A Foreign Subsidiary in India refers to an Indian company in which a foreign entity (individual or corporate) holds more than 50% of the voting power or shareholding. It is considered a separate legal entity, distinct from its parent company, and is incorporated under Indian laws. The foreign company may either wholly own or partially own the subsidiary. The establishment of a foreign subsidiary provides a structure for a foreign company to carry out business operations and investments in India while maintaining some level of independence.

The operations, establishment, and regulation of foreign subsidiaries in India are governed by the Companies Act, 2013, and Foreign Exchange Management Act (FEMA), 1999 along with other relevant regulations, including those provided by the Reserve Bank of India (RBI).

1. Definition of Foreign Subsidiary

A foreign subsidiary is an Indian company in which a foreign company or individual holds a majority (more than 50%) of the voting shares. The foreign entity has significant control over the subsidiary’s management and operations.

Key Characteristics:

• Control: The parent company (foreign entity) must hold more than 50% of the voting shares or stock in the Indian subsidiary.
• Separate Legal Entity: The foreign subsidiary is considered a separate legal entity, distinct from its parent company, and is governed by the Companies Act, 2013.
• Ownership: The parent company can wholly own or partially own the Indian subsidiary, depending on the percentage of shares held.
• Business Activities: The subsidiary can engage in a wide range of business activities in India and may expand its operations into manufacturing, trading, services, etc.

2. Types of Foreign Subsidiaries in India

Foreign subsidiaries can be broadly categorized based on the ownership structure:

• Wholly Owned Subsidiary (WOS): The foreign parent company holds 100% of the equity shares in the Indian subsidiary.
• Joint Venture (JV): The foreign parent company holds a controlling interest (greater than 50%), but there may be Indian partners or investors involved who hold the remaining equity shares.

3. Legal Framework for Establishing a Foreign Subsidiary in India

To establish a foreign subsidiary in India, a foreign company must comply with the provisions of FEMA, the Companies Act, 2013, and other applicable laws. The main steps and legal framework involved are:

a. Approval under FEMA

Under FEMA, foreign direct investment (FDI) is allowed in India through automatic and approval routes. The foreign parent company can invest in the Indian subsidiary in the following ways:

• Automatic Route: For sectors where FDI is allowed without requiring prior government approval, the foreign parent company can directly invest in the subsidiary without needing clearance from the Indian government or the Reserve Bank of India (RBI). For example, most sectors, such as services, technology, etc., allow 100% FDI under the automatic route.
• Approval Route: For certain sectors where FDI is restricted or has conditions (such as defense, retail trading, etc.), prior approval from the Indian government or the Department for Promotion of Industry and Internal Trade (DPIIT) is required.

b. Incorporation under the Companies Act, 2013

• The foreign subsidiary in India must be incorporated as an Indian company under the Companies Act, 2013.
• The company can be incorporated as a Private Limited Company or a Public Limited Company, depending on the number of shareholders and the intended scale of operations.

To incorporate a foreign subsidiary, the following steps are typically involved:

1. Name Reservation: The name of the company must be reserved with the Ministry of Corporate Affairs (MCA).
2. Directors: At least two directors are required, and one of them must be a resident of India.
3. Share Capital: The foreign parent company must invest the required minimum share capital for the company, which can vary depending on the type of company.
4. Certificate of Incorporation: Upon the submission of the necessary documents, the Registrar of Companies (RoC) will issue a Certificate of Incorporation, marking the company’s legal existence.

c. FDI Guidelines

• FDI in a foreign subsidiary is regulated by the RBI, which ensures compliance with FDI policies under FEMA. The parent company must ensure that its investment is within the permissible limits and complies with the conditions laid out by the RBI.

4. Key Approvals and Documentation

To establish a foreign subsidiary in India, the following approvals and documentation are required:

a. Approval from RBI (if applicable)

• If the subsidiary is in a sector that requires government approval for FDI (e.g., defense, retail trading), approval from the DPIIT and other ministries may be required. Otherwise, foreign companies can invest in the subsidiary under the automatic route.

b. Documents for Incorporation

• Application for Company Registration: Form SPICe (Simplified Proforma for Incorporating Company electronically) filed with the Ministry of Corporate Affairs (MCA).
• Proof of Identity and Address of Directors: Directors’ identification and proof of residence.
• Company’s Memorandum of Association (MoA) and Articles of Association (AoA).
• Foreign Parent Company Documents: Certificate of Incorporation and audited financial statements of the foreign parent company.
• Board Resolution: A board resolution from the parent company authorizing the establishment of the subsidiary in India.

c. Tax Registration

• Permanent Account Number (PAN): The foreign subsidiary must obtain a PAN from the Income Tax Department.
• Goods and Services Tax (GST): If the subsidiary intends to engage in supply of taxable goods or services, it must obtain GST registration.

5. Key Advantages of Setting Up a Foreign Subsidiary in India

A foreign subsidiary in India offers several benefits:

• Access to the Indian Market: India is one of the world’s largest consumer markets. Setting up a subsidiary provides direct access to this large market.
• Control: The foreign company retains control over the subsidiary’s management, decision-making, and strategic direction.
• Local Presence: A subsidiary in India establishes a formal local presence, making it easier to build relationships with Indian customers, suppliers, and government bodies.
• FDI Regulations: India allows 100% foreign investment in many sectors, making it easier for foreign entities to set up wholly owned subsidiaries.
• Tax Incentives: In some sectors, foreign companies may benefit from tax exemptions or reduced rates on profits generated through Indian subsidiaries.

6. Key Disadvantages of Setting Up a Foreign Subsidiary in India

• Regulatory Compliance: Foreign subsidiaries must comply with Indian corporate laws, tax regulations, and other sector-specific guidelines, which may require significant administrative effort.
• Higher Costs: Establishing and operating a subsidiary in India involves various setup costs, including legal fees, office expenses, and compliance costs.
• Complexity in Management: Managing an Indian subsidiary requires navigating the Indian regulatory and business environment, which may be different from the parent company’s home country.
• Taxation: The foreign subsidiary is subject to Indian income tax, and any profits repatriated to the parent company may be subject to withholding taxes or other levies.

7. Taxation of a Foreign Subsidiary in India

Foreign subsidiaries are subject to the following tax provisions in India:

• Corporate Income Tax: The foreign subsidiary is taxed on its global income at the corporate tax rate in India. The tax rate for a domestic company is currently 22% (with an option for a reduced rate subject to compliance).
• Dividend Tax: Dividends paid by the subsidiary to the parent company may be subject to Dividend Distribution Tax (DDT) or withholding tax.
• Transfer Pricing: Transactions between the foreign parent company and its Indian subsidiary are subject to transfer pricing regulations, which require that inter-company transactions be conducted at arm’s length prices.

8. Winding Up a Foreign Subsidiary in India

If the foreign parent company decides to shut down its Indian subsidiary, the process involves the following steps:

• Settling Liabilities: Ensure that all debts, liabilities, and obligations are settled.
• Filing with the MCA: File for the striking off or winding up of the company with the Ministry of Corporate Affairs (MCA).
• Tax Filing: File final tax returns and ensure compliance with any tax liabilities before the closure.
• Repatriation of Profits: If there are any remaining funds or profits, they can be repatriated to the parent company, subject to compliance with FEMA.

Conclusion

Setting up a foreign subsidiary in India provides significant benefits, such as access to the Indian market, control over business operations, and opportunities for growth. However, it also requires adherence to various regulatory, compliance, and tax obligations under Indian laws. With proper planning and management, a foreign subsidiary can become a powerful tool for expanding a foreign company’s presence and operations in India.