Comprehensive Guide to Setting Up Global Capability Centers (GCCs) in India

India, with its robust infrastructure, skilled workforce, and favorable economic policies, has become a global hub for Global Capability Centers (GCCs). These centers, often referred to as captive units, provide strategic and operational support to multinational corporations, helping them streamline operations and leverage India’s vast talent pool. Setting up a GCC in India involves navigating a complex legal landscape. This article provides a detailed guide on the legal requirements and considerations for establishing a GCC in India.

Company Formation

Setting up a company in India requires compliance with the Companies Act, 2013. The process involves several key steps including reserving the company name through the RUN (Reserve Unique Name) service and filing the SPICe+ form, which incorporates the Memorandum of Association (MOA) and Articles of Association (AOA). Directors must obtain a Director Identification Number (DIN) and Digital Signature Certificate (DSC). Additionally, businesses must apply for a Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN).

Depending on the company’s objectives and operational scale, entities can choose from different structures: a Private Limited Company is often preferred for its limited liability and ease of operation, a Public Limited Company suits larger operations seeking to raise capital through public offerings, a Limited Liability Partnership (LLP) offers flexibility and tax benefits, and a Branch Office or Liaison Office requires prior approval from the Reserve Bank of India (RBI).

Foreign Direct Investment (FDI)

India’s FDI policy, governed by the Foreign Exchange Management Act (FEMA), 1999, facilitates foreign investments. Under the automatic route, 100% FDI is permitted in sectors like IT and ITES without prior approval, while other sectors necessitate approval from the Foreign Investment Promotion Board (FIPB). Specific sectoral caps are in place for areas such as defense, retail, and insurance. Compliance includes filing the Annual Return on Foreign Liabilities and Assets (FLA) with the RBI and reporting equity investments and transfers through FC-GPR (Foreign Currency-Gross Provisional Return) and FC-TRS (Foreign Currency-Transfer of Shares) forms.

Taxation

The Indian tax framework is outlined under the Income Tax Act, 1961, which specifies corporate tax rates for domestic and foreign companies and mandates compliance with transfer pricing regulations to ensure arm’s length pricing for transactions with associated enterprises. Businesses can benefit from tax holidays and incentives available in Special Economic Zones (SEZs) and for specific activities. The Goods and Services Tax (GST) regime, a unified tax structure, requires entities exceeding a turnover threshold to register and regularly file GST returns, adhering to the rules set forth by the Central Goods and Services Tax (CGST) Act, 2017.

Labour Laws

Compliance with labour laws is crucial for smooth operations. The Industrial Disputes Act, 1947, governs industrial relations and dispute resolution, while the Shops and Establishments Act regulates working conditions and varies by state. The Minimum Wages Act, 1948, ensures the payment of minimum wages, and the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, provides social security for employees. Additionally, the Employees’ State Insurance Act, 1948, covers health insurance. Drafting employment contracts that comply with these laws and include necessary clauses such as non-compete and confidentiality is essential.

Intellectual Property Rights (IPR)

Protecting intellectual property is vital for business success. The Patents Act, 1970, allows for filing patents with the Indian Patent Office for inventions. The Trademarks Act, 1999, facilitates the registration of trademarks with the Trademark Registry. Copyrights are protected under the Copyright Act, 1957, covering literary and artistic works. Trade secrets can be safeguarded by implementing measures under the Indian Contract Act, 1872, to protect confidential information. These steps are crucial for maintaining a competitive advantage.

Information Technology and Data Protection

The Information Technology Act, 2000, provides legal recognition for electronic contracts and digital signatures and mandates compliance with cybersecurity guidelines to ensure data protection. Businesses must also adhere to data protection norms under the IT Act and prepare for the anticipated Personal Data Protection Bill (PDPB), which will regulate the processing of personal data and enhance data privacy protections in India. The IT Rules, 2021, further provide guidelines for intermediaries and digital media ethics.

 Real Estate

The Real Estate (Regulation and Development) Act, 2016 (RERA), ensures transparency and accountability in real estate transactions. Commercial real estate developers must register their projects under RERA. Conducting due diligence to verify property titles and compliance with local zoning laws is essential when leasing or purchasing property. Additionally, ensuring lease terms comply with legal requirements and paying applicable stamp duty and registration fees is necessary for legal ownership and transfer of property.

Exchange Control Regulations

The Foreign Exchange Management Act (FEMA), 1999, governs foreign exchange transactions, including guidelines for the repatriation of profits and dividends, regulations for raising debt from foreign sources through External Commercial Borrowings (ECBs), and regular filings with the RBI for foreign transactions. Compliance with these regulations is crucial for smooth international financial operations and maintaining foreign exchange stability.

Sector-Specific Regulations

Specific regulations apply to different sectors to ensure compliance and operational efficiency. For IT and ITES units, the Software Technology Parks of India (STPI) scheme provides various benefits, including tax exemptions. Financial services and fintech operations must adhere to Reserve Bank of India (RBI) guidelines, while healthcare facilities must comply with the Clinical Establishments (Registration and Regulation) Act, 2010. Understanding and complying with these sector-specific regulations is crucial for legal operations in India.

Trade and Commercial Laws

The Indian Contract Act, 1872, ensures that agreements are legally enforceable and provides remedies for breach of contract, which is fundamental for conducting business transactions. Additionally, the Sale of Goods Act, 1930, regulates commercial transactions involving goods, ensuring that the sale and purchase processes are clear and legally sound, providing rights and obligations to both buyers and sellers.

Banking and Financial Services

Setting up banking and financial services in India requires compliance with the Banking Regulation Act, 1949, which provides a framework for banking operations. For non-banking financial companies (NBFCs), understanding the regulations and guidelines under the Reserve Bank of India Act, 1934, is essential for legal operations. These regulations ensure the financial sector’s stability and integrity, providing a comprehensive framework for various financial activities, including lending and investment.

Export and Import Regulations

Compliance with India’s Foreign Trade Policy, governed by the Foreign Trade (Development and Regulation) Act, 1992, and guidelines from the Directorate General of Foreign Trade (DGFT) is essential for businesses involved in export and import activities. Obtaining an Import Export Code (IEC) is mandatory for these entities. Adhering to these regulations facilitates smooth international trade operations and ensures legal compliance with trade laws and regulations.

E-commerce Regulations

The Consumer Protection (E-commerce) Rules, 2020, under the Consumer Protection Act, 2019, protect consumer rights and ensure fair trade practices for e-commerce platforms. Additionally, the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021, mandate compliance for online intermediaries and digital media platforms, ensuring ethical and legal online operations, and safeguarding user data and privacy.

Investment Vehicles and Funding

For raising funds through venture capital and private equity, businesses must comply with guidelines under the Securities and Exchange Board of India (SEBI) regulations. Angel investor regulations also require adherence to ensure legal compliance for start-ups and investment networks. Understanding these regulations is crucial for securing funding, fostering innovation, and supporting business growth in the highly competitive market.

Insurance Regulations

The Insurance Regulatory and Development Authority of India (IRDAI) provides comprehensive compliance guidelines for insurance companies and intermediaries. The Insurance Act, 1938, and subsequent amendments outline the regulatory framework. Additionally, regulations for foreign investment in the insurance sector, guided by FEMA and IRDAI, outline the necessary steps and requirements for foreign entities investing in Indian insurance companies. These regulations ensure the stability and growth of the insurance sector.

Environmental, Social, and Governance (ESG)

ESG reporting standards and compliance are becoming increasingly important for businesses. The Companies Act, 2013, mandates certain companies to engage in Corporate Social Responsibility (CSR) activities and report on their ESG performance. Implementing sustainability practices in operations and adhering to emerging ESG standards and reporting requirements can enhance a company’s reputation and operational efficiency. Understanding these requirements is crucial for long-term business success and fostering a positive impact on society and the environment.

Anti-bribery and Corruption Laws

The Prevention of Corruption Act, 1988, outlines regulations against bribery and corruption. Implementing mechanisms to protect whistleblowers and encourage the reporting of misconduct is also essential for maintaining ethical business practices. The Whistle Blowers Protection Act, 2014, provides safeguards for individuals reporting corruption and other malpractices. Compliance with these laws helps prevent corruption, promotes transparency, and ensures accountability in business operations.

Consumer Protection Laws

The Consumer Protection Act, 2019, ensures protection against unfair trade practices, safeguarding consumer rights. Regulations for product safety and liability under the Act ensure that businesses provide safe products and are held accountable for any issues arising from their use. Adhering to these laws is crucial for maintaining consumer trust and business integrity, providing a legal framework for resolving consumer disputes and ensuring fair practices.

Advertising and Marketing Regulations

Compliance with the Advertising Standards Council of India (ASCI) guidelines is necessary for maintaining advertising standards and ensuring ethical practices. The Consumer Protection Act, 2019, also includes provisions for regulating misleading advertisements. Digital marketing activities must comply with the Information Technology Act, 2000, and related rules to ensure transparency and protect consumer interests.

Technology Transfer and Licensing

Legal frameworks for technology transfer agreements are essential for businesses engaged in transferring technology between entities. The Indian Contract Act, 1872, governs these agreements, ensuring they are legally enforceable. Compliance with licensing terms and conditions under the Patents Act, 1970, and the Trademarks Act, 1999, is crucial. Additionally, regulations under the Copyright Act, 1957, for software and other intellectual property must be adhered to.

Research and Development (R&D) Incentives

The Income Tax Act, 1961, provides tax incentives for research and development activities, including deductions under Section 35 for scientific research expenditures. Businesses can also collaborate with academic institutions through legal frameworks such as the Industry-Academia Collaborative Research Programs to enhance R&D efforts. ### 22. Corporate Governance and Compliance

Compliance with SEBI guidelines for listed companies ensures adherence to corporate governance norms. The Companies Act, 2013, outlines the duties and responsibilities of directors, including the requirement for independent directors and the formation of committees such as the Audit Committee and the Nomination and Remuneration Committee. Understanding these legal duties and responsibilities is essential for effective corporate governance, promoting transparency, accountability, and long-term business success. Regular compliance audits and adherence to disclosure requirements under SEBI regulations are also necessary for maintaining corporate integrity.

Data Privacy

In India, data privacy for technology Global Capability Centers (GCCs) is governed by several regulations, including the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011, and the Data Protection and Digital Privacy (DPDP) Act, 2023. The DPDP Act establishes comprehensive guidelines for data protection, emphasizing principles such as data minimization, user consent, and transparency. It requires GCCs to implement stringent security measures, ensure data is processed lawfully, and provide mechanisms for individuals to exercise their rights over their data. Additionally, the Act mandates data localization and imposes significant penalties for non-compliance, aiming to enhance privacy protections and maintain robust standards in the tech industry.

Conclusion

Setting up a Global Capability Center in India offers significant advantages, including access to a skilled workforce and a supportive economic environment. However, navigating the complex legal landscape requires careful planning and compliance with various regulations. This comprehensive guide outlines the key legal requirements and considerations, helping businesses establish a successful GCC in India. Engaging with local legal and business advisors is crucial to ensure thorough compliance and smooth operations. By understanding and adhering to these legal requirements, companies can leverage India’s potential to drive growth and innovation through their Global Capability Centers.

Contributed by – Sindhuja Kashyap

King Stubb & Kasiva,
Advocates & Attorneys

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