Setting up an Indian private limited company as an NRI founder

An Indian private limited company must have at least one director who is resident in India. The test is a day-count one: a person who has stayed in India for 182 days or more during the financial year qualifies as resident for this purpose (Companies Act 2013, Section 149(3)). It is not about citizenship — a foreign citizen who lives in India enough days can satisfy it, and an Indian citizen living abroad usually cannot.

This is the single requirement that catches founders who are all based overseas. You can be a director, your co-founder abroad can be a director, and you can together hold all the shares — but the board still needs that one resident director on it. Many overseas founders solve this with a trusted family member or co-founder already living in India, or by appointing someone whose day count clearly meets the test.

The resident-director rule sits alongside the basic shape of a private limited company: a minimum of two directors and two shareholders, and a cap on members. A director and a shareholder can be the same person, so two people can cover both roles, as long as one of those directors meets the residency test.

When a non-resident subscribes to or buys shares in an Indian company, that investment is foreign direct investment and is governed by FEMA, not just the Companies Act. For most ordinary business sectors, FDI is allowed under the automatic route — meaning no prior government approval is needed — up to 100%. A handful of sensitive sectors are capped or need approval, so the sector is checked before the structure is locked.

The money has to come through proper banking channels into the company's account, and the share allotment against it is reported to the Reserve Bank of India within the prescribed window (through the RBI's reporting portal). This reporting is a compliance step in its own right; missing it is a common and avoidable problem.

The practical point is that the inward investment, the share allotment and the RBI reporting are one connected chain. A CA on the Indian side sequences them so the money, the shares and the filing all line up rather than being patched together after the fact.

Shares issued to a non-resident cannot simply be priced at face value by choice. Under the FEMA pricing guidelines, shares issued to a person outside India must be priced at or above the fair value of the share, and that fair value is worked out using an internationally accepted valuation method. For tax purposes, the related fair-market-value mechanics for unlisted shares sit in Rule 11UA of the income-tax rules.

The reason is straightforward: the rules stop value being quietly transferred out of (or into) India by issuing shares too cheaply or too dearly to an overseas party. So at incorporation, or whenever fresh shares are issued to a non-resident, the price per share is supported by a valuation rather than picked.

For a brand-new company subscribing its first shares, the valuation is usually simple. It becomes more involved once the company has been trading, has assets, or is taking investment at a premium — which is exactly when getting the pricing and its supporting valuation right protects you from a later dispute on either the FEMA or the tax side.

Beyond the people and the money, incorporation needs a few mechanical building blocks in place.

Every proposed director needs a digital signature certificate (DSC), because the incorporation forms are signed and filed electronically — and a foreign or NRI director's DSC application usually needs identity and address documents that are notarised and, depending on the country, apostilled or consularised. Each director also needs a director identification number (DIN), which for first-time directors is generally allotted through the incorporation application itself.

The company also needs a registered office address in India from the start — a real address where official correspondence can be received, supported by proof such as a utility bill and, if rented, the owner's consent. The company name is reserved, the constitutional documents (the memorandum and articles) are prepared, and the whole set is filed for incorporation. A PAN and TAN for the company are issued as part of the process, so it can transact and deduct tax from day one.

Arjun, an NRI in Singapore, runs a small software business and wants an Indian private limited company — partly as a subsidiary to hire a team in India, partly to bill Indian clients. He intends to hold most of the shares himself, with his Singapore company holding the rest, and he wants to be on the board.

The first thing settled is the resident-director requirement. Arjun and his overseas co-founder can both be directors, but neither lives in India enough days to qualify under Section 149(3), so he appoints his cousin in Pune — who clearly meets the 182-day test — as the resident director on the board. With that in place, the board is valid.

On the money, Arjun's shareholding and his Singapore company's shareholding both come in as FDI. The sector is ordinary software services, so it falls under the automatic route with no prior approval; the funds are remitted into the company's account through banking channels, the shares are allotted, and the allotment is reported to the RBI within the window. Because the shares are issued to non-residents, the price per share is supported by a valuation under the FEMA pricing guidelines (with Rule 11UA for the tax-side fair value) rather than just set at face value.

In parallel, DSCs are arranged for each director — Arjun's and his co-founder's needing notarised, apostilled documents from abroad — DINs are allotted through the filing, a registered office in Pune is documented, and the company is incorporated with its PAN and TAN. Arjun ends up with a clean structure: a valid board, investment that complies with FEMA, and shares priced defensibly — which is far less painful than discovering a gap a year in.