Setting up a subsidiary in India

Setting Up a Subsidiary in India: A Complete Guide

India has become one of the most attractive destinations for foreign investments due to its rapidly growing economy, large consumer market, and strategic geographic location. For foreign companies looking to expand their business operations, setting up a subsidiary in India offers a great opportunity to tap into this burgeoning market. However, the process of establishing a subsidiary in India can seem complex, given the country’s regulatory and compliance requirements. In this blog, we will walk you through the entire process of setting up a subsidiary in India, highlighting key steps, legal considerations, and tips to ensure smooth registration and operation.

What is a Subsidiary Company?

A subsidiary is a company that is controlled by another company, typically referred to as the parent company. The parent company holds a majority of shares in the subsidiary, giving it control over the company’s operations and management. In the context of India, a foreign company may set up a subsidiary as a separate legal entity that is registered under Indian law. The subsidiary is typically established to conduct business activities within India while being governed by Indian corporate laws.

Benefits of Setting Up a Subsidiary in India

Setting up a subsidiary in India has several advantages, particularly for foreign companies looking to expand their footprint in the country. Some of the benefits include:

• Access to India’s Growing Market: India is the second most populous country in the world, with a large and diverse consumer base, making it a high-potential market for various industries.
• Limited Liability: A subsidiary operates as a separate legal entity, which means that the parent company’s liability is limited to the shares it holds in the subsidiary.
• Tax Incentives: Depending on the nature of the business, the Indian government offers certain tax incentives and exemptions for foreign investors setting up subsidiaries, especially in specific sectors like manufacturing, technology, and research and development.
• Brand Recognition: Having a legal presence in India through a subsidiary can enhance a company’s brand image and customer trust in the local market.
• Operational Control: Unlike joint ventures, where a foreign company may have to share control, a subsidiary allows the parent company to maintain full operational control over the Indian business.

Types of Subsidiary Companies in India

Before delving into the process, it’s important to understand the types of subsidiary companies foreign entities can set up in India:

• Wholly-Owned Subsidiary: A wholly-owned subsidiary is a company where the parent company holds 100% of the shares. This structure offers full control to the parent company over the subsidiary’s operations and decisions.
• Joint Venture Subsidiary: In this case, the parent company partners with an Indian company or other foreign entities to form a joint venture. The ownership is shared, with the foreign company holding a majority or minority stake.

The structure of the subsidiary will depend on the foreign company’s business goals, level of control desired, and the strategic partnership model.

Key Steps to Setting Up a Subsidiary in India

Setting up a subsidiary in India requires adherence to various legal, regulatory, and procedural requirements. The process can be broken down into several stages:

Step 1: Decide on the Type of Business Entity

The first step in setting up a subsidiary in India is determining the most suitable type of business entity. There are primarily three options for foreign companies looking to establish a subsidiary:

1. Private Limited Company: The most common structure for a subsidiary in India is the private limited company. This type of entity requires at least two directors and two shareholders. It limits liability to the extent of the company’s share capital and offers the flexibility of raising capital from investors.
2. Public Limited Company: A public limited company can also be formed, but this requires a minimum of seven members and three directors. This structure is less common for subsidiaries but may be suitable for large foreign entities looking to expand their operations in India.
3. Limited Liability Partnership (LLP): In some cases, a foreign company may prefer to set up a limited liability partnership (LLP) in India, which allows the foreign entity to have limited liability while sharing control with one or more partners. This structure is particularly useful for professional services firms.

Step 2: Obtain the Necessary Approvals and Permits

Once the type of business entity has been decided, the next step is to obtain the necessary approvals and permits from Indian authorities. Some of the approvals you may need include:

• Foreign Direct Investment (FDI) Approval: India allows foreign investment in many sectors through the Foreign Direct Investment (FDI) route. Depending on the sector, foreign companies may need approval from the Reserve Bank of India (RBI) or the Foreign Investment Promotion Board (FIPB).
• Sector-Specific Clearances: Certain industries, such as defense, media, and telecommunications, have sector-specific regulations that may require additional clearances from relevant ministries or departments.
• Filing with the Registrar of Companies (RoC): The company must be registered with the Registrar of Companies (RoC) under the Ministry of Corporate Affairs. The registration process requires the company to file several documents, including the Memorandum of Association (MOA) and Articles of Association (AOA), along with details of directors and shareholders.

Step 3: Register the Company

Once the necessary approvals have been obtained, the next step is the registration of the company. The registration process involves the following key steps:

• Obtain Digital Signature Certificates (DSC): All documents filed with the Registrar of Companies must be signed digitally. Directors and shareholders must obtain a Digital Signature Certificate (DSC) to facilitate this process.
• Apply for Director Identification Number (DIN): Every director of the company must obtain a Director Identification Number (DIN) from the Ministry of Corporate Affairs.
• Choose a Company Name: The company name must be unique and comply with the naming guidelines set by the Ministry of Corporate Affairs. You will need to submit an application for name approval before proceeding with the registration.
• Draft the MOA and AOA: The Memorandum of Association (MOA) outlines the company’s business objectives, while the Articles of Association (AOA) defines the rules and regulations governing the company’s operations. Both documents must be submitted as part of the registration process.
• File Incorporation Forms: Once all the documents are in order, you will need to file the incorporation forms with the Registrar of Companies (RoC). Upon approval, the company will receive a Certificate of Incorporation.

Step 4: Set Up the Office and Bank Accounts

After registering the subsidiary, the next step is to set up physical operations. This involves:

• Lease or Purchase of Office Space: You will need to lease or purchase office space in India. The office must be registered with the local municipal authorities to ensure that all legal and tax obligations are met.
• Opening a Bank Account: The subsidiary must open a bank account in India. The bank account will be required to handle transactions and meet the financial requirements of the subsidiary.

Step 5: Comply with Ongoing Regulatory Requirements

After the subsidiary is set up, the company must ensure that it complies with ongoing regulatory and tax requirements in India. Some of these include:

• Goods and Services Tax (GST): If the subsidiary’s turnover exceeds the prescribed limit, it must register for Goods and Services Tax (GST).
• Annual Filings: The company must file annual returns and financial statements with the Registrar of Companies. The financial statements should be audited by a certified Chartered Accountant in India.
• Tax Compliance: The subsidiary must comply with Indian tax laws, including corporate tax, transfer pricing regulations, and employee-related taxes like the Provident Fund (PF) and Employees’ State Insurance (ESI).
• Labor Laws: The subsidiary must comply with India’s labor laws, which govern wages, working conditions, and employee benefits.

Legal Considerations When Setting Up a Subsidiary in India

When setting up a subsidiary in India, it is crucial to be aware of various legal considerations that will impact the company’s operations:

• Foreign Investment Regulations: Foreign investment in India is regulated by the Reserve Bank of India (RBI) and must comply with the FDI policy, which specifies the maximum permissible foreign ownership in various sectors.
• Employment Laws: The subsidiary must adhere to India’s labor laws, which protect employees’ rights and govern hiring practices, compensation, benefits, and termination procedures.
• Intellectual Property (IP) Protection: Foreign companies must ensure that their intellectual property rights (patents, trademarks, etc.) are protected under Indian laws.
• Dispute Resolution: India’s legal system provides mechanisms for dispute resolution, including arbitration. It’s crucial for the subsidiary to understand its rights and obligations under Indian law to avoid litigation.

Conclusion

Setting up a subsidiary in India is an exciting venture for foreign businesses seeking to tap into one of the world’s largest and fastest-growing markets. However, it is essential to navigate the legal, regulatory, and operational challenges carefully to ensure a smooth setup. By understanding the process, selecting the right business entity, obtaining necessary approvals, and complying with local regulations, companies can establish a successful subsidiary that thrives in the Indian market.

Whether you’re looking to expand your business or establish a long-term presence in India, working with legal and tax experts familiar with Indian corporate laws can help streamline the process and ensure compliance