The Indian software industry is the fastest-growing segment of the global IT industry, accounting for more than 50% of the global market share. Categorised into product-based and service-based companies, the industry has accumulated huge consumer demand in the domestic and international markets, especially in the past couple of years. As a result, the value of its exports surpassed USD 80 billion in the financial year 2020-21, out of which software products and engineering services solely accounted for USD 34 billion. After the government permitted 100% FDI in the sector, overseas funding and investments have also witnessed exponential growth.
As the second-largest source of employment in India, the industry currently employs over 5 million highly-skilled, experienced, and qualified professionals with the highest-paying jobs and designations. Accounting for 8% of India’s total GDP, the industry has managed to accumulate consumer spending worth billions of dollars for its new and innovative software products in the Indian market. However, entrepreneurs must realize that the journey between developing a software product and turning it into a commercial commodity is long, complicated, and tedious unless they possess the accurate information about the steps and procedures involved before establishing a software company in India. Relevantly, this blog mentions all such steps and procedures in detail.
On the basis of their primary business activity, software companies can either be categorised as product-based or service-based. A product-based company is involved in selling software products to end-users, while a service-based company uses or develops such products, to offer services and solutions to customers.
The domestic and global markets for both these categories of companies are incredibly robust and dynamic. According to India Brand Equity Foundation (IBEF), the total consumer spending in the IT industry in India, amounted to USD 82 billion in the financial year 2020-21. The spending increased by 24% in the following financial year, to approximately USD 108 billion.
The consumer demand for Indian software products and software engineering services equally peaked in the international markets, where their total exports amounted to USD 34 billion in the financial year 2020-21. According to the leading market research and analysis platform, Statista, Indian software products, and services account for more than 50% of the global IT market.
India’s software industry accounts for more than 50% of the global IT market and is known across the world for its innovative and cost-effective software products and services. The value of their exports had already surpassed USD 30 billion in the financial year 2021. The industry, witnessing such a sharp growth in the domestic and international markets, is the result of the emergence of several IT-based start-ups in India, in the past couple of years. Considering the huge consumer demand in the sector, the establishment of new software companies in India is yet to witness its peak. Hence, it becomes increasingly essential for the owners of such companies to possess complete knowledge of the steps to be followed while starting their software business in India.
Company owners selling software products have to be mindful of the fact that the industry is highly competitive and dynamic. Hence, it is recommended that instead of sticking to their initially launched products, they must consistently develop newer products, upgrade the older versions for better features, quality, and performance, and ensure that their products are at par with the current trends in the global IT industry.
Contrarily, if you choose the option to establish your business as a software services company, you must first buy or develop the software tools you will require to deliver services to your customers. Out of multiple types of software-based services, you must choose the niche that best suits your interest, skills, knowledge, and experience. Besides, the choice of your niche must also depend on the market competition and potential for growth and expansion in the industry.
Immediately after you chose the type of business activity for your company, you must determine the customer base you wish to cater to. The choice will probably depend on the utility of the product or service. For example, a gaming application software can aptly cater to a younger age group, multimedia software can aptly engage the younger and the elderly alike, BPM and e-commerce services target businesses, online recruitment services are meant for human resources, and online surveys and reports cater to the academia and accounting services have utilities across industries. Software engineering and software development services, which drive the Indian software industry, thrive on the demands of the global IT industry.
The markets for software products and services are coherent rather than segmented into small pockets of locations. Consequently, most software businesses operate on a larger scale and cater to an ever-expanding customer base. Exports of software products and services are also a billion-dollar market for Indian software companies. Even, the mode of sales and payments for most software companies are completely online, favouring the growth and expansion of businesses.
Hence, a private limited or public limited company status is best suited for incorporating Indian software companies. On the other hand, if a software business is owned by a single owner and caters to the local consumer base only, it can be incorporated as a one-person company
It is recommended that you choose and reserve a name and logo for your company before beginning the procedure for its incorporation. This is because choosing a name for your company is a complicated process of trial and error, involving a lot of rules and regulations that are required to be followed before the name gets approved by the ROC. All such rules are covered by Section 4 of the Companies Act 2013, Rule 8 of Company Incorporation Rules 2014, Trademark Act 1999, and Names and Emblems Act, 1950.
The name and logo of your company must be unique and original. It must not be phonetically or visually the same, similar, or deceptively identical to the name of an existing company, LLP, or a registered trademark. Besides, the name must not show any patronage of the central, state, or local government, or be “undesirable” in the opinion of the Central Government. The list of “undesirable” names is mentioned in Rule 8 of the Company Incorporation Rules. The rule also carries a list of certain words that can be used for naming companies, only after the prior approval of the Central Government.
To ensure the availability of the chosen name, you can perform the auto-search facility on the MCA website or avail of the services of SetIndiaBiz in this regard. As soon as you are assured that the name chosen is not similar to the name of an existing company, you can reserve it for your company through the RUN web-based service. Here, you will have the option of proposing two names per application at the cost of Rs.1000. Additionally, you shall also receive the chance to resubmit the same application twice, in case the proposed names are not approved by the ROC. After the two chances of resubmission are over, your application for name reservation will either be rejected or accepted.
Another way to apply for the reservation of name is through SPICe+, the application form for incorporating a company. You can fill out PART-A of the application form, and either submit it individually or along with the entire application for incorporation of the company. If you submit the form individually, you will be required to pay an application fee of Rs.1000. Here too, you will be able to propose two names per application, with a single chance of resubmission before the final verdict of acceptance or rejection of the application by the ROC comes about.
Software businesses usually have an incredibly wide consumer base, which expands from domestic to international markets. Such companies are established with huge potential and aspirations for growth, not restricted by their location/ principal place of business. Hence, while a registered office address is required for incorporating the company, it hardly has any significance on the profit-earning capacity of the company.
The only parameter you must consider while choosing the location of your software company is the availability, accessibility, and affordability of a skilled workforce. For instance, Bengaluru, the “Silicon Valley of India”, houses most Indian software companies and start-ups due to the easy availability of a skilled and economical workforce.
The next important step is to arrange enough funding for companies to conduct business activities without any hindrances. Software companies, be it product-based or service-based, promise high growth and expansion in a short period of time. The success of a software company depends on the creativity and efficiency of the product/ service and its consumer demand in the domestic and international markets. Since all these conditions are extremely favourable for Indian software companies, finding investors has become immensely easy and effortless for their owners. Besides, there are a number of financial institutions that are ready to lend money to such profitable ventures. Recognizing the entrepreneurial drive and motivation of young software developers in India, the government is also trying to nudge investments to support the industry in all possible ways.
The start-ups must, though, be mindful of the fact that the authorised capital of the company is extremely relevant for company registration and other compliances, and hence determining the same becomes a mandatory pre-requisite for companies before filing for their registration.
The application fee for filing form 20A depends on the authorised capital of the company.
According to the provisions of the Income Tax Act, it is mandatory for software companies in India to register their STP units under the Software Technology Parks of India (STPI). STPI is an independent organisation under the Ministry of Information and Technology, formed with the primary purpose of establishing tax-free zones for software export companies in India. The registration offers benefits regarding research in software development, export promotion, 100% reduction in export/customs duties,100% FDI for domestic software companies through the automatic route, exemptions under the IT act, etc.
When all is done, you may launch the business and aggressively market its products and services on social media, print media, and broadcast media through advertisements and call to action.
With utilities across industries, software products, and services have become the ultimate necessity in the era of digital technology. There are hardly any businesses now that can be operated in the complete absence of such products. A software company has become the most profitable investment in terms of money, time, effort, and innovation, for developers and investors alike. Besides, the huge consumer demand and the availability of an economical workforce, have driven the growth of the smallest software companies in India. The industry has prominently depicted its huge potential to resolve India’s employment crisis with opportunities that are well-paid and well-incentivised. Pertaining to all these factors, the consistent increase in the number of software startups is not expected to slump any time soon, thereby making the information about detailed business and legal procedures to be followed while starting a software company in India, more relevant than ever.