How To Set Up an Offshore Development Center in India

Often US companies underestimate the process involved in setting up and managing a development center. Many multinational companies that have started development centers in India in the last few years have reconsidered the wisdom of their decision due to the issues they have at the development center related to human resources and cost control. Recently, an IT vendor based in India acquired the subsidiaries of two US companies when the subsidiaries were unable to ramp up as planned.

Why do firms run into difficulties in setting up and running their own India-based subsidiaries?

  • Companies don't understand the different cost components for setting up and running a development center. This often results in inaccurate budget projections for the Indian subsidiary.
  • Companies underestimate the commitment required from the different departments, such as finance, legal, human resources and IT.
  • Companies don't understand the selection criteria for the subsidiary's captive center.
  • Companies underestimate the dynamics involved in the hiring process and take a long time to hire the core team.
  • Companies don't understand the complexities involved in the HR policies of the development center.
  • Even though the legal and statutory regulations have been greatly reduced in India, companies make a mistake of not planning in advance for the various clearances. This often becomes a bottleneck for the subsidiary setup.
  • Companies underestimate the planning and execution effort involved in the infrastructure setup, including real estate, hardware/software acquisition and IT.
  • Companies don't often understand the dependencies of the various subsidiary setup tasks. This increases the time and cost involved in the subsidiary setup process.

After researching the challenges faced by subsidiaries in India, we've developed a model, shown in the diagram below, that will reduce the time, cost and risks involved in setting up a subsidiary in India. This article shares details about the incorporation and registration process you need to go through. (For coverage on the other steps in the process, see the link to the whitepaper in “Useful Links.”)


Incorporation under Companies Act 1956

The process of registering a corporate entity in India involves a set of legal and other related issues which is estimated to take two to three weeks. Multinational organizations have to comply with the specifications of the Companies Act of 1958 to establish their operations in India. For meeting the relevant legal compliance, they have to submit certain documents and forms to the Registrar of Companies (ROC) the approval. Some of the major ones are:

  • Form 1A to be submitted for registering the name of the organization, proposed objectives and minimum paid up capital, etc.
  • The Memorandum of Association and the Articles of Association.
  • The power of attorney from the investing companies duly notarized by the Indian Embassy.

The Registrar of Companies will provide a Certificate of Incorporation after the filing of the above-mentioned documents. The certificate of Incorporation licenses the organization to start its operations in India.

Incorporation under STPI

Companies that plan to set up operations in India always have the choice to register with the Software Technology Parks India (STPI). Although the registration isn't mandatory, it provides them with benefits, such as a relaxation in Fringe Benefit Tax (FBT) and other tax-related concessions.

The STPI registration requires certain specific details and documents for the processing of the application. Among the important ones are:

  • Clear statement of the project.
  • Sources of finance.
  • A business plan with the detailed marketing strategy.
  • A financial plan with five-year projections.

The approval for the organization happens in three stages. In the first stage, the application will be screened by the authorities. This will be followed by the validation of the documents.

In stage two, the CEO of the organization makes a presentation to the STPI director and the head of the New Application Processing Committee.

The final phase is the approval process. The following documents are drafted between the STPI and the organization along with the approval letter:

  • A legal agreement with the STPI and the organization specifying the terms and conditions.
  • Registration cum Membership Certificate, Green Card.
  • Application for Customs Bonded Warehouse license.

If all the processes are performed and documents submitted in a timely fashion, the license for a period of five years can get issued within a period of two weeks.

Useful Links: readers can read Zinnov's recommendations and timeline for the other aspects of setting up an India-based development center — infrastructure selection and setup, process and human resources setup — in the whitepaper available free here:


Informative, practical blog on offshoring

The Ministry of Company Affairs, where you can download forms, such as the Registrar of Companies Form 1A.

A copy of Form 1A