How To Setup a New Factory in India

Reliance Industrial Plots in Delhi NCR provides Industrial Plots in NCR for the establishment of a Factory and Manufacturing Plant at Reliance MET. The Haryana government has approved the Model Economic Township (MET) project in Jhajjar, which is located along the western border of Delhi in Haryana. The Reliance Industrial Plots Jhajjar project is envisioned as an 8250-acre fully integrated industrial township with all the benefits of domestic tariff areas, special economic zones, and industrial park clusters, as well as logistics hub support infrastructure and social infrastructure such as residential, commercial, recreational, and institutional development. 

Introduction 

In 1991, India opened its economy to the rest of the world, attracting significant investment from multinational corporations across a wide range of industries. The Indian government announced the ambitious “Make in India” programme in 2014 in order to transform India into a manufacturing and global design hub. In recent years, such an initiative has had a positive impact on sectors such as phone manufacturing, with global companies such as Samsung and Xiaomi shifting some of their manufacturing to India. 

To overcome the challenges posed by the COVID-19 pandemic and to make India an export hub rather than an importer, India has announced a number of schemes to support this initiative, with a focus on self-reliance. The programme also identifies priority sectors, with specific benefits or relaxations extended based on the sector requirements – for example, certain licencing exemptions are allowed for automobiles, as well as rebates for research and development, and for the leather industry, some exemptions from excise and import duties have been put in place. The ‘Invest India’ programme also offers advice and assistance in obtaining approvals for factories or projects. 

The measures outlined above will not only encourage companies to establish themselves in India in order to tap into the vast potential market there, but will also encourage them to make India a global supplier for their global operations. Many international companies are reportedly considering not only establishing factories in India, but also relocating their manufacturing bases from other countries to India. 

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

1. Registering an Indian Entity 

Manufacturing activities in India necessitate a physical presence. A manufacturing facility can be established by a corporation or a partnership (including an LLP). A limited company (private or public) is still the most common organisational structure for any manufacturing business. 

A foreign company may choose to establish a wholly-owned subsidiary in India (foreign exchange regulations govern the maximum amount of foreign direct investment allowed depending on the sector) or form a joint venture (JV) with a local partner. A JV benefits from a local partner’s experience and knowledge of the Indian market, but the foreign company must be careful in selecting the JV partner and structuring the agreement to effectively participate in the JV. The provisions of the Companies Act, 2013, a central (federal) Act, allow for the incorporation of a local entity. A foreign company can choose to keep this company as a wholly-owned subsidiary or to make any local partner by diverting some shareholding in the such incorporated entity. The entire incorporation process can now be completed online, with the exception of submitting supporting documents that may need to be notarized and apostilled. The process is streamlined once the submission is made, and it may take 4 – 6 weeks to complete. 

Takeaway: This is a necessary step in establishing the business and should begin as soon as the decision to enter the Indian market is made. Time should be set aside to collect the necessary documents. 

2. Where to Go 

A company that decides to enter India must identify a location within the country, which could be any Indian state, in addition to conducting market and technical research. The location should be chosen with care, taking into account factors such as the company’s product, business-friendly policies and incentives, the availability of raw materials or supply chains, the availability of land, existing infrastructure, the availability of skilled, unskilled, or semi-skilled labour in the local population, political and administrative stability, and so on. Proximity to ports, markets, supply chains, and so on will also aid in deciding on a specific region/district of the state to establish the manufacturing base.

Almost all Indian states now provide general incentives for investment (such as cheaper land, stamp duty rebates, exemption from electricity charges, low-interest loans, and subsidies for specific industries), as well as administrative measures such as’single window’ clearance, which allows approvals to be obtained at a single location or through a single nodal agency. The nodal agencies coordinate various compliances, which have proven effective in increasing transparency and shortening timelines. However, due to the number of agencies/government departments that grant such approvals in some states, obtaining approvals and licences remains a time-consuming process. 

To entice more investment, the most industrialised and progressive states periodically extend benefits/incentives or implement new policies. The table below summarises the benefits provided by some more industrialised Indian states. The following is not an exhaustive list: 

Takeaway: Deciding where to go in India is just as important as deciding whether or not to enter India. Some states are more investor and investment-friendly than others, and some have become industry hubs, such as Tamil Nadu for automobiles. Determine whether the identified location has any unique risks or benefits. 

Reliance industrial plots in reliance met

3. The Industrial Plots and Land 

The most important aspect of establishing a factory is finding industrial plots and land with clear title and proper access. It may result in significant monetary loss if subsequent deficiencies in title or approvals that were to be obtained prior to entering the land or beginning construction are discovered. 

Agricultural or private land cannot be used to establish a factory until it is converted to industrial use. This is a common practise, but it can be a time-consuming process that requires repeated contact with the relevant government department. Private land acquisition would also necessitate addressing issues such as land fragmentation and compliance with local land ceiling laws. 

After identifying land, complete title due diligence should be performed to ensure that title is clear and the land is free of encumbrances such as mortgages and litigations. The maximum period for which governments permit access to land records is 30 years, and it is always prudent to conduct due diligence for the entire period. Following this, underlying documentation should be properly drafted and all associated fees and duties (such as stamp duty, registration, and so on) should be fully paid during the conveyancing process. All original documents should be kept as well, as they may be needed later when raising funds. 

Takeaway: Rather than acquiring land from private sources, it is preferable to lease/purchase land in industrial parks. This eliminates a significant portion of the title-related risk when purchasing private land. 

4. Setting up a Factory 

Every factory in India must follow the Factories Act of 1948. (“Factories Act”). A manufacturing unit is considered a ‘factory’ if it employs 10 or more workers with power, or if it employs 20 workers without power. The Factories Act covers all manufacturing processes and establishments in India, and various states have enacted their own rules to implement its provisions. 

A factory licence is the most basic requirement: in most cases, an owner can register the factory online with the state government and request a licence. Depending on the nature of the manufacturing process, each state has different timelines and approvals. For example, if any factory proposes to use any hazardous substances, the registration process may require some additional documents and approvals and may take slightly longer. Many states require land-related documents to be submitted with the application, so it is critical to complete land acquisition before submitting the application. 

Pre-construction approvals: In addition to the factory licence, a factory must obtain a number of other approvals prior to or concurrent with construction. Building plan and site approval, consent to establish, procuring a power and water connection, fire permissions, boilers and explosives-related permissions, building a sewage or effluent treatment plant, or receiving a ‘no-objection’ from the pollution control board are all standard approvals (if the industry is highly polluting, an environmental impact assessment study). Certain industries (such as drugs and pharmaceuticals) may also necessitate separate registration with the sectoral regulator. 

Employees: Depending on the manufacturing process, factories require a mix of skilled, semi-skilled, and unskilled labour. These workers may be hired permanently, temporarily, or on a ‘contract’ basis. All owners must follow labour laws and may be required to obtain registrations and licences depending on the number and nature of workers employed in the factory, which may vary from state to state. Owners should take special care in managing and supervising contractors who provide labour, as well as in not hiring child labour and being aware of human trafficking issues. Owners must also be aware of workman retrenchment provisions under Indian law, which are complex and frequently necessitate specialised advice to navigate. 

Importing equipment: If technology or equipment must be imported before the factory can begin operations, clearances from customs must be obtained. While import clearance procedures for most equipment are generally transparent, multiple rounds of documentation may be required. Proper agreements should also be in place depending on how the equipment is financed and brought into India, which may necessitate the participation of an authorised dealer bank.

Takeaway: Because some pre-construction compliances will take less time than others, this should be factored into project timelines. 

5. Running a Factory 

Once a factory is operational after completion of construction and installation of equipment, there are ongoing compliances under the Factories Act (such as filing of returns/intimations) as well as separate labour laws. Additional requirements for worker health and safety are also expected to be met at all times, as are public displays of notices in vernacular languages, hygienic conditions, and suitable sanitation facilities for workers. Many states now provide online compliance systems and have established fixed inspection intervals for government officers to visit factory sites and certify that all compliances are met. 

The person designated as an ‘occupier’ in the registration application (usually any manager/director of the company) will be held accountable for the factory’s non-compliance with the Factories Act, labour laws, and other basic compliances regarding health and safety standards, the provision of amenities to workers, and the payment of wages. It is usually best to name the manager or director with local knowledge of these regulations as the owner. 

Takeaway: Implement an effective monitoring system and plan regular compliances ahead of time to avoid delays. 

6. What to Expect 

The government has made a number of policy announcements emphasising its commitment to making manufacturing more appealing in India, and policy efforts in this direction are expected to continue. In the coming months, more clarity is expected. As a result, any manufacturer’s post-COVID business strategy would undoubtedly benefit from considering manufacturing in India, as businesses around the world are revisiting these strategies, with a particular emphasis on business continuity plans in the supply chain. As a result, shifting a portion of a manufacturing base to India may be an appealing risk-reduction strategy. 

While the ease of doing business in India has undoubtedly improved, implementation timelines should be realistically set, keeping in mind that government departments are involved at almost all stages of setting up. In practise, some bottlenecks remain in the establishment process, but major roadblocks have been eliminated, and remaining issues are much easier to navigate with proper on-the-ground support. 

 

The purpose of this article is to provide a general overview of the subject matter. You should seek specialist advice about your specific situation. 

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