Setting up a Subsidiary Company in India by Foreign Entities

India has become the seventh-largest economy globally and expects to become the third-largest economy in the world by 2025. One of the contributors to this development is the increasing amount of investments made by foreign companies in India. 

Talking about investing funds in a foreign country, one thing that the individuals or entrepreneurs must keep in mind before making any investments is to wisely choose their business or company structure as it allows the venture to operate efficiently, reach the desired goals, and achieve the business’s profitability.The potential entrepreneur must choose the appropriate business structure which would suit their demands and ultimate objectives.

Among the various types of company registration in India, having distinct advantages and disadvantages, setting up a subsidiary of a foreign company is majorly accessible in India since it carries more advantages in terms of tax regime benefits, post-incorporation compliances, and other formalities. Moreover, our government has come up with many initiatives and regulations to improve the ease of doing business in India and make it a lot easier for foreign companies to set up a wholly-owned subsidiary in India and has taken many steps to decrease the approval time of forming a subsidiary company in India.

Entrepreneurs planning to enter the Indian dimension for setting up a business in India must make sure that all the obligations or legal formalities that the law of the land demands are fulfilled. One of the essential business obligations is to get the business registered legally. This article looks at some crucial facets of setting up a subsidiary company in India by foreign companies.

Why to form a subsidiary company in India?

As we know that India is a place with a young and efficient population, so creating a large pool of business is effortless here. Therefore, setting up an Indian subsidiary of a foreign company in India is mainly approached by the foreign residents. A subsidiary company can either take the form of a private company or a public company in India, depending on the applicant’s requirement. Please read our blog “Know about new forms and procedure for company formation”to learn more about the same.

What is a subsidiary company?

The Companies Act, 2013 entirely controls the registration of the Indian subsidiary company. The Indian Companies Act, 2013 allows for the incorporation or setting up of a Subsidiary of a Foreign Company in India. The Subsidiary Company means a company in which such foreign company either controls the composition of the Board of Directors or exercises or controls more than half of its total voting power. The main point to be noted here is that the Indian subsidiary company is a separate legal entity from its parent company. The subsidiary company is obligated to follow the rules and compliances of the country where it is registered or situated

Basic conditions to be fulfilled for starting a business in India

Typically, the procedure for incorporating an Indian Subsidiary company by the foreign companies is the same as that of the Indian Company. For it incorporation, conditions and specific requirements are mentioned as follows:

* The minimum requirement is two directors in the case of a private company and three directors in a public company. One director in the company should be an Indian resident (the director who has stayed in the previous calendar year for at least 182 days in India). In addition to the above, at least two shareholders for a private limited company and seven shareholders for a public company are required to incorporate the company. It may be noted that shareholders can also be the directors of the company.

* The proposed directors should have a valid digital signature certificate.

* The majority of the stake in the company’s shares should be in the hands of the foreign shareholders to keep the control and management of the company in their hands. 

* The place of operations of the business should be in India. At the time of subscription of shares of the company, various guidelines of RBI and FEMA have to be adhered to. 

Documents required for incorporation of a company in India

For the purpose of incorporation, it is essential to ensure that all the documents are complete for registration. There are a lot of legal documents and formalities that are necessary to register a company in India. Some of the crucial documents required for company registration in India are mentioned below:

* PAN card of all the Indian shareholders and directors.

* Passport size photographs of all the directors and shareholders

* Proof of all proposed directors (Driving License/Passport/Voter ID) which should be Apostille in their home country

* Utility bill or electricity bill for the address proof of the Registered Office.

What are the advantages of forming a subsidiary company in India?

General advantages which are enjoyed by the Indian companies are discussed below:

* Such a company enjoys the benefit of a separate legal entity in the eyes of the law. It has a management structure different from the parent company.

* The crucial merit of the Indian Subsidiary of a foreign company is that the shareholders have limited liability toward the company.

* Foreign Direct Investment is widely allowed to subsidiary companies and is thus applied to most economic activities available to those countries. However, particular prior intimations need to be given to the Reserve bank of India.

* Such companies can perform all the activities mentioned in their Memorandum of Association.

Time and money consumed in registering such companies are less than other types of venture registration in India.

* Indian Subsidiary company is allowed to acquire properties in India as it is considered an independent structure.

Apart from the above advantages, there are many additional benefits of setting up a subsidiary company in India. Some of the merits are discussed here:

* One of the significant advantages of forming an Indian Subsidiary company is that it gets the financial support from the parent company in terms of funding through share subscription money, training, technical know-how, employees and other consultancy at nominal prices or free of cost, which will be very difficult for any newly established company.

* This arrangement will allow joint ventures with other companies.

* The parent company can provide a continuous flow of funds by subscribing to new shares of a subsidiary company and thus save the company from the cost of debt.

* MNCs planning to operate in more than one country can operate their business through a wholly-owned subsidiary.

* It also benefits both the parent and subsidiary companies in terms of brand name recognition.

* Another advantage is that it provides security and protection to the company’s trade secrets, expertise, and technical know-how and helps control the business operations.

* The potential for expansion is high as it is easier to raise cash from financial institutions, angel investors, and other venture capitalists. It enjoys the benefits of less liability and more transparency.

Benefits enjoyed in terms of taxes and compliances

* In terms of compliances, the Indian subsidiary company shall be treated as an Indian company for the purpose of Income-tax and all other applicable laws. 

*  An Indian subsidiary company is taxed at a lower rate of 30% than a foreign company that is taxable at a rate of 40%. The corporate tax from 30% has further been reduced to 22% to 25% provided some conditions are fulfilled.

Let’s sum up

Despite having many options to establish footprints in India, setting up a subsidiary company is an easy and viable option compared to others. It is recommended to hire a knowledgeable professional to ensure all the compliances are fulfilled to incorporate the company at the earliest opportunity.

FAQs (Frequently Asked Questions)

1:Is it mandatory to open a bank account in India?

Yes, opening a bank account in India is mandatory as all the subscription money will be received in that account. Apart from this, the company has to file the declaration of subscription money received in Form INC 20-A (commencement of business) within 180 days of incorporation of the company. 

2: Can a company form a One Person Company (OPC) as an Indian subsidiary?

As per Rule 3 of Companies Rule, 2014, only a natural person who is an Indian and resident in India is eligible to incorporate the OPC. Hence, the question of body corporate or other organization form being the single-member doesn’t arise.

In conclusion, establishing a subsidiary company in India offers numerous advantages for foreign investors. With India's growing economy and favorable business environment, it provides an opportunity for expansion, access to a young and skilled workforce, and potential financial support from the parent company. Moreover, the subsidiary company structure offers limited liability, tax benefits, and compliance with Indian laws. Seeking professional guidance is crucial to navigate the incorporation process effectively and maximize the benefits of investing in India.

Ready to set up a subsidiary company in India? Get expert guidance and fulfill all legal obligations seamlessly. Contact us at info@manishanilgupta.com.

Disclaimer: This article is meant purely for knowledge and educational purposes. It contains only general information and references to legal content. It is not legal advice, and should not be treated as such.