Understanding Foreign Subsidiary in India

An Indian company operated by a foreign parent receives foreign ownership exceeding 50% of its shares, thus becoming a foreign subsidiary. The foreign company can be an individual, a corporation, or an entity based outside India. The subsidiary company is subject to the Companies Act of India, 2013, along with other regulations governing foreign investments.

Regulatory Framework for Foreign Subsidiaries in India

Foreign direct investment (FDI) operates in the majority of Indian sectors but needs to fulfill specific conditions for entry. Foreign subsidiaries are primarily governed by:

• Foreign Exchange Management Act (FEMA), 1999

• Reserve Bank of India (RBI) Guidelines

• The Companies Act, 2013

• The Foreign Direct Investment (FDI) Policy of India

Eligibility for Setting Up a Foreign Subsidiary in India

Foreign companies are permitted to establish a subsidiary in India, provided they meet certain criteria:

• A parent company must own 50% or more of its subsidiary company's equity shares.

• The subsidiary must comply with Indian laws and regulations.

• The subsidiary may need approvals from the RBI or other relevant authorities depending on the sector.

Types of Subsidiaries in India

• Wholly-Owned Subsidiary (WOS): A subsidiary in which the foreign company owns 100% of the shares.

• Joint Venture (JV): A partnership between a foreign company and an Indian partner, where the foreign company holds a majority or a minority stake.

Key Steps in Incorporating a Foreign Subsidiary in India

• Choosing a Company Structure

Foreign parent companies must select a suitable business structure. The two most widespread company types operating in India consist of:

1. The choice of the private limited company represents the favoured structure for international subsidiaries because of its liability protection and simplified administrative burden and operational efficiency.

2. The choice of establishing a Public Limited Company is best for businesses that operate at a large scale while seeking investments from the public.

3. LLP functions as a business structure that combines features of partnerships along with private limited company features and serves small to medium-sized enterprises.

• Obtaining Approval from Reserve Bank of India (RBI)

Foreign entities intending to set up a subsidiary in India may need approval from the RBI if the proposed investment falls under certain categories. However, in most cases, the approval is automatic under the FDI policy, especially in sectors where FDI is allowed.

1. Automatic Route: For most sectors, foreign investments up to a certain percentage (usually 100%) are permitted without the need for prior approval from the government.

2. Government Route: For sectors that are sensitive or require special permissions (e.g., defense, retail, media).

• Name Approval from the Ministry of Corporate Affairs (MCA)

1. The parent company must choose a unique name for the subsidiary. The Ministry of Corporate Affairs, through its Registrar of Companies department, needs to approve the business name.

2. The name should ideally be related to the business of the subsidiary and should not conflict with any existing company name or trademark.

• Drafting the Memorandum and Articles of Association (MoA & AoA)

1. A company establishes its operating framework in combination with its objectives and operational boundaries through the Memorandum of Association (MoA). A company in India needs the Memorandum of Association as its basic incorporation document.

2. The Articles of Association (AoA) defines the company's internal rules and regulations.

• Obtaining Digital Signature Certificate (DSC) and Director Identification Number (DIN)

1. Digital Signature Certificate (DSC): All directors of the company must obtain a DSC for filing electronic documents with the MCA.

2. Director Identification Number (DIN): Every director must obtain a DIN before they can be appointed.

• Filing with the Ministry of Corporate Affairs (MCA)

1. Form SPICe (INC-32) is filed for company incorporation, which includes details of directors, the proposed business, and the registered office address.

2. The application includes the Moose Factory Act and the Animal Diseases Act which belong to the company.

3. Proof of the registered office address is required (lease agreement or ownership document).

4. The required fee is paid for the registration.

• Registering with the Tax Authorities

1. Permanent Account Number (PAN): The subsidiary must apply for a PAN with the Income Tax Department.

2. Goods and Services Tax (GST) Registration: If the subsidiary is involved in selling goods or services in India, it must obtain GST registration.

3. Import Export Code (IEC): For businesses engaged in import or export, obtaining an IEC from the Directorate General of Foreign Trade (DGFT) is mandatory.
   
   

Requirements for Incorporating a Foreign Subsidiary in India

Before initiating the incorporation process, a foreign company must meet certain legal requirements. These requirements include:

• Eligibility Criteria for Foreign Investors

1. A foreign parent company needs to maintain ownership control through holding a minimum 50% share capital in their subsidiary firm. This can be a wholly-owned subsidiary (WOS) or a joint venture (JV) if the foreign company shares ownership with an Indian partner.

2. The foreign investment needs to respect all provisions of the Foreign Direct Investment (FDI) Policy issued by the Government of India. FDI is allowed in most sectors under the Automatic Route, meaning no prior government approval is needed. However, certain sectors like defense, retail, and media have restrictions and may require government approval under the Government Route.

3. The foreign parent company can be a corporation, a limited liability company (LLC), an individual, or any other entity registered outside India.

• Types of Subsidiaries

1. Wholly-Owned Subsidiary (WOS): A wholly-owned subsidiary operates under foreign parent ownership since they possess full control over the Indian subsidiary's share ownership.

2. Joint Venture (JV): The foreign company forms a partnership with an Indian entity, where the foreign company typically holds a majority (51% or more) share.

• Sector-Specific Restrictions

1. Retail: Foreign investment in multi-brand retail is limited to 51%, while single-brand retail allows up to 100% foreign investment.

2. Defense: FDI is allowed up to 49% under the automatic route; beyond that, government approval is required.

3. Media and Broadcasting: Foreign investments in media are restricted to 26% under the automatic route.
   
   

It’s essential to check the specific FDI guidelines applicable to the industry in which the subsidiary will operate.

• Compliance with Indian Laws

1. All foreign subsidiaries operating in India must obey both Companies Act 2013 and FEMA (Foreign Exchange Management Act 1999) and RBI guidelines. Various areas of company establishment alongside investments and taxation and foreign currency operations in India fall under the direction of these laws.

Compliances After Incorporation

• Foreign Direct Investment (FDI) Reporting

1. Once the foreign subsidiary is incorporated, it must report the inflow of foreign investment to the Reserve Bank of India (RBI) through a Form FC-GPR. A filing requirement exists for this form that must happen within 30 days after receiving foreign investment allocations.

• Annual Compliances

1. Under the Companies Act 2013 the subsidiary obligates itself to file annual returns to ROC which include both financial statements and director reports.

2. The subsidiary needs to submit tax returns for income tax and must follow additional tax duties that include transfer pricing regulations when these rules apply.

3. The subsidiary requires appointment of a statutory auditor by law while maintaining proper financial records for annual audit inspections.

• Repatriation of Profits

1. Subject to tax requirements the parent company abroad can retrieve profits from its foreign subsidiaries. Foreign subsidiaries must fulfill two requirements to remit profits to their parent company abroad - they need to file required documents and follow RBI regulations.

Sector-Specific Restrictions and Guidelines

• Defense: FDI is allowed only up to 49%, and beyond that, government approval is required.

• Retail: Government authorization is required for foreign direct investment at retail establishments selling multiple brands.

• Media and Broadcasting: Foreign investments in the media and broadcasting sector are regulated and capped at certain levels.

It is essential to review the FDI policy for the specific sector before proceeding.

Advantages of Setting up a Foreign Subsidiary in India

• One of the largest global emerging markets exists in India where a population exceeds 1.4 billion individuals.

• India presents manufacturers and service providers with a cost-efficient operational base that allows businesses to thrive by minimising expenditures.

• Foreign businesses benefit from tax agreements and supportive government initiatives that intend to promote foreign direct investments.

• The Indian government includes intellectual property protection measures which attract technology and innovation-based companies to operate in the country.

Challenges and Risks

• Organizations face lengthy and complicated challenges when they try to follow complex regional laws and tax standards and foreign investment requirements.

• A foreign subsidiary's success depends on deep knowledge about local culture, business standards and how customers act in the market.

• The process of returning profits to the home country and handling local taxes presents major complexity because of transfer pricing regulations.

Conclusion

People seeking to establish a foreign subsidiary in India should execute comprehensive plans while understanding specific regulations and fulfilling national as well as international legal rules. Foreign companies that follow these established steps and monitor changes in Indian legal regulations will achieve successful subsidiary establishment and operation in India. Professional legal and financial advice makes the incorporation process easier while helping the subsidiary fulfill all requirements.

Disclaimer

The information provided in this blog is purely for general informational purposes only. While every effort has been made to ensure the accuracy, reliability and completeness of the content presented, we make no representations or warranties of any kind, express or implied, for the same. 

We expressly disclaim any and all liability for any loss, damage or injury arising from or in connection with the use of or reliance on this information. This includes, but is not limited to, any direct, indirect, incidental, consequential or punitive damage.

Further, we reserve the right to make changes to the content at any time without prior notice. For specific advice tailored to your situation, we request you to get in touch with us.