Company formation by NRIs

Promotion Stage: The stage of conceiving an idea and its working is termed as promotion of a company. The person involved in this task is termed as “Promoter”. There are certain important decisions which are taken before the formation of the company. There first important matter to decide could be either :-

(1) To start a new business altogether, or
(2) To acquire an already running business, if it is available at considerable attractive terms and conditions. Some time it does happen that some people may start a business without having sufficient knowledge or sufficient experience or sufficient funds and later on they decide to dispose of that business to avoid huge losses. In such a case it may be better to acquire a running business with favorable terms and conditions and it may prove to be a good decision.

The other important matters be decided before the formation of the company could be the decision regarding the product to be produced, the size of the company, the capital involved in the project, the sources of the capital and whether it shall be a Private Company or a Public Company.

Any of the above decisions i.e., to start a new business altogether or to acquire an already running business, along with the other matters shall have to be taken by some person or persons who are at the helm of the affairs. They are called PROMOTERS.

Where it has been decided to form a Private Company 2 persons and where it has been decided to form a Public Company at least 7 persons shall subscribe their names to a Memorandum of Association and they shall also comply with the other formalities in respect of the registration of the company under the Indian Companies Act, 1956.

Document to be filed with the Registrar: It is desirable to ascertain from the Registrar (Registrar of the State in which the Registered office of the company shall be situated) of the companies that whether the proposed name of the company shall be approved if registration is sought for a new company with such name.

Where already a company with such name is existing, it shall not be allowed by the Registrar, because tow companies with the similar name cannot be registered.

But if he says yes, because no other company is registered with that name, an application for the registration of the company should be presented to the Registrar of the State in which the Registered office of the company shall be situated. The appl9ication along with necessary fee shall be presented along with the following documents :

(1) The Memorandum of Association.
(2) The Articles of Association, if any which should be signed by the subscribers to the Memorandum of Association.
(3) Any agreement with the individual persons who are proposed to e appointed as Managers, Directors or Managing Director of the company.
(4) A statement of the nominal capital of the Company.
(5) A notice of address of the registered office of the company.
(6) A list of the Directors who have agreed to become the first Directors of the company along with their consent to act as Directors and to take up the qualification shares of the company in the case of a public company.
(7) A declaration that all the requirements of the Companies Act have been complied with, shall also be submitted, which shall be signed by one nay of the following persons :

(i) An advocate of the Supreme Court or High Court, or
(ii) An attorney or a pleader entitled to appear before a High Court, or
(iii) A Secretary or a Chartered Accountant in whole time practice in India, who is engaged in the formation of the company, or
(iv) A person named in the Articles as a Directors, Manager or Secretary of the company.

Where the Registrar of Companies is satisfied that all the requirement have been complied with, he will register the company and enter the name of the company in the Register of Companies.

2. Incorporation Stage : Where the Registrar of Companies is satisfied that all the requirements have been complied with, he will register the company, and enter the name of the company in the Register of Companies.

When a company is registered and its name in entered in the register of companies, the Registrar will issue a Certificate of Incorporation in which he certifies that the company is incorporated under his hand and in the case of a limited company that the company is a Limited Company.

Effects of Registration and Incorporation of A Company
Distinction Between A Public Company And a Private Company
Company Law - Tips for Lawyers and Layman

NRO Account

The depositor under both the schemes are accepted in Indian rupees on non-repatriation basis. The main points of distinction under both the schemes are as under :

(a) Accounts under NR (NR) Scheme can be opened only with proceeds of fresh remittances from abroad or by transfer from existing NR (E) FCNR Accounts of the depositor, whereas legitimate local resources may be utilised to open NRO Accounts.

(b) Advances against security of deposit under NRO Scheme are governed by directives of Reserve Bank of India, whereas banks have freedom to determine rates of interest, margin etc. while granting advances against security of deposits held under NR (NR) Scheme.
In order to simplify the procedures applicable to operation of bank accounts and financial transactions in India by non-resident individuals of Indian nationality/persons of Indian origin, it was decided to introduce, with effect from 15th April 1999, a new type of account viz., Non-Resident (Special) Rupee (NRSR) Account for such persons who would voluntarily undertake not to seek repatriation of funds held in these, with the exception that investment of funds held in these accounts in shares/securities and immovable property will be governed by the extant exchange control regulations. For opening of NRSR account, the applicant should submit an application in Form NRSR to an authorised dealer, together with the undertaking contained therein duly signed. Authorised dealers may, on receipt of the application and the undetaking open the account and allow all financial transactions therein freely without going into the details of sources of credits and purposes of debits. This facility will, however, not be available to overseas corporate bodies.

The non-resident individuals of Indian nationality /persons of Indian origin maintaining Non-Resident (Ordinary) Account have the option of converting these accounts into Non-Resident (Special) Rupee Accounts. Similarly, when a resident becomes a non-resident by virtue of going abroad on emigration/employment etc. he will also have an option of designating his account as Non-Resident Ordinary Account or Non-Resident (Special) Rupee Account. There will be no need for completion of Form A4 either for approval or for reporting the transactions in Non-Resident (Special) Rupee Accounts.

NRSR accounts may be current, savings, recurring or fixed deposits accounts. Requirements in regard to resident accounts, including nomination facility, shall apply to NRSR accounts. Opening of and operations on the accounts of individuals of Pakistani/Bangladeshi/Sri Lankan nationality require approval of Reserve Bank.

Accout Opening by NRIs in INDIA

When an Indian national or person of Indian origin residing in India leaves India for a foreign country (other than Nepal and Bhutan) for taking up employment, business or vocation outside India, or for any other purpose, indicating his intention to say outside India permanently or for an indefinite period, he becomes a person resident outside India. His bank account, if any, in India is designated as an Ordinary Non-resident Account (NRO Account). Such accounts can also be opened with funds remitted from abroad. . As funds in this type of account are non repatriable, they cannot be remitted abroad to the account holders or transferred to their NRE Accounts without the Reserve Bank’s prior permission. Interest earned on these deposits is not exempt from Indian Income-tax.

Type of Account

The accounts may be maintained in the form of savings or current or term deposit accounts. The accounts can also be opened jointly by non-residents with their close relatives resident in India and operations thereon by the resident account holders can be made freely. If an account is used only for the personal or business needs of the resident account holder, it may be opened jointly even with a person who is not a close relative but this needs prior permission of the Reserve Bank. Interest earned on balances in NRO Accounts is not exempt from Indian Income-tax instead Income-tax (at present @ 20%) is deducted at source i.e. at the time of payment of interest by the bank. Balance held in NRO Account can neither be repatriated nor any remittance in foreign currency is allowed without prior approval of Reserve Bank.

Operation of the Account

There are not many restrictions on the operation of this account and a number of credit and debit transactions can be made after filling up Form A4. The following credit transactions can be made :

(a) Proceeds of remittances received in any permitted form through normal banking channels.

(b) Proceeds of foreign currency notes/traveller cheques tendered by the account holder during his temporary visit to India.

(c ) Remittance by way of transfer from rupees accounts of non-resident banks.

(d) Legitimate dues in rupees of the account holder in India.

Certain credits to the accounts such as proceeds of foreign inward remittances, dividend and interest earned on shares/securities acquired with the Reserve Bank’s permission (wherever necessary ) and held in India by the account holder, sale proceeds/maturity proceeds of shares/securities, surrender value of life insurance policies of the account holder and proceeds of cheques for small amounts upto specified limits can be made by banks without the Reserve Bank’ permission.

Following debit transactions can also be made after filling Form A4

(a) All local payments in rupees.

(b) Debits for investment and credits representing sale proceeds of investments may also be permitted by banks.

Withdrawals from these accounts can be freely made for local disbursements as well as for investments in Units of UTI, Government securities and National Plan/Savings Certificates, without prior approval of the Reserve Bank.

Change of Status from Resident to Non-resident Account vice versa

All resident accounts of a person with banks in India will automatically be treated ordinary non-resident accounts on his becoming non-resident.

Similarly NRO account may be redesignated as resident accounts on the account of holder becoming resident in India. It may be noted that residential status of a person will be determined as per the definition under Foreign Exchange Regulation Act, 1973.
With a view to providing further incentives and wider options to persons of Indian Nationality/Origin residing abroad (NRIs) and Overseas Corporate Bodies predominantly owned by NRIs (OCBs) as well as giving opportunities to persons of non-Indian origin and overseas corporate bodies owned by them for making investments in India, Reserve Bank has formulated Non-resident (Non-repatriable) Rupee Deposit Scheme. The Scheme came into effect from 15th June, 1992.

The scheme is open to all non-residents including foreign citizens of non-Indian origin (except Pakistani and Bangladeshi Nationals) and Overseas Corporate Bodies owned by them. Accounts under the Non-resident (Non-Repatriable ) Rupee Deposit Scheme may be opened in Indian rupees by authorised dealers out of the funds in freely convertible foreign exchange transferred for the purpose to India in an approved manner from the county of residence of the prospective non-resident account holder or from any other country. Accounts may also be opened by transfer of funds from the existing NRE/FCNR Accounts of the non-resident account holder. No penal interest is charged in case of premature withdrawal of existing NRE/FCNR deposits for the purpose of making investment under the scheme.

Letting out Immovable property

Reserve Bank of India has granted general permission to Foreign Citizens of Indian Origin (whether resident in India or not) and Non-residents of Indian nationality and origin (except citizens of Pakistan, Bangladesh, Nepal, Bhutan, Afganistan and Sri Lanka ) to let out, either their commercial or residential premises, to persons in India, subject to the following conditions:

a) The rental income and the proceeds of any investment, out of such income, shall be repatriable (due to current account convertibility); otherwise

b) The rental income shall be credited in the owner’s Non-Resident (Ordinary) Rupees Account or to the Non-Citizen’s Resident Rupee Account maintained with a Bank in India.

Further, it must be noted that there seems to be no direct reference to Foreign Citizens of Non-Indian Origin, for the above relaxation. In their cases, therefore, it may be necessary to take Reserve bank of India’s prior approval before renting out their properties.

Acquisition of Immovable property by NRIs(Contd..)

The relatives of NRIs often wish to bequeath properties to non-residents in their wills. For such cases, Reserve Bank of India has granted general permission to non-residents of Indian Origin (irrespective of their citizenship) to acquire immovable properties by way of inheritance and also to hold and enjoy these properties acquired by them.

However, Reserve Bank of India has not granted any repatriation facilities for sale proceeds of such inherited properties. This is because there is no convertibility of the Indian Rupee on capital account.

Acquisition of Immovable property by NRIs by gifts

Non-residents have also been granted general permission to acquire such properties by way of gifts. However, the gift must be from/to a relative who may be either an Indian Citizen or a person of Indian Origin who may or may not be a Resident in India. “Relative” is to be construed as per definition given under section 6 of the Companies Act, 1956.

Acquisition of immovable properties by NRIs

There are no formalities under FERA in case of a Non-Resident Indian who is an Indian Citizen and who wishes to sell his immovable property in India. Even if the non-resident is a foreign citizen (regardless of origin), he has been granted general permission by Reserve Bank of India to sell his immovable property situated in India.

However, while a Non-Resident Indian can sell his immovable property without Reserve Bank of India’s permission, as per FERA, a Resident Indian cannot make any payment including the purchase price for the property to a non-resident without RBI’s prior permission. Section 9 of FERA prohibits any payment by a resident to any non-resident except with prior general or special permission from Reserve Bank of India. For purchase and sale of a flat, while the non-resident is under no obligation to obtain any permission from Reserve Bank of India to sell his flat, the resident should seek prior permission to make payment (including the purchase consideration) to a non-resident. The resident should not pay without RBI’s permission, even the earnest or token money to the non-resident, as a mark of completion of the negotiations for the transaction.