How a Foreign National from China can Start and Register a Company in India?

How a Foreign National from China can Start and Register a Company in India?. India has is seen as one of the most promising investment destinations in the world due to its rising economic growth, massive consumer base, favourable government policies, and ongoing liberalization of the foreign direct investment (FDI) regime. Among the foreign investors, Chinese companies and nationals have shown growing interest in tapping into India’s dynamic market.
The Legal Framework of FDI in India
Foreign Direct Investment (FDI) in India is governed by a composite framework of laws, rules, regulations, and notifications issued by different authorities. This legal infrastructure ensures that all foreign investments are systematically regulated to balance economic development with national security and sovereignty. Below is an elaboration of the key laws and authorities involved, and their significance in shaping FDI policy and practice in India:
Foreign Exchange Management Act (FEMA), 1999
FEMA is the cornerstone legislation that regulates cross-border foreign exchange transactions in India, including all foreign investments. Enforced by the Reserve Bank of India (RBI), FEMA aims to facilitate external trade and payments and promote orderly development and maintenance of the foreign exchange market in India.
Under FEMA, any investment made by a person residing outside India is governed by regulations notified by the RBI. It lays down categories of permissible capital account transactions, procedure for inward remittances and repatriation, conditions and limits for investment, penalties for non-compliance, thus FEMA -RBI compliance becomes essential
Its impact on FDI is significant because any foreign investment that does not comply with FEMA is considered illegal and liable for penal action.
FDI Policy by Department for Promotion of Industry and Internal Trade (DPIIT)
The DPIIT, under the Ministry of Commerce and Industry, issues the consolidated FDI Policy annually and is the nodal authority for FDI regulations. The FDI policy specifies:

Sector-specific investment caps

Routes of investment (Automatic or Government), Conditions under which investments are allowed, sectors where FDI is prohibited

DPIIT also scrutinizes investments from countries with geopolitical sensitivities, such as China, and recommends whether government approvals should be granted.
Consolidated FDI Circular (Updated Annually)
This circular is a comprehensive document that collates all policies, press notes, and circulars related to FDI issued by DPIIT and RBI. It serves as a reference for investors and professionals to ensure compliance.
It consolidates:

Definitions of terms like foreign investor, downstream investment, control, and ownership

Revised limits and conditions for different sectors

Reporting and compliance obligations

The impact of this circular is that it provides clarity, transparency, and predictability for foreign investors.
The Companies Act, 2013
This Act governs the incorporation, regulation, and dissolution of companies in India. Foreign investors must comply with its provisions while establishing a company.
Key highlights affecting FDI include:

Requirements for Indian resident directors

Allotment of shares and maintenance of registers

Filing of incorporation documents and annual compliance

The Act ensures that the structure and functioning of a foreign-invested company align with Indian corporate governance norms.
RBI Circulars and Notifications
The RBI plays a vital regulatory role under FEMA and regularly issues circulars to:

Update procedures for FDI reporting (e.g., Form FC-GPR, FC-TRS, LLP-I)

Outline sector-specific compliance

Modify policy directions in line with government objectives

RBI also manages the processing of FDI through the automatic route and oversees compliance with foreign exchange regulations.
In essence, RBI acts as the central bank intermediary between foreign investors and India’s financial regulatory structure.
Investment Approval for Chinese Nationals
In April 2020, amid growing concerns regarding national security and opportunistic acquisitions during the COVID-19 pandemic, the Government of India made critical amendments to its FDI policy. These changes were specifically aimed at regulating investments coming from countries that share land borders with India—most notably, China. According to the revised guidelines, any investment from such countries, whether direct or through beneficial ownership, requires prior government approval under the Government Route. The objective was to scrutinize the flow of strategic capital into sensitive sectors and ensure that Indian assets and infrastructure were protected from undue foreign influence. Consequently, Chinese nationals or entities intending to invest in India must seek clearance from several government agencies, including the Department for Promotion of Industry and Internal Trade (DPIIT), the Ministry of Home Affairs (MHA), and relevant security agencies.
The FIFP Portal and the Application Process
To initiate the approval process, all Chinese investors must apply through the Foreign Investment Facilitation Portal (FIFP), which is the central portal managed by DPIIT for submitting proposals under the Government Route. The approval process typically spans six to nine months, reflecting the multi-level scrutiny involved. After submission, the application is reviewed by the nodal ministry overseeing the concerned sector and security-related agencies.
The application must comprehensively detail the investor's background, including the registration credentials of the foreign company, its group structure, business activities, financial history, and global operations. A significant part of the application involves providing a complete and verifiable list of ultimate beneficial owners (UBOs), i.e., the individuals or entities that will ultimately benefit from the investment. This requirement ensures transparency and helps the Indian government assess the real controllers behind the investing entity.
Nature of Business and Manufacturing Plans
Applicants must describe in detail the nature of activities the proposed Indian company will engage in. This includes explaining whether the business will be in manufacturing, trading, services, or any specialized domain. In the case of manufacturing, the investor must submit specific production plans, product categories, machinery investment, employment projections, and plans for domestic sale or export. If trading or technology services are proposed, an outline of the product or service cycle, distribution channels, and target customers must be included.
Director and Shareholder Information
All Indian and Chinese directors' details must be included in the application. These include full names, nationalities, designations, experience profiles, addresses, and contact information. This ensures that authorities can conduct proper due diligence and assess the credibility and backgrounds of individuals responsible for running the Indian business.
Employment Projections and Financial Forecasts
The application should also contain the proposed employment plan for the next five years, outlining expected growth in employee strength and skills. It must also include financial projections, such as projected turnover, profit margins, capital expenditure, and contribution to the Indian economy. This allows policymakers to evaluate the investment's economic significance.
Supporting Documentation
To validate the information in the proposal, several documents must be submitted:

Proposal Summary on Letterhead: A summarized version of the business proposal must be printed on the official letterhead of the applicant foreign company. It should succinctly state the nature of investment, business goals, and strategic intent.

Certificate of Incorporation: Both the foreign investing company and the Indian investee company (if already incorporated) must submit their respective Certificates of Incorporation. This serves as legal proof of the entity's existence.

Memorandum and Articles of Association (MOA and AOA): These corporate charter documents must be submitted for both the investing and investee entities. They describe the company's objectives, scope of operations, and internal governance framework. Alteration of MOM and AoA are also to be informed Alteration of MoA & AoA The Companies Act, 2013

Board Resolutions: Board Resolutions passed by the Board of Directors of both the investor and investee companies must be submitted. These resolutions must explicitly approve the proposed investment transaction and authorize the officers responsible for filing the application.

Audited Financial Statements: Latest audited balance sheets and profit & loss statements must be included for both the investing and investee entities. These provide financial background and reflect the investor's ability to commit capital.

Identification Documents: Notarized and apostilled copies of passports of all foreign shareholders and directors must be attached. This ensures authenticity and enables verification of the individuals involved in the business structure.

Once all documents are compiled and submitted through the FIFP portal, the proposal undergoes an exhaustive review by the concerned ministry, DPIIT, MHA, and security agencies. These bodies may seek additional clarifications or raise queries during the evaluation. After satisfactory review, the investment is approved, following which the applicant can proceed to register the company with the Ministry of Corporate Affairs (MCA) and commence business operations in India.

Company letterhead summary

Certificate of Incorporation (investor and investee entities)

MOA and AOA

Board Resolutions

Audited Financial Statements

Passport copies of shareholders and directors

Business Entity Types Available in India
Foreign nationals, including Chinese investors, can choose from a range of business structures based on their commercial objectives, regulatory needs, tax considerations, and control preferences. Each entity type has distinct features, eligibility conditions, and FDI implications. Below is a detailed explanation of the various business entity types available to Chinese nationals looking to enter the Indian market.
Private Limited Company
A Private Limited Company is one of the most preferred business structures for foreign investors in India due to its operational flexibility, limited liability protection, and ability to attract venture capital. It allows up to 100% FDI under the automatic route for most sectors, unless restricted by the FDI policy.
The legal requirements include a minimum of two directors, one of whom must be an Indian resident (i.e., someone who has stayed in India for at least 182 days during the financial year). The company must also have at least two shareholders, with a maximum cap of 200 shareholders. This structure is best suited for small to medium-sized enterprises looking to maintain control and avoid public scrutiny while raising private capital.
Public Limited Company
A Public Limited Company is suitable for large-scale ventures that may require access to public capital markets. It mandates a minimum of three directors and at least seven shareholders, but there is no upper limit on the number of shareholders. Public limited companies can list on stock exchanges, raise funds through public offerings, and enjoy a broader capital base.
FDI is allowed in such companies up to 100% through the automatic or government route, depending on the sector. However, public limited companies are subject to more rigorous compliance requirements under the Companies Act, SEBI regulations (if listed), and corporate governance norms.
Limited Liability Partnership (LLP)
An LLP is a hybrid structure combining the benefits of a partnership and limited liability of a corporation. It is ideal for small service firms, consultancies, and professional practices. LLPs are permitted to accept 100% FDI under the automatic route only in sectors where there are no FDI-linked performance conditions.
An LLP must have at least two designated partners, of which one should be an Indian resident. Unlike companies, LLPs cannot issue equity shares and hence cannot raise equity capital from the public. Nevertheless, LLPs enjoy tax benefits and lower compliance burdens compared to companies, making them a cost-effective option.
Branch Office, Liaison Office, and Project Office
These forms are suitable for foreign companies not intending to establish a separate legal entity in India but still wishing to operate in the country for specific objectives.

Branch Office: A branch office is allowed to conduct business activities such as export/import of goods, professional consultancy, research work, and representation. It is treated as an extension of the foreign parent company and not as a separate legal entity. RBI approval is mandatory before setting up a branch office in India.

Liaison Office: This office acts purely as a communication channel between the head office abroad and parties in India. It cannot undertake any commercial or revenue-generating activity. Its main functions include promoting import/export relations, establishing communication, and market research. Liaison offices also require RBI and government approval.

Project Office: A project office can be set up to execute specific projects in India. This structure is typically used when a foreign company has secured a contract from an Indian entity. While no FDI is directly allowed in this format, remittance of project revenues is regulated through RBI norms.

These offices do not constitute independent business entities and cannot carry out operations beyond the scope permitted by RBI. They are best suited for companies that aim to explore the Indian market or fulfil short-term project obligations without establishing a full-fledged company.
Choosing the Right Business Structure
The selection of business form depends on factors such as the nature of business, control preference, investment size, and taxation implications. For most operational businesses intending to scale, Private Limited Company is the most recommended option due to flexibility, control, and ability to raise capital.
Company Incorporation Procedure
Step 1: Appoint Resident Director
As per the Companies Act, 2013, every company must have at least one Indian resident director (i.e., an individual staying in India for more than 182 days during the previous financial year).
Step 2: Obtain Digital Signature Certificate (DSC)
All directors must obtain a Digital Signature Certificate (DSC) from a licensed Certifying Authority in India for online filings.
Step 3: Obtain Director Identification Number (DIN)
DIN is mandatory for all directors and is issued by the Ministry of Corporate Affairs (MCA). It is a one-time registration number for directors.
Step 4: Name Reservation
The company name must be reserved through the RUN (Reserve Unique Name) service on the MCA portal. It should not be identical or similar to existing companies or trademarks.
Step 5: Draft MOA and AOA

Memorandum of Association (MOA) outlines the company’s objectives

Articles of Association (AOA) details the rules and regulations for internal management

Step 6: File SPICe+ Form
The integrated SPICe+ form allows for simultaneous:

Name reservation

Incorporation

PAN and TAN allotment

EPFO/ESIC registration

GSTIN (optional)

Step 7: Deposit Share Capital
Open a bank account in the name of the company and deposit the initial share capital as mentioned in the MOA.
Step 8: FDI Reporting to RBI
After the capital investment is made, it must be reported to the RBI via Form FC-GPR within 30 days of allotment of shares.
Prerequisites for Incorporation
When a foreign national or Chinese investor plans to incorporate a company in India, there are certain foundational requirements that must be fulfilled even before filing the incorporation documents. These prerequisites form the backbone of the incorporation process and must be understood thoroughly to avoid delays or non-compliance issues later.
Registered Office Address in India
At the time of incorporation, every company must declare its registered office address. This is a statutory requirement under the Companies Act, 2013. The registered office serves as the official correspondence address for the company, and all formal communication from regulators like the Ministry of Corporate Affairs (MCA), Income Tax Department, and other agencies is sent to this address.
If the office premises are on rent, the company must furnish a copy of the lease or rental agreement. Additionally, a No Objection Certificate (NOC) must be obtained from the landlord, explicitly stating that the premises may be used as the company’s registered office. This documentation is crucial during the company’s incorporation process, as it forms part of the SPICe+ application filed with the MCA.
The office need not be a commercial space; a residential property can also serve as a registered office, provided the landlord permits it and gives the required NOC. However, the office must be capable of receiving communications, including legal notices, from regulators or courts.
Taxation Structure for Incorporated Companies
Taxation is a critical consideration for any foreign investor establishing a company in India. Once a company is incorporated and commences operations, it becomes a taxable entity under the Indian Income Tax Act, 1961. Companies are subject to corporate tax, and the applicable rate depends on the company’s annual turnover and nature of income.
Corporate Tax Rates

Companies with turnover up to Rs.5 crore: These companies are taxed at a concessional corporate tax rate of 25%, in addition to applicable surcharge and health & education cess. This lower tax rate is part of the government’s efforts to encourage small-scale businesses and startups.

Companies with turnover exceeding Rs.5 crore: In such cases, the standard corporate tax rate increases to 30%, along with the surcharge and cess. This is applicable to large corporations and established entities with significant revenues.

Minimum Alternate Tax (MAT)
In situations where a company, due to various deductions or exemptions, reports negligible or zero tax liability despite earning substantial profits, the concept of Minimum Alternate Tax (MAT) comes into play. The MAT ensures that such companies contribute a minimum amount to the exchequer.
Currently, MAT is levied at a rate of 15% (plus surcharge and cess) on the book profits of the company as calculated under the Companies Act, 2013. However, companies that opt for the concessional tax regime under Section 115BAA of the Income Tax Act are exempted from MAT provisions.
This regime is crucial for Chinese investors to understand while structuring their business operations and financial planning, as it can have a direct bearing on profitability and post-tax returns.
Understanding and complying with the taxation framework helps avoid future litigation and ensures smoother operations in India. Hence, consultation with tax professionals and chartered accountants is strongly recommended before and after incorporation.
Special Compliance for FDI from China
The Government of India has imposed heightened scrutiny and specific compliance requirements for FDI originating from countries sharing land borders with India, especially China. These measures are based on national security concerns and are aimed at monitoring strategic investments that may influence critical sectors or national infrastructure.
Policy Background and Coverage
As per the Press Note 3 (2020 Series) issued by the Department for Promotion of Industry and Internal Trade (DPIIT), any investment direct or indirect from countries that share a land border with India, including China, must undergo government approval before the investment can be made. This includes not only investments from mainland China but also from special administrative regions such as Hong Kong and Macau.
Additionally, the policy applies even when the investing entity is not directly Chinese but has Chinese beneficial owners. The term 'beneficial ownership' refers to any person who ultimately owns or controls the investor entity, even if not directly listed as the shareholder. This ensures that investments made through layered corporate structures involving Chinese control are not exempt from scrutiny.
Regulatory Authorities Involved
The special compliance process involves multiple government bodies that evaluate the proposal from both an economic and security standpoint:

DPIIT (Department for Promotion of Industry and Internal Trade): Acts as the nodal body for receiving and forwarding applications submitted via the Foreign Investment Facilitation Portal (FIFP).

Ministry of Home Affairs (MHA): Conducts security clearance by analyzing the credentials of the investor and identifying any potential threat to national security.

Reserve Bank of India (RBI): Oversees the compliance of the investment with foreign exchange laws under FEMA and ensures proper routing of funds.

Security and Intelligence Agencies: These agencies, such as the Intelligence Bureau (IB), carry out background checks on the individuals and entities involved, including ultimate beneficial owners, to assess geopolitical or economic threats.

Process of Special Compliance

Filing Application on FIFP Portal: The investor must initiate the approval process by filing a detailed application on the Foreign Investment Facilitation Portal (FIFP), maintained by DPIIT. The application must disclose the nature of the investment, proposed activities in India, background of the investor, and full details of beneficial ownership.

Documentation: All supporting documents must be provided, including incorporation certificates, board resolutions, financials, and notarized/apostilled identity documents of the shareholders and directors.

Security Clearance: Once the application is submitted, the DPIIT forwards it to the MHA and other security agencies. The clearance process is comprehensive and may take 6 to 9 months, depending on the nature and sensitivity of the investment.

Sectoral Ministry Review: Based on the sector in which investment is proposed, the concerned ministry (such as Ministry of Telecom, Defence, or Finance) also evaluates the proposal and gives its recommendation.

Final Approval and Conditions: Upon receiving all clearances, DPIIT conveys the final approval to the applicant. In some cases, the approval may be subject to additional conditions such as restrictions on data storage, audits, or compliance checks.

Chinese investors must be prepared for an elongated timeline and higher documentation standards due to this layered approval structure. It is advisable to consult legal and compliance experts familiar with cross-border investments and the specific nuances of Indian FDI regulations before initiating the process.
Downstream Investment Rules
If a foreign-invested Indian company (Company A) further invests in another Indian entity (Company B), this is called Downstream Investment. The following apply:

If Company A has more than 50% foreign investment, any investment it makes in Company B will be treated as indirect foreign investment.

If Company A has less than 50% foreign investment, its investment in Company B will be treated as Indian investment.

Any investing company (non-operating) must seek FIPB approval.

External Commercial Borrowings (ECB)
Foreign companies may also fund their Indian subsidiaries via ECB.
Eligibility:

Borrowers: Manufacturing, infrastructure, hotels, hospitals, software sectors

Lenders: Direct equity holders, international banks, overseas investors

Routes:

Automatic: Approved by Authorized Dealer Banks

Government: Requires RBI approval

ECB proceeds must be used as per RBI-specified end-uses such as capital expenditure, R&D, and refinancing.
Sectoral Caps and Restrictions
Each industry sector in India has a designated cap on FDI.
Examples:

100% FDI (Automatic Route): E-commerce, Pharma (Greenfield), Manufacturing, IT

Up to 49% (Government Route): Defence

Prohibited Sectors: Lottery business, gambling, chit funds, real estate (except construction)

Sector-Wise Inflows from China (2000-2015)
Automobile: 60%, Metallurgical: 14%, Electrical Equipment: 4%, Industrial Machinery: 4%, Power: 4%
Practical Considerations for Chinese Investors

Due Diligence: Conduct thorough checks on Indian partners, consultants, and suppliers.

Language Barriers: English is the business language; legal documents must be translated accurately.

Cultural Sensitivity: Understanding regional business culture is essential.

Consultation: Engage with professionals well-versed in Indian corporate, tax, and FDI law.

Remarks
The Indian market offers immense potential for foreign investors, including Chinese nationals and businesses. While the process of setting up a company in India is detailed and multi-layered, understanding the legal and regulatory ecosystem makes it seamless. Given the evolving FDI policies and bilateral relations, it is vital for Chinese investors to approach this venture with due diligence, accurate legal guidance, and full compliance.
Establishing a private or public limited company under the Indian framework offers operational flexibility, tax benefits, and ease of access to the growing Indian market. However, navigating the government approval processes, especially under the current regulations for bordering countries, is essential.
Hence, timely professional support, complete documentation, and regulatory adherence remain the key to successful market entry and business continuity in India. 
FAQs
Q1. What triggered the special compliance requirements for FDI from China?
Ans. In April 2020, the Indian government amended its FDI policy to mandate prior government approval for investments from countries sharing land borders with India, including China. This move was primarily driven by concerns over national security and potential hostile takeovers during economic vulnerabilities.
Q2. Does the restriction apply only to Chinese companies?
Ans. No. The restriction applies to any investor (company or individual) based in or controlled from countries that share land borders with India. This includes mainland China, Hong Kong, Macau, and entities that have Chinese beneficial ownership, even if the investing company is registered in a third country.
Q3. What is considered 'beneficial ownership' in this context?
Ans. Beneficial ownership refers to the person(s) who ultimately own or control the investing entity. If a Chinese national or entity holds significant control, decision-making power, or ownership (directly or indirectly), the investment is subject to prior approval.
Q4. Which government authorities are involved in processing FDI applications from China?
Ans. The following agencies are involved:

DPIIT (Department for Promotion of Industry and Internal Trade)

MHA (Ministry of Home Affairs)

RBI (Reserve Bank of India)

Sector-specific ministries (e.g., Telecom, Defence, Finance)

Security and intelligence agencies (e.g., Intelligence Bureau)

Q5. Where and how should a Chinese investor apply for approval?
Ans. Applications must be submitted online through the Foreign Investment Facilitation Portal (FIFP), managed by DPIIT. The application must include detailed disclosures about the investor, business activities, Indian counterparts, and beneficial owners.
Q6. What documents are required for the FIFP application?
Ans. Key documents include:

Summary of the proposal on the investor company’s letterhead

Certificate of Incorporation of investor and investee entities

Memorandum and Articles of Association (MoA and AoA)

Board resolutions authorizing investment

Audited financial statements

Passport copies and details of directors and shareholders

All documents must be duly notarized and apostilled or legalized, depending on the jurisdiction.
Q7. What is the estimated time frame for getting approval?
Ans. The entire process can take 6 to 9 months, as the proposal is reviewed by multiple ministries and security agencies. The timeline may extend based on sector sensitivity and completeness of documentation.
Q8. Are there any sectors that are more sensitive for Chinese investments?
Ans. Yes. Sectors like defence, telecommunications, data and cybersecurity, infrastructure, and financial services attract more scrutiny and may require additional conditions or clearances from specific ministries.
Q9. Is prior approval required for additional or indirect investments (downstream investments)?
Ans. Yes. Even indirect investments made through Indian subsidiaries of Chinese-invested companies may be scrutinized under the FDI policy. It is important to analyze the ownership and control structures to determine compliance.
Q10. Can the Indian government impose conditions even after granting approval?
Ans. Yes. Approvals may come with special conditions, such as restrictions on data storage, periodic audits, compliance declarations, or sectoral caps. These are binding and must be complied with for the investment to remain valid.
Q11. What happens if a Chinese investor proceeds without approval?
Ans. Any FDI from China without prior approval is considered a violation of FEMA and FDI regulations, leading to penalties, reversal of investment, or legal consequences. Compliance is mandatory and non-negotiable.
Q12. Should a Chinese investor consult a professional before applying?
Ans. Absolutely. Due to the multi-layered approval structure and national security reviews, it is strongly advised to work with legal experts, company secretaries, or FDI consultants who specialize in cross-border investments and regulatory compliance in India.

India has is seen as one of the most promising investment destinations in the world due to its rising economic growth, massive consumer base, favourable government policies, and ongoing liberalization of the foreign direct investment (FDI) regime. Among the foreign investors, Chinese companies and nationals have shown growing interest in tapping into India’s dynamic market.

The Legal Framework of FDI in India

Foreign Direct Investment (FDI) in India is governed by a composite framework of laws, rules, regulations, and notifications issued by different authorities. This legal infrastructure ensures that all foreign investments are systematically regulated to balance economic development with national security and sovereignty. Below is an elaboration of the key laws and authorities involved, and their significance in shaping FDI policy and practice in India:

Foreign Exchange Management Act (FEMA), 1999

FEMA is the cornerstone legislation that regulates cross-border foreign exchange transactions in India, including all foreign investments. Enforced by the Reserve Bank of India (RBI), FEMA aims to facilitate external trade and payments and promote orderly development and maintenance of the foreign exchange market in India.

Under FEMA, any investment made by a person residing outside India is governed by regulations notified by the RBI. It lays down categories of permissible capital account transactions, procedure for inward remittances and repatriation, conditions and limits for investment, penalties for non-compliance, thus FEMA -RBI compliance becomes essential

Its impact on FDI is significant because any foreign investment that does not comply with FEMA is considered illegal and liable for penal action.

FDI Policy by Department for Promotion of Industry and Internal Trade (DPIIT)

The DPIIT, under the Ministry of Commerce and Industry, issues the consolidated FDI Policy annually and is the nodal authority for FDI regulations. The FDI policy specifies:

Sector-specific investment caps
Routes of investment (Automatic or Government), Conditions under which investments are allowed, sectors where FDI is prohibited

DPIIT also scrutinizes investments from countries with geopolitical sensitivities, such as China, and recommends whether government approvals should be granted.

Consolidated FDI Circular (Updated Annually)

This circular is a comprehensive document that collates all policies, press notes, and circulars related to FDI issued by DPIIT and RBI. It serves as a reference for investors and professionals to ensure compliance.

It consolidates:

Definitions of terms like foreign investor, downstream investment, control, and ownership
Revised limits and conditions for different sectors
Reporting and compliance obligations

The impact of this circular is that it provides clarity, transparency, and predictability for foreign investors.

The Companies Act, 2013

This Act governs the incorporation, regulation, and dissolution of companies in India. Foreign investors must comply with its provisions while establishing a company.

Key highlights affecting FDI include:

Requirements for Indian resident directors
Allotment of shares and maintenance of registers
Filing of incorporation documents and annual compliance

The Act ensures that the structure and functioning of a foreign-invested company align with Indian corporate governance norms.

RBI Circulars and Notifications

The RBI plays a vital regulatory role under FEMA and regularly issues circulars to:

Update procedures for FDI reporting (e.g., Form FC-GPR, FC-TRS, LLP-I)
Outline sector-specific compliance
Modify policy directions in line with government objectives

RBI also manages the processing of FDI through the automatic route and oversees compliance with foreign exchange regulations.

In essence, RBI acts as the central bank intermediary between foreign investors and India’s financial regulatory structure.

Investment Approval for Chinese Nationals

In April 2020, amid growing concerns regarding national security and opportunistic acquisitions during the COVID-19 pandemic, the Government of India made critical amendments to its FDI policy. These changes were specifically aimed at regulating investments coming from countries that share land borders with India—most notably, China. According to the revised guidelines, any investment from such countries, whether direct or through beneficial ownership, requires prior government approval under the Government Route. The objective was to scrutinize the flow of strategic capital into sensitive sectors and ensure that Indian assets and infrastructure were protected from undue foreign influence. Consequently, Chinese nationals or entities intending to invest in India must seek clearance from several government agencies, including the Department for Promotion of Industry and Internal Trade (DPIIT), the Ministry of Home Affairs (MHA), and relevant security agencies.

The FIFP Portal and the Application Process

To initiate the approval process, all Chinese investors must apply through the Foreign Investment Facilitation Portal (FIFP), which is the central portal managed by DPIIT for submitting proposals under the Government Route. The approval process typically spans six to nine months, reflecting the multi-level scrutiny involved. After submission, the application is reviewed by the nodal ministry overseeing the concerned sector and security-related agencies.

The application must comprehensively detail the investor's background, including the registration credentials of the foreign company, its group structure, business activities, financial history, and global operations. A significant part of the application involves providing a complete and verifiable list of ultimate beneficial owners (UBOs), i.e., the individuals or entities that will ultimately benefit from the investment. This requirement ensures transparency and helps the Indian government assess the real controllers behind the investing entity.

Nature of Business and Manufacturing Plans

Applicants must describe in detail the nature of activities the proposed Indian company will engage in. This includes explaining whether the business will be in manufacturing, trading, services, or any specialized domain. In the case of manufacturing, the investor must submit specific production plans, product categories, machinery investment, employment projections, and plans for domestic sale or export. If trading or technology services are proposed, an outline of the product or service cycle, distribution channels, and target customers must be included.

Director and Shareholder Information

All Indian and Chinese directors' details must be included in the application. These include full names, nationalities, designations, experience profiles, addresses, and contact information. This ensures that authorities can conduct proper due diligence and assess the credibility and backgrounds of individuals responsible for running the Indian business.

Employment Projections and Financial Forecasts

The application should also contain the proposed employment plan for the next five years, outlining expected growth in employee strength and skills. It must also include financial projections, such as projected turnover, profit margins, capital expenditure, and contribution to the Indian economy. This allows policymakers to evaluate the investment's economic significance.

Supporting Documentation

To validate the information in the proposal, several documents must be submitted:

Proposal Summary on Letterhead: A summarized version of the business proposal must be printed on the official letterhead of the applicant foreign company. It should succinctly state the nature of investment, business goals, and strategic intent.
Certificate of Incorporation: Both the foreign investing company and the Indian investee company (if already incorporated) must submit their respective Certificates of Incorporation. This serves as legal proof of the entity's existence.
Memorandum and Articles of Association (MOA and AOA): These corporate charter documents must be submitted for both the investing and investee entities. They describe the company's objectives, scope of operations, and internal governance framework. Alteration of MOM and AoA are also to be informed Alteration of MoA & AoA The Companies Act, 2013
Board Resolutions: Board Resolutions passed by the Board of Directors of both the investor and investee companies must be submitted. These resolutions must explicitly approve the proposed investment transaction and authorize the officers responsible for filing the application.
Audited Financial Statements: Latest audited balance sheets and profit & loss statements must be included for both the investing and investee entities. These provide financial background and reflect the investor's ability to commit capital.
Identification Documents: Notarized and apostilled copies of passports of all foreign shareholders and directors must be attached. This ensures authenticity and enables verification of the individuals involved in the business structure.

Company letterhead summary
Certificate of Incorporation (investor and investee entities)
MOA and AOA
Board Resolutions
Audited Financial Statements
Passport copies of shareholders and directors

Business Entity Types Available in India

Foreign nationals, including Chinese investors, can choose from a range of business structures based on their commercial objectives, regulatory needs, tax considerations, and control preferences. Each entity type has distinct features, eligibility conditions, and FDI implications. Below is a detailed explanation of the various business entity types available to Chinese nationals looking to enter the Indian market.

Private Limited Company

A Private Limited Company is one of the most preferred business structures for foreign investors in India due to its operational flexibility, limited liability protection, and ability to attract venture capital. It allows up to 100% FDI under the automatic route for most sectors, unless restricted by the FDI policy.

The legal requirements include a minimum of two directors, one of whom must be an Indian resident (i.e., someone who has stayed in India for at least 182 days during the financial year). The company must also have at least two shareholders, with a maximum cap of 200 shareholders. This structure is best suited for small to medium-sized enterprises looking to maintain control and avoid public scrutiny while raising private capital.

Public Limited Company

A Public Limited Company is suitable for large-scale ventures that may require access to public capital markets. It mandates a minimum of three directors and at least seven shareholders, but there is no upper limit on the number of shareholders. Public limited companies can list on stock exchanges, raise funds through public offerings, and enjoy a broader capital base.

FDI is allowed in such companies up to 100% through the automatic or government route, depending on the sector. However, public limited companies are subject to more rigorous compliance requirements under the Companies Act, SEBI regulations (if listed), and corporate governance norms.

Limited Liability Partnership (LLP)

An LLP is a hybrid structure combining the benefits of a partnership and limited liability of a corporation. It is ideal for small service firms, consultancies, and professional practices. LLPs are permitted to accept 100% FDI under the automatic route only in sectors where there are no FDI-linked performance conditions.

An LLP must have at least two designated partners, of which one should be an Indian resident. Unlike companies, LLPs cannot issue equity shares and hence cannot raise equity capital from the public. Nevertheless, LLPs enjoy tax benefits and lower compliance burdens compared to companies, making them a cost-effective option.

Branch Office, Liaison Office, and Project Office

These forms are suitable for foreign companies not intending to establish a separate legal entity in India but still wishing to operate in the country for specific objectives.

Branch Office: A branch office is allowed to conduct business activities such as export/import of goods, professional consultancy, research work, and representation. It is treated as an extension of the foreign parent company and not as a separate legal entity. RBI approval is mandatory before setting up a branch office in India.
Liaison Office: This office acts purely as a communication channel between the head office abroad and parties in India. It cannot undertake any commercial or revenue-generating activity. Its main functions include promoting import/export relations, establishing communication, and market research. Liaison offices also require RBI and government approval.
Project Office: A project office can be set up to execute specific projects in India. This structure is typically used when a foreign company has secured a contract from an Indian entity. While no FDI is directly allowed in this format, remittance of project revenues is regulated through RBI norms.

Choosing the Right Business Structure

The selection of business form depends on factors such as the nature of business, control preference, investment size, and taxation implications. For most operational businesses intending to scale, Private Limited Company is the most recommended option due to flexibility, control, and ability to raise capital.

Company Incorporation Procedure

Step 1: Appoint Resident Director

As per the Companies Act, 2013, every company must have at least one Indian resident director (i.e., an individual staying in India for more than 182 days during the previous financial year).

Step 2: Obtain Digital Signature Certificate (DSC)

All directors must obtain a Digital Signature Certificate (DSC) from a licensed Certifying Authority in India for online filings.

Step 3: Obtain Director Identification Number (DIN)

DIN is mandatory for all directors and is issued by the Ministry of Corporate Affairs (MCA). It is a one-time registration number for directors.

Step 4: Name Reservation

The company name must be reserved through the RUN (Reserve Unique Name) service on the MCA portal. It should not be identical or similar to existing companies or trademarks.

Step 5: Draft MOA and AOA

Memorandum of Association (MOA) outlines the company’s objectives
Articles of Association (AOA) details the rules and regulations for internal management

Step 6: File SPICe+ Form

The integrated SPICe+ form allows for simultaneous:

Name reservation
Incorporation
PAN and TAN allotment
EPFO/ESIC registration
GSTIN (optional)

Step 7: Deposit Share Capital

Open a bank account in the name of the company and deposit the initial share capital as mentioned in the MOA.

Step 8: FDI Reporting to RBI

After the capital investment is made, it must be reported to the RBI via Form FC-GPR within 30 days of allotment of shares.

Prerequisites for Incorporation

When a foreign national or Chinese investor plans to incorporate a company in India, there are certain foundational requirements that must be fulfilled even before filing the incorporation documents. These prerequisites form the backbone of the incorporation process and must be understood thoroughly to avoid delays or non-compliance issues later.

Registered Office Address in India

At the time of incorporation, every company must declare its registered office address. This is a statutory requirement under the Companies Act, 2013. The registered office serves as the official correspondence address for the company, and all formal communication from regulators like the Ministry of Corporate Affairs (MCA), Income Tax Department, and other agencies is sent to this address.

If the office premises are on rent, the company must furnish a copy of the lease or rental agreement. Additionally, a No Objection Certificate (NOC) must be obtained from the landlord, explicitly stating that the premises may be used as the company’s registered office. This documentation is crucial during the company’s incorporation process, as it forms part of the SPICe+ application filed with the MCA.

The office need not be a commercial space; a residential property can also serve as a registered office, provided the landlord permits it and gives the required NOC. However, the office must be capable of receiving communications, including legal notices, from regulators or courts.

Taxation Structure for Incorporated Companies

Taxation is a critical consideration for any foreign investor establishing a company in India. Once a company is incorporated and commences operations, it becomes a taxable entity under the Indian Income Tax Act, 1961. Companies are subject to corporate tax, and the applicable rate depends on the company’s annual turnover and nature of income.

Corporate Tax Rates

Companies with turnover up to Rs.5 crore: These companies are taxed at a concessional corporate tax rate of 25%, in addition to applicable surcharge and health & education cess. This lower tax rate is part of the government’s efforts to encourage small-scale businesses and startups.
Companies with turnover exceeding Rs.5 crore: In such cases, the standard corporate tax rate increases to 30%, along with the surcharge and cess. This is applicable to large corporations and established entities with significant revenues.

Minimum Alternate Tax (MAT)

In situations where a company, due to various deductions or exemptions, reports negligible or zero tax liability despite earning substantial profits, the concept of Minimum Alternate Tax (MAT) comes into play. The MAT ensures that such companies contribute a minimum amount to the exchequer.

Currently, MAT is levied at a rate of 15% (plus surcharge and cess) on the book profits of the company as calculated under the Companies Act, 2013. However, companies that opt for the concessional tax regime under Section 115BAA of the Income Tax Act are exempted from MAT provisions.

This regime is crucial for Chinese investors to understand while structuring their business operations and financial planning, as it can have a direct bearing on profitability and post-tax returns.

Understanding and complying with the taxation framework helps avoid future litigation and ensures smoother operations in India. Hence, consultation with tax professionals and chartered accountants is strongly recommended before and after incorporation.

Special Compliance for FDI from China

The Government of India has imposed heightened scrutiny and specific compliance requirements for FDI originating from countries sharing land borders with India, especially China. These measures are based on national security concerns and are aimed at monitoring strategic investments that may influence critical sectors or national infrastructure.

Policy Background and Coverage

As per the Press Note 3 (2020 Series) issued by the Department for Promotion of Industry and Internal Trade (DPIIT), any investment direct or indirect from countries that share a land border with India, including China, must undergo government approval before the investment can be made. This includes not only investments from mainland China but also from special administrative regions such as Hong Kong and Macau.

Additionally, the policy applies even when the investing entity is not directly Chinese but has Chinese beneficial owners. The term 'beneficial ownership' refers to any person who ultimately owns or controls the investor entity, even if not directly listed as the shareholder. This ensures that investments made through layered corporate structures involving Chinese control are not exempt from scrutiny.

Regulatory Authorities Involved

The special compliance process involves multiple government bodies that evaluate the proposal from both an economic and security standpoint:

DPIIT (Department for Promotion of Industry and Internal Trade): Acts as the nodal body for receiving and forwarding applications submitted via the Foreign Investment Facilitation Portal (FIFP).
Ministry of Home Affairs (MHA): Conducts security clearance by analyzing the credentials of the investor and identifying any potential threat to national security.
Reserve Bank of India (RBI): Oversees the compliance of the investment with foreign exchange laws under FEMA and ensures proper routing of funds.
Security and Intelligence Agencies: These agencies, such as the Intelligence Bureau (IB), carry out background checks on the individuals and entities involved, including ultimate beneficial owners, to assess geopolitical or economic threats.

Process of Special Compliance

Filing Application on FIFP Portal: The investor must initiate the approval process by filing a detailed application on the Foreign Investment Facilitation Portal (FIFP), maintained by DPIIT. The application must disclose the nature of the investment, proposed activities in India, background of the investor, and full details of beneficial ownership.
Documentation: All supporting documents must be provided, including incorporation certificates, board resolutions, financials, and notarized/apostilled identity documents of the shareholders and directors.
Security Clearance: Once the application is submitted, the DPIIT forwards it to the MHA and other security agencies. The clearance process is comprehensive and may take 6 to 9 months, depending on the nature and sensitivity of the investment.
Sectoral Ministry Review: Based on the sector in which investment is proposed, the concerned ministry (such as Ministry of Telecom, Defence, or Finance) also evaluates the proposal and gives its recommendation.
Final Approval and Conditions: Upon receiving all clearances, DPIIT conveys the final approval to the applicant. In some cases, the approval may be subject to additional conditions such as restrictions on data storage, audits, or compliance checks.

Downstream Investment Rules

If a foreign-invested Indian company (Company A) further invests in another Indian entity (Company B), this is called Downstream Investment. The following apply:

If Company A has more than 50% foreign investment, any investment it makes in Company B will be treated as indirect foreign investment.
If Company A has less than 50% foreign investment, its investment in Company B will be treated as Indian investment.
Any investing company (non-operating) must seek FIPB approval.

External Commercial Borrowings (ECB)

Foreign companies may also fund their Indian subsidiaries via ECB.

Eligibility:

Borrowers: Manufacturing, infrastructure, hotels, hospitals, software sectors
Lenders: Direct equity holders, international banks, overseas investors

Routes:

Automatic: Approved by Authorized Dealer Banks
Government: Requires RBI approval

ECB proceeds must be used as per RBI-specified end-uses such as capital expenditure, R&D, and refinancing.

Sectoral Caps and Restrictions

Each industry sector in India has a designated cap on FDI.

Examples:

100% FDI (Automatic Route): E-commerce, Pharma (Greenfield), Manufacturing, IT
Up to 49% (Government Route): Defence
Prohibited Sectors: Lottery business, gambling, chit funds, real estate (except construction)

Sector-Wise Inflows from China (2000-2015)

Automobile: 60%, Metallurgical: 14%, Electrical Equipment: 4%, Industrial Machinery: 4%, Power: 4%

Practical Considerations for Chinese Investors

Due Diligence: Conduct thorough checks on Indian partners, consultants, and suppliers.
Language Barriers: English is the business language; legal documents must be translated accurately.
Cultural Sensitivity: Understanding regional business culture is essential.
Consultation: Engage with professionals well-versed in Indian corporate, tax, and FDI law.

Remarks

The Indian market offers immense potential for foreign investors, including Chinese nationals and businesses. While the process of setting up a company in India is detailed and multi-layered, understanding the legal and regulatory ecosystem makes it seamless. Given the evolving FDI policies and bilateral relations, it is vital for Chinese investors to approach this venture with due diligence, accurate legal guidance, and full compliance.

Establishing a private or public limited company under the Indian framework offers operational flexibility, tax benefits, and ease of access to the growing Indian market. However, navigating the government approval processes, especially under the current regulations for bordering countries, is essential.

Hence, timely professional support, complete documentation, and regulatory adherence remain the key to successful market entry and business continuity in India.

FAQs

Q1. What triggered the special compliance requirements for FDI from China?

Ans. In April 2020, the Indian government amended its FDI policy to mandate prior government approval for investments from countries sharing land borders with India, including China. This move was primarily driven by concerns over national security and potential hostile takeovers during economic vulnerabilities.

Q2. Does the restriction apply only to Chinese companies?

Ans. No. The restriction applies to any investor (company or individual) based in or controlled from countries that share land borders with India. This includes mainland China, Hong Kong, Macau, and entities that have Chinese beneficial ownership, even if the investing company is registered in a third country.

Q3. What is considered 'beneficial ownership' in this context?

Ans. Beneficial ownership refers to the person(s) who ultimately own or control the investing entity. If a Chinese national or entity holds significant control, decision-making power, or ownership (directly or indirectly), the investment is subject to prior approval.

Q4. Which government authorities are involved in processing FDI applications from China?

Ans. The following agencies are involved:

DPIIT (Department for Promotion of Industry and Internal Trade)
MHA (Ministry of Home Affairs)
RBI (Reserve Bank of India)
Sector-specific ministries (e.g., Telecom, Defence, Finance)
Security and intelligence agencies (e.g., Intelligence Bureau)

Q5. Where and how should a Chinese investor apply for approval?

Ans. Applications must be submitted online through the Foreign Investment Facilitation Portal (FIFP), managed by DPIIT. The application must include detailed disclosures about the investor, business activities, Indian counterparts, and beneficial owners.

Q6. What documents are required for the FIFP application?

Ans. Key documents include:

Summary of the proposal on the investor company’s letterhead
Certificate of Incorporation of investor and investee entities
Memorandum and Articles of Association (MoA and AoA)
Board resolutions authorizing investment
Audited financial statements
Passport copies and details of directors and shareholders

All documents must be duly notarized and apostilled or legalized, depending on the jurisdiction.

Q7. What is the estimated time frame for getting approval?

Ans. The entire process can take 6 to 9 months, as the proposal is reviewed by multiple ministries and security agencies. The timeline may extend based on sector sensitivity and completeness of documentation.

Q8. Are there any sectors that are more sensitive for Chinese investments?

Ans. Yes. Sectors like defence, telecommunications, data and cybersecurity, infrastructure, and financial services attract more scrutiny and may require additional conditions or clearances from specific ministries.

Q9. Is prior approval required for additional or indirect investments (downstream investments)?

Ans. Yes. Even indirect investments made through Indian subsidiaries of Chinese-invested companies may be scrutinized under the FDI policy. It is important to analyze the ownership and control structures to determine compliance.

Q10. Can the Indian government impose conditions even after granting approval?

Ans. Yes. Approvals may come with special conditions, such as restrictions on data storage, periodic audits, compliance declarations, or sectoral caps. These are binding and must be complied with for the investment to remain valid.

Q11. What happens if a Chinese investor proceeds without approval?

Ans. Any FDI from China without prior approval is considered a violation of FEMA and FDI regulations, leading to penalties, reversal of investment, or legal consequences. Compliance is mandatory and non-negotiable.

Q12. Should a Chinese investor consult a professional before applying?

Ans. Absolutely. Due to the multi-layered approval structure and national security reviews, it is strongly advised to work with legal experts, company secretaries, or FDI consultants who specialize in cross-border investments and regulatory compliance in India.