Formation of a Foreign Subsidiary Company in India
India today is one of the most paced economies in the world with bountiful of business opportunities terming it as one of the preferred investment destinations for Foreign nationals and companies. While there are various ways of investing into India forming a foreign subsidiary is a preferred option given its easiness.
In this article, we shall briefly explain what a foreign subsidiary company in India is, how it is formed and what the post formation requirements are.
What is a foreign subsidiary company?
A subsidiary company with its voting equity shares (i.e. greater than 50%) held and controlled by a foreign registered company, may also be termed as the parent company or the holding company. The subsidiary so formed in India will be subject to the regulations of Indian Company laws as prevalent.
How to form a Foreign Subsidiary in India?
A. Choice of Company type:
As per the Indian Foreign Exchange Management act (FEMA), Foreign Direct Investment (FDI) isn’t permitted in a one person company, partnership firm or a proprietorship. Investment in LLPs are however allowed but that warrants a prior RBI nod. The quickest and simplest way to set up your foreign company business in India is by way of formation of a private limited company.
B. Basic requirements for a private limited company:
Minimum Equity Capital: There is no minimum capital required to form a private limited company in India.
Number of Directors: Minimum two directors are required, both should be individuals and at-least one of whom should be a resident of India.
Number of Shareholders: Company law requires that a Private Limited Company shall have a minimum of two shareholders. There is no condition for residential status of shareholders. Shareholders can be either individuals or entities or a combination of both.
Broad steps for Foreign company registration in India:
1. Obtaining Digital Signature Certificate (DSC) and Director Identification Number (DIN): This is the first step where the proposed directors of the Indian subsidiary need to obtain their respective DSC and DIN. These would require KYC documents such as Proof of identity, proof of address, Passport size photos. For any foreign citizen or non-resident, these KYC docs will need to be notarized and apostilled by the competent authority of the foreign country they reside in.
2. Name Approval application: Choosing a unique and acceptable name of the proposed Indian subsidiary is crucial to the incorporation process. The same has to be reflective of the company’s object and shouldn’t conflict with the names or trademarks of any existing Indian company or as unapproved by the company law.
3. Incorporation Application: The ultimate step in the foreign company registration process is filing the incorporation application along with the charter documents of the company such as the Memorandum and Articles of Association of the Indian subsidiary, the Subscriber sheets to the charter documents, prescribed declarations by directors, shareholders etc. These documents as applicable to foreign nationals signing off will need to be notarized and apostilled in the foreign country of their residence.
If the subscriber is a foreign entity, then the Incorporation documents of such foreign entity (i.e. parent or holding company) should be signed by the representative of the foreign entity. An Authorization Letter/Board resolution duly stating the name of the Authorized Person and the number of shares subscribed should be notarized and apostilled, as the case may be in the home country of the subscriber company.
Once the Incorporation application is approved, the Registrar of Companies in India would issue a Certificate with a Corporate Identification Number (CIN). The Permanent Account Number (PAN) and Tax Deduction Account Number (TAN) of the Company, as issued by the Income Tax department would also be allotted simultaneously on the Certificate of incorporation.
Instant Compliances mandatory post incorporation:
Foreign Investments in Indian Companies are regulated by FEMA Guidelines and the Reserve Bank of India. Whenever the holding company invests funds in the share capital of the Indian subsidiary, it has to follow RBI guidelines along with compliances under Companies Act 2013.
RBI Compliances: A dual reporting process is to be undertaken when a company is raising funds from a foreign investor:
1. On receipt of funds: The Company has to provide details in an “Advance Reporting Form” to the RBI within 30 days of receiving funds from foreign investor(s).
2. Issue of Shares: The Company has to issue shares within 180 days from the date of receipt of funds.
3. Allotment of Shares: The company has to report in specified form (FC-GPR) to the RBI, within 30 days from the date of issue of shares along with:
a. A Certificate from the Company Secretary certifying that the company has complied with the procedure for issue of shares as laid down under the Foreign Direct Investment (FDI) Scheme, and,
b. A certificate from a Chartered Accountant indicating the manner of arriving at the price of the shares issued to the foreign investors.
c. Finally, an Annual return on Foreign Liabilities and Assets is required to be submitted reporting all the investments received during the year.
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Hardik Panchal is the Founder and Director of Business Development of CharterCPA Inc., an outsourced accounting and bookkeeping services company that provides accounting, bookkeeping, payroll, taxation and other business advisory services to Small, Medium and Large size CPA firms across the US.