Incorporation of a Foreign Subsidiary Company in India

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Today, India is proving to be one of the destinations for businesses looking to expand internationally with growth in economies, skilled workforce, and high customer base. Sometimes, international organizations prefer establishing their subsidiary companies here as an initial step in terms of market entry because they want control via their parent company. A Foreign Subsidiary Company is incorporated under the country's law where it has originated but is dominated by another abroad. Such organizations provide liability to the limited shareholder and freedom for operations.

Conditions for Incorporation of a Foreign Subsidiary Company

1. Shareholding Structure

The most critical pre-requisites of establishing a foreign subsidiary in India are having the right shareholding structure. Indian subsidiary is expected to have the majority ownership stake held by the foreign parent company. At least 51% of shares must be held by the parent entity, but the actual percentage of foreign ownership permitted differs in different sectors of industry. In sectors like defense, media, and real estate, FDI is allowed up to certain percentages or require government approval, in some sectors like technology, manufacturing, and services allow 100% FDI automatically.

2. Directors and Resident Requirements

Another key requirement for incorporating a foreign subsidiary is the directorial structure. Indian corporate laws dictate that a private limited company must have at least two directors. One of the directors must be a resident of India, as someone who has resided in India for at least 182 days in the preceding financial year. This resident director is also important in ensuring that the subsidiary complies with Indian legal and regulatory requirements.

3. Sectoral FDI Rules

Foreign Direct Investment (FDI) rules in India are another critical consideration when incorporating a foreign subsidiary. While many sectors in India permit 100% FDI under the automatic route, which makes the incorporation process much easier, other sectors have some restrictions or prior government approval.

Step-by-Step Incorporation Process for a Foreign Subsidiary Company

The following is the Foreign Subsidiary Company Registration in India:

The process of registering a foreign subsidiary company in India involves several structured steps. The first step is to reserve the name of the proposed company by filing SPICe+ Part A on the Ministry of Corporate Affairs (MCA) portal. The chosen name must align with regulatory requirements, and foreign companies can use their existing name with the addition of “India” or leverage their registered trademark for branding.

Necessary documents, such as a No Objection Certificate (NOC) from the foreign company, apostilled charter documents, and trademark registration papers, must be submitted if a trademark is used. If no trademark is involved, attaching a document outlining the main objectives is optional. Once the name is approved, the next step involves filing SPICe+ Part B.

Following name reservation, the required documents must be compiled. For the proposed company, address proof such as a lease agreement or utility bill, not older than two months, along with an NOC from the property owner, are needed. For Indian directors and shareholders, personal identification documents like PAN cards, Aadhar cards, and utility bills are essential. Similarly, foreign directors and shareholders must provide apostilled or notarized copies of their passports, address proofs, and board resolutions from the foreign company. In the case of wholly owned subsidiaries (WOS), the nominee's details must also be submitted.

The incorporation process requires preparing specific documents, including the Memorandum of Association (MOA) and Articles of Association (AOA), both of which must be apostilled or notarized in the foreign company’s country of origin. Other documents, such as the INC-9 declaration by first directors or subscribers and the DIR-2 consent from directors, are also mandatory. Certification by a practicing professional through INC-8 is required to validate the process.

Once the documents are prepared, the details must be entered in SPICe+ Part B and submitted online for professional certification. This is followed by filing the AGILE PRO form, which facilitates GST registration, mandatory EPFO/ESIC registration, and the selection of a bank for opening a corporate account. While EPFO and ESIC filings are only required once the provisions become applicable, GST registration can be opted for if needed. The INC-9 declaration must also be completed digitally unless one of the directors or subscribers lacks both PAN and DIN, in which case a manual process is followed.

After completing all web-based forms, the PDFs of SPICe+, AGILE PRO, and INC-9 must be downloaded, digitally signed, and uploaded to the MCA portal. Following this, the required fees must be paid, and the documents are submitted for approval. Once the Central Registration Centre (CRC) reviews and approves the application, a Certificate of Incorporation is issued. This certificate includes the Company Identification Number (CIN), Permanent Account Number (PAN), and Tax Deduction and Collection Account Number (TAN), completing the process of incorporation.

Advantages of a Foreign Subsidiary in India

1. Access to a Large Consumer Basis

India has a massive consumer base and an eternal growth opportunity. The demand for a wide range of products and services is further heightened, more particularly, for the technological, consumer goods, and services sectors. The retail sector provides huge prospects for growth for foreign subsidiary units. Rising urbanization trends and disposable incomes are driving demand in various sectors in India, making it a lucrative place for foreign companies.

2. Regulatory Compliance

The Government has initiated several reforms in company registration and license procurement. Initiatives such as the Goods and Services Tax and liberalization of FDI norms have opened the door for foreign investors. Online registration processes and further booster to business ease rankings help inversely pave the way for business disposition.

3. Tax Efficiency

To avoid the risk of double taxation of income between the home and host countries, India has concluded Double Taxation Avoidance Agreements with numerous countries. In accordance with DTAA, India allows specific sectors, including manufacturing, infrastructure, and technology, a wide range of tax exemptions and incentives to foreign enterprises.

Challenges

1. Regulatory Complexity

The Indian regulatory framework is tedious and requires a suitably detailed understanding of an interpretation of FDI regulations, company law and tax compliance matters. Foreign subsidiaries should make themselves acquainting with local laws that govern business operations in India and its sectorial-specific rules regarding FDI. Further limitations may be placed on foreign promoters on matters concerning ownership and/or requiring approval by the Government, for instance, in the areas of defense, media, and retail.

2. Differences in Indian Business Culture from the Foreign Counterpart.

Relationship building is a core aspect of doing business in India. Building strong connections with local partners, suppliers, and government officials can make all the difference for a subsidiary. Managing the workforce in India requires knowledge of local work ethics, communication styles, and hiring practices.

3. Burden of Compliances

India possesses a well-functional compliance system to regulate the entry of foreign subsidiaries, and, those subsidiaries must stick to several regulation requirements such as maintaining proper accounts, filing the annual return along with statutory audit. These requirements can be quite challenging for foreign companies, especially those who are not familiar with the regulations of India. Delays in filing or failure to meet compliance deadlines may attract hefty penalties and fines

4. Exchange Rate Volatility

India's local currency, INR, changes relative to a foreign currency of any subsidiary making its profitability unpredictable at times. Its subsidiaries, where imports are considerable, face exchange rate volatility; it results in uncertain cost hikes. In such situations, even indirect importers experience the effects of exchange rate movements on their aggregate pricing strategies due to the large part of their earnings coming from abroad. 

FAQs

1. What is the function of a resident director in a foreign subsidiary in India?

Ans. A resident director makes sure of the compliance of the foreign subsidiary with Indian laws. The requirement of Indian corporate law is for at least one director from outside India to be a resident of India, who is defined as someone who has stayed in that country for not less than 182 days during the preceding financial year.

2. Can a foreign company function in India without a resident director?

Ans. No, Indian corporate laws mandate that at least one director must be a resident of India (having stayed in India for at least 182 days in the preceding financial year).

3. What are the principal documents required for incorporating a foreign subsidiary in India?

Ans. The principal documents are the Memorandum of Association (MOA) and the Articles of Association (AOA). MOA defines the aims and objectives of organization, whereas AOA holds the rules governing the organization.

4. What are the post-incorporation registrations required for a subsidiary in India?

Ans. The subsidiary must apply for incorporated membership to be given its own PAN and TAN by incorporating a corporation, register under the guidelines before starting operations, and possibly reckon GST.

5. What are the common impediments while incorporating a foreign subsidiary in India?

Ans. Some of the impediments faced include dealing with the complicated regulatory structure that India is reputed for and an understanding of the cultural changes required in business practices, compliance to requirements, and maintaining balance with the withdrawal rate changes.

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