Foreign entities setting up a business representing them in India can establish two types of subsidiaries, depending on how much capital the foreign company has.
Investors can choose between a wholly owned subsidiary company or a subsidiary. This guide provides an overview of incorporating a subsidiary in India.
- There are two types of subsidiaries in India: wholly owned subsidiaries and subsidiaries, both providing limited liability to their shareholders
- Setting up a subsidiary as a private limited company requires two subscribers and USD 1,620 in paid-up capital. A public limited company needs at least seven subscribers and USD 8,100.
- Subsidiary registration can be filed through the Ministry of Corporate Affairs website
What is a subsidiary?
According to section 2 (87) of the Companies Act, a subsidiary company or subsidiary, in relation to any other company (that is to say the holding company), means a company in which the holding company:
- Controls the composition of the board of directors
- Exercises or controls more than one-half of the total share capital
There are two main categories of subsidiary companies in India, which are:
- Wholly owned subsidiary
- The parent company owns 100% of the subsidiary’s shares but can only be formed in sectors that allow 100% foreign direct investment.
- The parent company owns 50% of the subsidiary’s shares.
There are several advantages of setting up a subsidiary in India, which include:
- A subsidiary has limited liability from the foreign parent company. Shareholders are limited to the amount they invest, and their assets will be secured.
- A joint venture can be formed between businesses as subsidiaries to increase revenues and market reach
- The parent company can purchase additional shares of a subsidiary company which the parent can access new funding channels
- The subsidiary’s profits can offset the parent company’s losses
How to set up a subsidiary in India
Depending on the size and status of the parent company, businesses can choose between private and public limited company entities when setting up a subsidiary in India.
Private limited companies are suitable for small or middle-sized businesses as they require less. The Indian subsidiary law requires a minimum of two subscribers and approximately USD 1,620 in paid-up capital. Financial statements must be prepared and submitted to a statutory audit within six months of the end of the fiscal year.
Public limited companies must be listed according to The Securities and Exchange Board of India (SEBI) regulations. The minimum paid-up capital required is roughly USD 8,100, and at least seven subscribers. The accounting and auditing requirements are the same for private limited companies.
To set up a subsidiary in India, a minimum of two directors are required, and at least one director must be an Indian resident or citizen.
The first step of incorporating the subsidiary is applying for the Digital Signature Certificate (DSC). The required documents include the following:
- Address of the proposed director
- Email address and Indian mobile number
- ID proof of the proposed director
- Photo of the proposed director
Part A of the SPICe+ must be filed to reserve the company name, and only two names can be filed each time. Once the name is approved, it will be reserved for 20 days and extended for another 40 or 60 days by submitting the extension application. The subsidiary can use the same name as the foreign parent company, but the word India must be included in the name.
Parts B and C of the SPICe+ must be filed on the Ministry of Corporate Affairs (MCA) website to register the subsidiary. Services provided under the mentioned form include:
- Company incorporation
- Director Identification Number (DIN) allotment
- Issue of Permanent Account Number (PAN)
- Issue of Tax Collection Account Number (TAN)
- Social Security registration
- Profession Tax Registration (Maharashtra)
- Bank account selection
- Goods & Service Tax registration
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- Understand all compliance requirements
The following documents are required to apply for the above services and must be duly notarised and apostilled:
- Copy of the resolution passed by the board of Foreign Companies with the following details:
- Details of investors/subscribers
- Name and designation of the authorised representative
- The proposed capital structure of the company
- Proposed directors’ details
- ID proofs of the authorised representative
- Directors’ address
- Copy of the Certificate of Registration and Articles of Association of the foreign parent company
- Business activity of the company
- Articles/by-laws of the company, together with subscriber sheet
Documents that do not need to be notarised are:
- Proof of registered office (lease deed, rent agreement)
- Copy of utility bills of the registered office
Upon submitting the documents and successful registration, the MCA will issue the Certificate of Incorporation and provide the company’s Corporate Identification Number (CIN).
After setting up a subsidiary, there are several compliance requirements you must follow to avoid any penalties:
- The subsidiary must hold its first Board of Directors meeting within 30 days of its establishment according to section 173(1) of the Companies Act 2013.
- Must have a corporate bank account
- Must have a registered office within 15 days of incorporation, according to section 12(1)
- All subsidiaries must display their name, registered office address, CIN, contact details, and Goods & Services Tax Identification Number (if any) outside every place it carries on business.
- The Board of Directors must choose the auditor within 30 days of incorporation. If the Board fails to appoint an auditor, the members must appoint an auditor at the extraordinary general meeting within 90 days
- According to section 184(1) of the Companies Act 2013, every director shall disclose his concern or interest in any company, company, or corporate (including shareholding interest), firm or other association of individuals by giving a notice in writing in Form MBP 1
- The subsidiary must keep statutory registers at the registered office
- Share certificates must be issued to the shareholders within 60 days of incorporation.
- According to section 128 of the Companies Act, every company shall prepare and keep at its registered office books of account and other relevant books and papers and financial statements for every financial year, which give an accurate and fair view of the state of the affairs of the company
- The subsidiary must obtain a certificate of commencement within 180 days
- The company must obtain business licenses and registration from several government agencies, depending on the type of business
Foreign investors can incorporate two types of subsidiaries in India: the wholly owned subsidiary (parent company owns 100% of the subsidiary’s shares) and the subsidiary (parent company owns 50% of the shares).
When appointing foreign directors, getting approval from the Reserve Bank of India (RBI) is essential as the capital is considered a foreign direct investment.
If you plan to set up a subsidiary in India, do not hesitate to contact Acclime India. Our team can help you with the whole process, from strategy to implementation, making your India business expansion fully compliant and seamless.
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