Process of Incorporation of a Foreign subsidiary in India

India is among the fastest growing economies in the world with plenty of business opportunities making it a preferred investment destination for NRIs, foreigners, and foreign companies. There are many ways in which foreign investment can be made in India. One of the most successful and sought-after ways of registering foreign companies in India is through the establishment of a subsidiary company. This article discusses the process of incorporating foreign subsidiaries in India.

Subsidiary Company- Meaning

A subsidiary is a company with voting rights (that is, more than 50%) controlled by another company, usually referred to as the parent company or holding company. In cases where the parent company owns a foreign subsidiary, the subsidiary must be governed by the laws of the country where it is incorporated and operates. So, if a foreign company is registered in India, it has to follow the laws in force in India.

Investing in a business in India through equity

A foreign national (other than a citizen of Pakistan or Bangladesh) or an entity incorporated outside India (other than an entity incorporated in Pakistan or Bangladesh) can invest in India by acquiring shares in an Indian company following India’s FDI policy. Investing in the shares of an existing business can generally be divided into two categories: investments under the automatic process and investments under the government approval process. The automatic route requires no prior regulatory approval for investment in shares of an Indian company and only post facto filing/information with the Reserve Bank of India within 30 days of receipt of investment money in India and submission of prescribed documents and particulars on the allocation of shares within 30 days of the allocation of shares to foreign investors. Investment in activities/sectors where the automatic route is not available can be made with the approval of the government under the government-approved FDI method. The Foreign Investment Promotion Board (FIPB) is the granting authority for such approvals.

The foreign direct investment that is allowed in India

FDI up to 100% is automatically allowed in India in many activities/sectors. However, it prohibits foreign investment in any form in a company or partnership firm or proprietary concern or in any entity, whether incorporated or unincorporated, engaged in or proposing to engage in the following business: 

• chit fund business; or 
• Nidhi Company; or 
• agricultural or plantation activities (except floriculture, horticulture, seed development, animal husbandry, fish farming, cultivation of vegetables, mushrooms, etc., under controlled conditions, services related to agriculture and allied sectors and tea plantations); or 
• Real estate business or construction of farm houses (Does not include development of townships, construction of residential/commercial premises, roads, or bridges); or 
• trading in Transferable Development Rights (TDRs).

How to register a foreign company in India?

Choosing a company type: As per FEMA guidelines, Foreign Direct Investment (FDI) is not allowed in the case of Proprietorship, Partnership Firm, and Single Company. Investment in LLP is allowed but requires prior approval of RBI.

The easiest and fastest way for NRIs and foreign nationals/entities to set up a business in India is to incorporate a private limited company.

Minimal requirements:

• Capital: There is no minimum capital required to set up a private limited company in India.
• Directors: A minimum of two directors are required to set up a private company in India. Both should be individuals and at least one of them should be a resident of India. (An Indian resident is a person who has stayed in India for at least 182 days in the FY).
• Shareholders: The Companies Act 2013 requires a private limited company to have a minimum of two shareholders. There is no requirement for the residential status of shareholders. Shareholders can be individuals or entities or both.

Document requisites for registration of foreign companies in India

• For Indian residents: Photograph, copy of PAN card, copy of passport, voter ID or driving license, bank statement, or any utility bill to their address – not older than 2 months

• For foreign directors/shareholders and an authorized representative of a foreign company: Photograph, copy of passport, copy of driver’s license, bank statement, or any utility bill in the country of residence – not older than two months

• For Indian Company: Proof of address of the proposed place of business (premises lease agreement), utility bill (electricity, telephone, gas, etc.) for premises – not older than 2 months, NOC for use of premises as headquarters.

Procedure for Foreign Company Registration in India

Step 1. Name Approval: The first step to registering a company is to reserve a company name. In the case of a foreign subsidiary, it is permissible to use the same name as the parent company with the addition of the word “India”. The name is approved provided that it is not identical to existing entities or is considered undesirable by law.

Step 2. Procurement of DSC: Simultaneously, Digital Signature Certificate (DSC) will be procured for the proposed directors of the company. This DSC is required for digital incorporation and will also be used for future compliance reporting.

Step 3. Company Incorporation Application: This is the final step in the company registration process. It requires the presentation of the Memorandum and Articles of Association along with various other documents duly executed by the proposed directors and shareholders.

• Incorporation documents to be executed through this list:
• Memorandum of association
• Articles of Association
• Directors’ declaration by form DIR 2
• Declaration of Directors/Shareholders and Representative in Form INC 9
• PAN from foreign companies and directors

Generally, the company’s incorporation documents must be attested by Indian nationals. However, in the case of foreigners, the procedure is as follows:

• If the documents are signed outside India, then they must be notarized by the notary public of the country of residence and consumerized or apostilled by the competent authority, as the case may be.
• If the documents are signed in India, a copy of the visa and stamped passport is required to prove his/her presence in India at the time of signing.
• If the subscriber is a foreign entity, then the incorporation documents should be signed by a representative of the foreign entity. The letter of authorization, duly stating the name of the authorized person and the number of shares subscribed, should be notarized, consular, or apostilled, as the case may be, in the home country of the underwriting company.

Once the company incorporation application is approved, the registrar will issue a company identification number (CIN) certificate. PAN and TAN of the company would also be allotted simultaneously.

Treatment of Share capital invested by the Holding Company and compliance

Foreign investment in Indian companies is regulated by FEMA and Reserve Bank of India guidelines. Whenever a holding company invests funds in the share capital of an Indian subsidiary, it has to comply with RBI guidelines along with compliance with the Companies Act, 2013.

Post Incorporation RBI Compliance

If the company receives funds from a foreign investor, a two-stage reporting procedure must be followed:

• After receipt of funds: Company has to provide details in the “Pre-Notification Form” to RBI within 30 days of receipt of funds from the foreign investor(s).

The company is obliged to issue shares within 180 days from the date of receipt of funds.

• About allotment of shares: The company has to report in the prescribed form (FC-GPR) to RBI within 30 days from the date of issue of shares along with:

– a certificate from the company secretary confirming that the company has followed the procedure for issuing shares as laid down in the Foreign Direct Investment (FDI) policy, and

– A certificate from a chartered accountant indicating the method of obtaining the price of shares issued to foreign investors.

In addition to the above, an annual return on foreign liabilities and assets is required, listing all investments received during the year.

Final words

Are you planning to expand your business overseas? Start by setting up a subsidiary. Our experts can help you with this process for a seamless corporation. In cases where the parent company wholly owns a foreign subsidiary, the subsidiary must be governed by the laws of the country where it is incorporated and operates. Therefore, if a foreign subsidiary is registered in India, it must be governed by the laws in force in India.