible notes** to a person resident outside India is required to receive the amount of consideration by inward remittance through banking channels or by debit to the Non-Resident External (NRE)/Foreign Currency Non-Resident Bank (FCNR(B))/Escrow account maintained by the person concerned in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.
*Master Direction number 11/2017-18 titled “Master Direction – Foreign Investment in India” as updated on March 17, 2022.
**In terms of the NDI Rules, convertible note means an instrument issued by a startup company acknowledging receipt of money initially as debt, repayable at the option of the holder, or which is convertible into such number of equity shares of that company, within a period not exceeding five years from the date of issue of the convertible note, upon occurrence of specified events as per other terms and conditions agreed and indicated in the instrument.
Eligible investors: Prior to any investment, it is important to be aware of the restrictions applicable to investors in India. For instance, an entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the government route and in specified sectors/activities.
FDI framework: Eligible investee entities
In terms of the NDI Rules and FDI Policy, FDI in the following entities in India are permitted:
Indian company: Indian companies can issue capital against foreign direct investment by way of equity shares; fully, compulsorily and mandatorily convertible preference shares; fully, compulsorily and mandatorily convertible debentures and warrants. NRIs and Persons of Indian Origin (PIOs) are allowed to invest in the primary and secondary capital markets in India through the portfolio investment scheme within the prescribed limits. As a part of this scheme, NRIs can acquire shares/debentures of Indian companies through the stock exchanges in India. To know about how an NRI can invest in the Indian stock market click here.
Partnership firm/Proprietorship: NRIs’ investment options in India include investing in the capital of a firm or a proprietary in India on non-repatriation basis provided:
The amount is invested by inward remittance or out of NRE/FCNR(B)/Non-Resident Ordinary (NRO) account maintained with authorised dealers/authorised banks
It is not engaged in any agricultural/plantation or real estate business or print media sector
The amount invested cannot be repatriated outside India.
NRIs may seek prior permission of the RBI for investment in sole proprietorship /partnership firms with repatriation option.
Investment vehicles*: An investment vehicle would be permitted to receive foreign investment from a person resident outside India (other than a citizen of, or any other entity, which is registered/incorporated in Pakistan or Bangladesh) in the manner and subject to the terms and conditions specified under the NDI Rules and the FDI policy.
*As per the NDI Rules, investment vehicle means an entity registered and regulated under the regulations framed by the Securities and Exchange Board of India (SEBI) or any other authority designated for that purpose and shall include, namely:- (i) Real Estate Investment Trusts (REITs) governed by the SEBI (REITs) Regulations, 2014 (ii) Infrastructure Investment Trusts (InvIts) governed by the SEBI (InvIts) Regulations, 2014 (iii) Alternative Investment Funds (AIFs) governed by the SEBI (AIFs) Regulations, 2012 and (iv) mutual funds which invest more than fifty percent in equity governed by the SEBI (Mutual funds) Regulations, 1996.
Trusts: Investment by a person resident outside India is not permitted in trusts other than in Venture Capital Funds (VCF) registered and regulated by SEBI and investment vehicles.
LLP: Foreign investment is permitted under the automatic route in LLPs operating in sectors/activities where 100% FDI is allowed through the automatic route and there are no FDI-linked performance conditions. Please do note that such foreign investment is also subject to compliance of conditions of the Limited Liability Partnership Act, 2008.
Startup companies: In terms of the NDI Rules, a person resident outside India (other than an individual who is citizen of Pakistan or Bangladesh or an entity which is registered or incorporated in Pakistan or Bangladesh), may purchase convertible notes issued by an Indian startup company for an amount of ₹25 lakh or more in a single tranche. A startup company engaged in a sector where foreign investment requires government approval may issue convertible notes to a person resident outside India only with approval of the government.
In light of the above and other applicable laws relating to investments by NRIs in India, it would be prudent to consult legal and tax advisors on the procedural requirements and tax compliances that an NRI or OCI may be required to comply with for investments including by way of transfer of equity instruments (whether by way of sale, gift or otherwise).
Tax implications
Various tax obligation (such as withholding tax, advance tax, return filing, etc) arises on setting up of business. These obligations will vary depending upon the type of entity set up by NRI. Further, taxability of income earned by the entity and taxability of the NRI will also depends on the type of entity. Tax on the income of a sole proprietorship is payable by the NRI, whereas other types of entities are required to pay tax on their income at the entity level. However, tax on income distributed by the entity (other than sole proprietorship) may be payable by NRI and such income is also subject to withholding tax obligations.
Tax payable by NRI may also evaluate the benefits available under the Double Tax Avoidance Agreement (DTAA) of India with various countries.
NRIs can also generate income in India through investments made within the country. To know about investment options for NRIs click here, to understand the taxability in detail. It is advisable to consult with tax advisors to gain a comprehensive understanding of your tax obligations.
To understand more about deemed residency and change in tax implications, click here.
Conclusion
Starting a business or investing in India requires careful planning. For setting up a business in India as an NRI, you will need to choose the right legal entity type, understand requirements to qualify as a startup and navigate regulations like entry procedures, licensing requirements, and repatriation regulations under FEMA. Government programs like "Startup Action India Plan" support new businesses, but to succeed, it's important to actively follow the legal guidelines. You should consult an expert and seek professional, legal and tax advice to ensure that your business complies with all regulations.
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