Setting Up New Factories In India – Legal And Land Issues - Corporate and Company Law - Corporate/Commercial Law (2024)

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In 1991, India opened up its economy to the world and attractedlot of investment from international companies across sectors. Tomake India a manufacturing and global design hub, the Indiangovernment in 2014 announced an ambitious program "Make inIndia". Such an initiative has positively impacted sectorssuch as phone manufacturing in the recent years, with globalcompanies such as Samsung and Xiaomi moving some of theirmanufacturing to India. Now, to overcome the challenges being faceddue to the COVID-19 pandemic and to make the country an export hubrather import dependent, India has announced various schemes toreinforce this initiative, with a focus towards self-reliance. Theprogram also identifies priority sectors, with specific benefits orrelaxations extended keeping in mind the sector requirement –for example, for the automobile sector, certain licensingexemptions are allowed for automobiles and as well as rebates forresearch and development and for the leather industry, someexemptions from excise and import duties have been put in place.The 'Invest India' program also provides guidance and helpsin procuring approvals for factories or projects.

The above measures will not only attract companies to set up inIndia, to tap into the huge potential market in India, but willalso encourage them to make India a global supplier for theirglobal operations. Many international companies are not onlyconsidering establishment of their factories in India but few arereportedly also planning to move their manufacturing bases fromother countries, to India.

We highlight some of the key considerations to be kept in mindwhen deciding to 'set up' a factory in India.

1. Registering an Indian entity

A physical presence is required to carry out manufacturingactivities in India. A manufacturing facility may be set up byeither a company or a partnership firm (including an LLP). Alimited company (private or public) is still the most popular formof organisation for any manufacturing business.

A foreign company may either decide to set up a wholly-ownedsubsidiary in India (foreign exchange regulations regulate thelimit of foreign direct investment depending on the sector) orenter into a joint venture (JV) with a local partner. A JV has thebenefit of a local partner's experience and knowledge of theIndian market, but the foreign company should be careful inselection of the JV partner and to structure the agreement toparticipate effectively in the JV. A local entity may beincorporated under the provisions of Companies Act, 2013, which isa central (federal) Act. A foreign company may decide whether theywish to keep this company as a wholly-owned subsidiary or wish tomake any local partner by diverting some shareholding in suchincorporated entity. The entire incorporation process can now becompleted online, subject to submission of underlying documentsthat may need to be notarized and apostilled. Once the submissionis made, the process is streamlined and it may take 4 – 6weeks to complete.

Takeaway: This is a necessary step in setting up theestablishment and should be initiated once the decision to enterthe Indian market is taken. Time should be budgeted for gatheringthe required documents.

2. Where to go

Once a company decides to enter India, apart from market andtechnical studies, it must identify a location within the country,which could be any Indian state. The choice of location should bean informed decision based on criteria such as product of thecompany, business-friendly policies and incentives, availability ofraw material or supply chains, land availability, existinginfrastructure, availability of skilled, unskilled or semi-skilledlabour in the local population, political and administrativestability etc.. Proximity to ports, market, supply chains etc. willfurther help in deciding on a particular region/district of thestate to set up the manufacturing base.

Almost all Indian states now offer general incentives forinvestment (such as less-expensive land, stamp duty rebates,exemption from electricity charges, low-interest loans, subsidy oncertain industries) including administrative measures, such as'single window' clearance for facilitation of approvals atone place or through one nodal agency. The nodal agenciescoordinate various compliances, which have proven effective inmaking the process transparent and reducing timelines. However, insome states, due to the multiplicity of agencies/ governmentdepartments that grant such approvals, procuring approvals andlicenses remains a time-consuming process.

To attract more investment, the most industrialized andprogressive states extend benefits/incentives from time to time, orintroduce new policies. The following table provides an overview ofthe benefits extended by some more-industrialised Indian states.The list is not exhaustive:

Setting Up New Factories In India – Legal And Land Issues - Corporate and Company Law - Corporate/Commercial Law (1)

Takeaway: Where to go in India is as important as decidingwhether to enter India. Some states are more investor andinvestment-friendly than others, or some states have become hubs ofparticular industries such as Tamil Nadu for automobiles. Assesswhether the identified location has any unique risks or singularbenefits.

3. Land

Land with clear title and proper access is the most criticalaspect in setting up a factory. It may lead to significant monetaryloss if subsequent deficiencies are found in title or approvalswhich were to be taken prior to entering upon the land orinitiation of construction.

For setting up a factory, agricultural or private land cannot beused until converted to industrial use. This is a common practice,however may be a time-consuming exercise and may involve repeatedliaising with the concerned government department. Acquisition ofprivate land also would require addressing issues such as landfragmentation and compliance with local land ceiling laws.

Once land is identified, a full title due diligence should becarried out to ensure that title is clear and the land is free fromencumbrances such as mortgages and litigations. The maximum periodfor which governments allow access to land records is 30 years andit is always advisable to carry out the diligence for this fullperiod. Once this is done, during the conveyancing process,underlying documentation should properly drafted and all associatedfees and duties (such as stamp duty, registration etc.) should befully paid. All original documents also should be retained, as theymay be later required while raising finance.

Takeaway: It is preferable to lease/buy land in industrial parksrather than acquire from private sources. This mitigates a largepart of the title-related risk while buying private land.

4. Setting up a factory

Every factory in India has to comply with the Factories Act,1948 ("Factories Act"). A manufacturing unit isconsidered as a 'factory' if 10 or more workers undertakethe manufacturing process with power, or 20 workers manufacturewithout power. The Factories Act applies to all manufacturingprocesses and establishments in India, and various states have alsointroduced their own rules to implement its provisions.

Basic requirement is a factory license: In most cases,an owner can register the factory online with the state governmentand request grant of a license. Each state has different timelinesand approvals depending on the nature of the manufacturing process– for example, if any factory proposes to utilise anyhazardous substances, the registration process may need someadditional documents and approvals, and may take slightly longer.In many states, land-related documents are required to be submittedalong with the application so it is important to complete landacquisition prior to submitting the application.

Pre-construction approvals: Other than the factorylicense, there are a number of other approvals that a factory hasto obtain, prior or in parallel to construction. These can varyfrom state to state, but standard approvals are building plan andsite approval, consent to establish, procuring a power and waterconnection, fire permissions, boilers and explosives-relatedpermissions, building a sewage or effluent treatment plant, orreceiving 'no-objection' from the pollution control board(if the industry is highly polluting, an environmental impactassessment study). Specific types of industries (such as drugs,pharmaceuticals) may also require separate registration with thesectoral regulator.

Employees: Factories need a combination of skilled,semi-skilled or unskilled labour, depending on the requirement ofthe manufacturing process. These workmen may be hired on apermanent, or temporary or 'contract' basis. All ownershave to comply with labour laws and might need to procureregistrations and licenses depending on the number and nature ofthe workmen employed in the factory, which may also vary from stateto state. Owners should take special care in managing contractorswho provide labour and supervise the same, be vigilant of nothiring child labour and of human trafficking issues. Owners willalso need to be mindful of workman retrenchment provisions underIndian law, which are complex and often require specialised adviseto navigate.

Importing of equipment: If technology or equipment isrequired to be imported before the factory can begin operations,clearances are to be obtained from the customs authorities. Whilefor most equipment, import clearance procedures are generallytransparent, multiple rounds of documentation may be required.Proper agreements should also be set in place depending on how theequipment is financed and brought into India, which may need theinvolvement of an authorised dealer bank.

Takeaway: Some pre-construction compliances will take less timethan others, so this should be anticipated when setting projecttimelines.

5. Running a factory:

After completion of construction and installation of equipment,once a factory is operational, there are ongoing compliances underthe Factories Act (such as filing of returns/ intimations) as wellas under separate labour laws. Additional requirements in relationto health and safety for workmen are also expected to be maintainedat all times, as well as public display of notices in vernacularlanguages, ensuring hygienic conditions and suitable sanitationfacilities for workmen. Many states now offer online systems forcertain compliances, and have also prescribed fixed intervals ofinspection for government officers to visit factory sites andcertify that all compliances are being met.

The person designated as an 'occupier' in theregistration application (usually any manager/director of thecompany) will be responsible for non-compliance by the factory ofrequirements under the Factories Act, labour laws and other basiccompliances regarding health, safety standards, provision ofamenities to workmen and ensuring payments are made. It is usuallyadvisable to designate the manager or director who has localknowledge of these compliances, as the owner.

Takeaway: Put in place an effective monitoring system and planregular compliances in advance to ensure no delay.

6. What to expect

The government has made a number of policy announcementsreinforcing its commitment to make manufacturing attractive inIndia, and policy push in this direction is expected to continue.Greater clarity is expected in the coming months. For this reason,any manufacturer's post-COVID business strategy could certainlybenefit by considering manufacturing in India since, worldwide,businesses are revisiting these strategies, with particularemphasis on business continuity plans in supply chain. Due to this,diversifying part of a manufacturing base to India may be anattractive strategy to reduce risk. While 'ease of doingbusiness' has undoubtedly improved in India, timelines shouldbe realistically set for implementation, keeping in mind thatgovernment departments are involved at almost all stages of settingup. Practically, some bottlenecks do remain in the establishmentprocess, but major hurdles have been streamlined and remainingissues are much easier to navigate with proper on-groundsupport.

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circumstances.

Setting Up New Factories In India – Legal And Land Issues - Corporate and Company Law - Corporate/Commercial Law (2024)
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