India is also the highest-ranked country in Transparency International’s 2006 Bribe Payers Index, which is a measure of the extent to which a country encourages corrupt business practices. Making the formation of a company in India less appealing.

The principal legislation through which Indian corporate law is enforced is the India Companies Act 1956. The MCA is the regulatory body enforcing law related to forming a company in India, and governs companies, businesses and certified public accountants.

Although it is based on UK common law, India ’s legal system suffers a poor international reputation; making forming a company in India less appealing. India’s political and legal system is negatively ranked the world’s 84th least corrupt in Transparency International's 2009 Corruption Perceptions Index. As a result, this discourages some foreign investors from forming a company in India because of the belief that they will receive inadequate protection from local courts, particularly with regards to intellectual property rights (IPR) protection.

Poor IPR enforcement acts as a deterrent to international investors wishing to form a company in India. Although it is a signatory to the World Trade Organisation’s (WTO) Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement, which sets standards for and helps enforce IPR protection, in reality local enforcement of IP standards in India is poor and copyright infringements are a part of everyday life.

For example, in 2007 the Business Software Alliance, an international organisation dedicated to representing software and hardware companies around the world, failed to win a civil enforcement action against an Indian company accused of making pirated software of Microsoft and Adobe products. Software piracy in India is estimated to cost the IT sector US$1.5 billion annually.

India’s corporate governance standards remain poor compared to western countries, due to weak enforcement of standards by the Securities and Exchange Board of India (SEBI), the Ministry of Corporate Affairs (MCA) and the various stock exchanges. In 2007, the World Bank confirmed corporate governance standards of an estimated 60% of Indian listed companies failed to meet international norms.

That said, corporate governance standards are slowly improving in India. To attract private equity and/or foreign direct investment, Indian companies are being forced to become more transparent in their operation and financing. Also, increasing numbers of Indian companies are raising capital overseas by listing on international stock exchanges. Finally, recent amendments to Indian company law strengthen corporate governance requirements for listed companies in India.

India’s lack of legal transparency and poor IPR protection are also key factors in the country’s low ranking as the world’s 124th-freest economy in the Heritage Organisation’s 2010 Index of Economic Freedom, which rates a country for its financial and labour freedom, protection of property rights, business licensing requirements and freedom from corrupt practices.