Advisory on Operating Model of Indian Subsidiary
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Indian Subsidiary Registration
A subsidiary company is a company whose control lies with another company. The company that holds the control is termed as a Parent Company or Holding Company. The Holding company owns a majority of the shares of the subsidiary company, and hence it can exercise control as the major shareholder.
The holding company holds an interest in the subsidiary company. The company in which the holding company holds 100% share capital is termed as a wholly-owned subsidiary. The subsidiary company can be either established or acquired by the holding company.
Definition of a Subsidiary Company
As per Section 2 (87) of the Companies Act 2013, a subsidiary company” or “subsidiary”, in relation to any other company (that is to say the holding company), means a company in which the holding company:
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total share capital
Either at its own or together with one or more of its subsidiary companies:
Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed.
Explanation-
For the purposes of this clause—
(a) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company;
(b) the composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors;
c) the expression “company” includes any body corporate;
(d) “layer” in relation to a holding company means its subsidiary or subsidiaries.
The above definition includes all the below mentioned types of holdings:
1. Company A holds more than 50% of the share capital in Company B.
2. Company A holds the power to appoint or remove the majority of the directors of Company B.
3. Company A holds more than 50 % share capital in Company B; Company B holds more than 50% share capital in Company C, then Company A is Holding company to both B and C.
4. Company X holds rights to modify the structure of directorship of Company Y; Company Y holds similar rights in company Z, then company X is the parent company to both Y and Z.
Things to Know Before Forming a Subsidiary in India
Venturing into the Indian market by Forming a subsidiary company can be thrilling and rewarding. A subsidiary, being a company under the control of a parent company, is a favoured route for many international businesses aiming to tap into India's dynamic and growing economy. However, to navigate this venture successfully, it's crucial to understand some fundamental aspects that can pave the way for a seamless and fruitful expansion into India. This article aims to shed light on essential elements you must consider before establishing a subsidiary company in India, ensuring you're well-prepared for the journey ahead. IndiaFilings simplifies Subsidiary Company Registration in India, ensuring compliance and a hassle-free setup.
Foreign subsidiary in India
An Indian Subsidiary Company is a business entity whose control or majority ownership is held by another company, often called the holding or parent company. The extent of control or ownership can be gauged through key financial indicators such as the proportion of preference share capital and the amount of paid-up equity share capital in the subsidiary.
It's important to note that forming a subsidiary in India requires approval from the Reserve Bank of India (RBI), especially in foreign investment contexts.
Foreign subsidiary in India
An Indian Subsidiary Company is a business entity whose control or majority ownership is held by another company, often called the holding or parent company. The extent of control or ownership can be gauged through key financial indicators such as the proportion of preference share capital and the amount of paid-up equity share capital in the subsidiary.
It's important to note that forming a subsidiary in India requires approval from the Reserve Bank of India (RBI), especially in foreign investment contexts.
1. Legal Structure and Company Registration
Before registering as an Indian Subsidiary Company, comprehending the legal framework and registration process is fundamental. In India, subsidiaries can typically adopt one of several legal structures, with the most prevalent being a
Private Limited Company
Public Limited Company
Limited Liability Partnership (LLP)
2. Regulatory Framework and Compliance
India's regulatory environment for businesses, particularly foreign entities, is governed by comprehensive laws and regulations. The Companies Act of 2013 is the primary legislation governing the incorporation and operation of companies in India. A foreign company looking to establish a subsidiary company in India must adhere to the provisions of this Act, alongside other relevant regulations such as the Foreign Exchange Management Act (FEMA), 1999, which regulates cross-border financial transactions. Key Points:
1. Incorporation Process: The process involves obtaining a Digital Signature Certificate (DSC) and Director Identification Number (DIN) for directors, reserving a company name through the RUN (Reserve Unique Name) service, and filing incorporation documents with the Ministry of Corporate Affairs (MCA).
2. Compliance Requirements: Regular compliance includes filing annual returns, financial statements, and various other documents with the MCA. Compliance with tax laws, including the Goods and Services Tax (GST), Income Tax, and other applicable taxes, is also mandatory.
3. Foreign Direct Investment (FDI) Regulations
India has a liberal FDI policy to attract foreign investment, but certain sectors have caps on foreign ownership or require government approval.
4. Minimum Capital Requirements
Adhering to the minimum capital requirements is a crucial regulatory mandate for foreign subsidiaries in India, which varies with the selected legal framework. A Private Limited Company must meet certain thresholds concerning both authorized and paid-up capital.
5. Corporate Governance and Compliance
India's corporate governance and compliance landscape is characterized by its rigour and demands strict adherence to many regulatory obligations. As a subsidiary company operating within this jurisdiction, aligning with statutory requirements is imperative. This includes the meticulous maintenance of books of accounts, timely submission of annual financial statements, conducting periodic board meetings, and ensuring full compliance with tax and other regulatory mandates.
6. Taxation and Transfer Pricing
Given its potential implications on business operations, navigating India's intricate tax landscape is crucial for subsidiary companies. It's essential to understand India's tax regulations, encompassing corporate tax rates, transfer pricing norms, withholding tax obligations, and the Goods and Services Tax (GST).
7. Intellectual Property Protection
Securing your intellectual property (IP) rights is critical when setting up a subsidiary in India. To ensure the protection of your business interests, it's recommended to register trademarks, copyrights, patents, or any other IP assets within Indian jurisdiction. Familiarizing yourself with the registration procedures and associated timelines is essential for safeguarding your valuable assets.
8. Timeframe for Establishing a Subsidiary in India
The process of establishing a subsidiary in India typically takes between 2 to 4 months. It's important to note that the parent company needs to approve all decisions made by the subsidiary, which can influence the timeframe for integration.
9. Hiring and Employment Laws
Understanding India's detailed employment laws and regulations is crucial when hiring staff for your subsidiary company. These laws encompass various aspects of employment, including recruitment processes, termination procedures, employee benefits, and workplace safety standards. Gaining a thorough understanding of these legal requirements is vital to ensuring full compliance and fostering a positive work environment.
Registration of a Subsidiary Company
Application in the prescribed form:
SPICe+ Form, which is an integrated form for the reservation of name and other services, is to be filled for the registration of subsidiary companies.SPICe+ form has two parts: –
Part A – Name Reservation (New Companies)
Part B:
1. Incorporation of Company
2. Application For DIN
3. PAN and TAN Application
4. EPFO and ESIC Registration
5. GSTIN Application
6. Bank Account Opening
7. Professional Tax Registration(Applicable to Companies in Maharashtra)
Document upload:
The following are the documents that will be required for the filing of the application. The documents are the same as required for the incorporation of the company:
1. Company Related
Memorandum of Association and Articles of Association
– Proof of Address of registered place of Business that is if the rented property, then rent agreement and if the owned property then copy of ownership documents
– Copy of Utility Bills
– Copy of resolution passed by the promoter company – Capital Layout of company – Copy of certificate of incorporation in case of foreign corporate
2. Directors and Shareholders Related
Digital Signature Certificate (DSC) and Director Identification Number (DIN) for the directors and designated shareholders
– Proof of identity and address for Directors and Shareholders
– Photographs of Directors and Shareholders
– The interest of first directors in other entities.
– Declaration by Directors and Shareholders
Authentication and Payment
On upload of documents, the applicant must download the form in PDF format, authenticate it by affixing DSC and upload the form along with all the requisite forms and declaration. On making payment post all these formalities, the Registrar of Companies (RoC) will scrutinize the same and issue the Certificate of Incorporation.
Conclusion
A company looking for expansion across regions and sectors will have to resort to the formation of subsidiaries. Subsidiaries act like extra arms to the main body and assist the holding company in reaching out to different regions, business sectors, and countries. Legally, an Indian subsidiary company is an Indian company and treated as one and is required to meet all the compliances applicable to Indian companies.
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FAQs
Forming a subsidiary company in India primarily falls into two categories.
Wholly-owned Subsidiary: The parent company owns all the subsidiary shares of this type. This structure is permissible in sectors that allow 100% Foreign Direct Investment (FDI).
Subsidiary Company: Here, the parent company holds more than 50% of the subsidiary’s shares, giving it a controlling stake.
