Client Case Studies: India

Background
Our client is a US-based textile trader, which buys quality silk and sells it to a US factory to manufacture high class furnishings. These are then sold to major retailers in the US and Canada.

The company had been sourcing its silk from a US supplier, but dwindling margins had prompted management to seek alternative supply sources outside the US. In time, it became apparent that setting up its own textile processing factory would be the most cost-effective way to control supply/demand lines, and therefore keep its clients happy.

Engagement Planning
When our client contacted Healy Consultants in January 2007, his objective was to build an export-orientated factory in one of the Special Economic Zones (SEZs) recently developed in India. The board of directors had conducted some preliminary research into the project, and had concluded that potential labour shortages in China would put a labour-intensive textile factory at a competitive disadvantage. In addition, the company believed that free trade agreements between the US and India were less restrictive than those between the US and China, especially with regards to US import quotas.

Following an initial fact-finding mission to India, the company’s executive director Bob Armitage flew through Singapore on his way back to the US to discuss with our staff how we could help him with his India manufacturing plans.

Aidan Healy, managing director of Healy Consultants, convened a conference call with our India office in Mumbai, so he could receive their expert input and answer in greater detail Bob’s questions. Bob’s principal criteria were that the operation should be 100% foreign-owned, and should have good access to raw materials and labour.

Accounting and Tax Support
Ramesh, our India Client Relationship Officer, explained to Bob the advantages and pitfalls of setting up an SEZ company, as well as the legal, accounting and tax obligations of doing so. Bob was interested to learn that some SEZs in India offer incentives to stimulate foreign investment, including tax holidays and minimal import and export tariffs. Ramesh also stated that manufacturers operating in SEZs are unable to sell their goods locally.

The principal challenge at this stage was to decide which SEZ would be the most suitable for Bob’s company. Following his Singapore visit, Bob paid Healy Consultants a US$1,000 retainer fee to cover preliminary research into different Indian SEZs, with the objective of receiving a detailed comparison table, including setup costs, of each one.

Ramesh and his team in Mumbai began by contacting SEZ authorities in Maharashtra and Gujarat (geographically closer to Mumbai), as well as West Bengal (where several foreign textile companies have successfully set up facilities).  

Within one week, our India Incorporation Team had prepared a comparison table and provided recommendations based on Bob’s criteria, and forwarded this to the client in the US.

Following discussions with his fellow shareholders, Bob short-listed two SEZs of particular interest to their business in West Bengal, and decided that he, along with one other shareholder, would again visit India to become better acquainted with their facilities.

We agreed that it would be more beneficial if one of our Indian team accompanied Bob and his colleague on their mission, and so Bob paid another US$1,000 retainer fee to cover the costs of having Ramesh fly to Calcutta to meet Bob and his colleague, and accompany them to the two SEZs.

During the three-day visit, our clients met officials from the SEZ authorities and it quickly became clear that the Falta SEZ, close to Calcutta, would be the most suitable location for the textile processing facility, and so it was agreed that Healy Consultants would proceed with a quotation for business setup there.
 
Our Singapore head office prepared a detailed proposal, including a breakdown of costs and an outline of engagement steps, and e-mailed this to Bob. As with all clients, our proposal documents aim to minimise unwanted surprises at any stage of the engagement, and this was especially pertinent to this engagement, given the potential bureaucratic hurdles faced in India.

Bob and his colleagues agreed to the costs as indicated, and the engagement proceeded by his signing and returning our standard Client Engagement Letter to our Singapore office, and remitting the necessary funds to our corporate bank account.

The Engagement Letter also confirmed the corporate structure for the new Indian SEZ entity. Although a subsidiary of a foreign company is allowed to have 100% foreign ownership, it requires a minimum of two shareholders. In our client’s case, however, the company would have five shareholders (all US citizens) and two directors.

Company Incorporation
With this information, our India Incorporation Team obtained an application form from the Falta SEZ authority to set up a limited liability company Export-Orientated Unit (EOU) in the SEZ. Application Form Appendix 14-1A was completed by our staff in Mumbai. At the same time, we requested that Bob’s company courier notarised copies of their US corporate documents to India, as these would be required for submission. This step took one week to complete. 

Our India Incorporation team submitted by courier the EOU application to the Development Commissioner of the Falta SEZ. In addition to the application form, our team submitted a bank draft of RS5,000 (US$120) to cover registration fees, along with notarised US corporate documents, including Certificate of Incorporation and Memorandum and Articles, and due diligence of the shareholders and directors (e g passport copies, proof of address etc) which was supplied by our Singapore head office.

To supplement the application, our Singapore-based Marketing Team had also prepared a detailed Business Plan, outlining the company’s intended activities, its clients and suppliers, as well as market analysis and financial projections.

Three days after dispatching the courier to Falta, Ramesh followed up by telephone to check that the application had been received, and this was confirmed by the officer at Falta, who advised that a letter of approval would take up to one month.

The Falta mentioned that, since textile processing is considered a ‘sensitive’ sector, approval would only be granted by the Development Commissioner after personal verification of the EOU’s directors and inspection of the factory site before. This was communicated to Bob and the other shareholders and directors.

Five weeks after submitting the EOU application (and four follow up calls from our India-based staff), our Mumbai office received written conditional approval from the Office of the Development Commissioner of Falta SEZ.

The approval letter contained terms and conditions which required acceptance from the company shareholders and directors. Some of the conditions included an undertaking that the company would begin construction of the manufacturing facility on the allotted plot within six months; that it would export its entire output; and that it would prepare and submit a quarterly performance report. In addition, the company was required to set up a business website, and Bob has since requested Healy Consultants’ assistance to develop a 10-page website for this purpose).

This step of the process proved time consuming, because the acceptance required the signatures of all five shareholders. Although our Mumbai office had couriered the document to the US the day after receiving it from Falta, it was two weeks before it was returned, because two of the shareholders were traveling on business and had been unable to sign the undertaking. Once received, our Mumbai staff then submitted the signed acceptance of the terms to the Falta SEZ.

With this objective complete, the next step was for our India Incorporation Team to   publish notice of the company’s establishment in the Gazette of India, at the Department of Commerce at the Ministry of Commerce and Industry in New Delhi.

Corporate Banking
With the company full established, Bob requested our assistance to set up a corporate bank account for the company at Standard Chartered Bank in India. Thanks to our excellent relationship with the bank worldwide, we were able to achieve this task without Bob or the other shareholders visiting India.
Our India Banking Team prepared the bank account application, while our Singapore-based Marketing Team modified the business plan which had been submitted to the Falta SEZ. The bank account application and business plan were then couriered to the US for the signatories’ signatures and return to us.

Healy Consultants’ India Banking Team then prepared a full application pack to send to the bank, including the signed documents from the US, the approval letter from Falta SEZ, the corporate documents of the US company and a copy of the bank signatories’ passports and proof of address (which had been supplied by our Singapore head office). Once this had been completed, our Mumbai staff visited the bank branch in Mumbai to submit the pack. They were advised that a bank account number would be issued within three weeks.

Healy Consultants’ Mumbai office received notification that the account had been approved within the three weeks indicated, and over the course of the following two weeks they received (in sealed, separate envelopes) Internet banking and ATM card PIN numbers, which were then couriered in separate packages to the US.

Accounting and Tax Support
The final phase of this engagement was to register the company with the Income Tax Department of India in Calcutta.

Healy Consultants completed all stages of the business setup to our client’s satisfaction, and construction has started on the manufacturing facility in the Falta SEZ, with completion slated for May 2008. Upon completion, it is likely that Healy Consultants will provide support services including recruitment of site managers; assistance with applications for tax exemption; assistance with obtaining reimbursement of Central Sales Tax (CST) on raw materials bought from domestic Indian suppliers; and assistance with filing tax returns.

In addition, the company will be required to prepare a quarterly performance report once it begins production, and our client has expressed his intention to outsource this to Healy Consultants on an ongoing basis.

Contact Us

For more information on India services, contact email@healyconsultants.com or telephone us at (+65) 6735 0120.

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