Foreign Subsidiary Company

Indian subsidiary Registration is ruled and administered by the businesses Act, 2013. Whenever a far off company owns not but fifty percent of the share capital of a corporation, then the aforesaid company is understood as a subsidiary.

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    What is a Foreign Subsidiary Company?

    A foreign subsidiary company is any company, where 50% or more of its equity shares are owned by a company that is incorporated in another foreign nation. The said foreign company in such a situation is called the holding company or the parent company.

    For a company to be a foreign subsidiary company in India, the company itself must be incorporated in India. It does not matter which country the parent company is incorporated in.

    Compliances are based on many aspects of the company. One must understand what all compliances are supposed to be met according to the type of company that is incorporated, the industry of operations, annual turnover, and number of employees. A foreign company is defined under section 2(42) of the Companies Act, 2013, such a company must follow regulations and rules established under multiple legislations and orders such as:

    – Companies Act, 2013
    – Income Tax Act, 1961
    – GST, 2017
    – SEBI rules and regulations
    – FEMA (Foreign Exchange Management Act), 1999
    – RBI compliances etc.

    Meaning – Foreign Subsidiary company:

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

    How to incorporate a Foreign Subsidiary in India?

    Selecting the type of Company

    According to FEMA guidelines, Foreign Direct Investment (FDI) is not allowed in case of Proprietorship, Partnership Firm and One Person Company. Though investment in LLP’s is allowed, but it requires prior approval of the RBI.

    Hence, the easiest and fastest way set up a business in India by NRI’s and Foreign Nationals/entities is concluded incorporation of a Private Limited Company.

    Minimum requirements

    Capital: There is no minimum capital required to form a Private Limited Company in India.

    Directors: Minimum two directors are required to incorporate a Private Company in India. Both should be individuals and at-least one of whom should be a resident of India. (A resident of India is a person who has stayed in India for at-least 182 days in the previous year).

    Shareholders: Companies Act, 2013 requires that a Private Limited Company have a minimum of two shareholders. There is no condition for residential status of shareholders.  Shareholders can be either individuals or entities or a combination of both.

    Procedure

    Procedure of Foreign Company Registration in India:

    Step1

    Obtaining DSC and DIN

    The first step towards Foreign Company Registration in India is applying for the DSC (Digital Signature) and DIN (Director’s Identification Number) of the Directors. The primary documents required for obtaining the DIN and DSC are as under:

    • Proof of Identity (PAN for Indian Nationals and Copy of Passport for Foreign Nationals)
    • Copy of Driving License, Bank Statement or any utility bill (not older than two months)
    • Residence permits for foreigners, if residing in India.
    • Passport size photograph

    All the above documents for foreign citizens and non-residents should be notarized and consuralized or apostilled by the competent authority, as the case may be.

    Step2

    Name Approval:

    Selecting a unique and acceptable name for the proposed Company is one of the important steps in the whole Incorporation process. The name should be in consonance with the Object of the Company and should not be identical to existing entities or Undesirable by Law.

    Step3

    Incorporation Application

    This is the final step in the Foreign Company Registration process. It requires filing of the Memorandum and Articles of Association of the Company digitally along with various other documents duly executed by the proposed directors and shareholders.

    List of Incorporation documents to be executed:

    1. Subscriber sheet of Articles of Association
    2. Subscriber sheet of Memorandum of Association
    3. Declaration by Director in form DIR 2
    4. Declaration of Director in Form INC 9

    Generally, the incorporation documents are required to be self-attested by Indian Nationals. However, in case of Foreign Nationals, the process is as under:

    In the documents are signed outside India, then the  same have to be notarized by a Public notary of the residence country and consularized or apostilled by the competent authority, as the case may be.

    If the documents are signed in India, then copy of Visa and stamped passport, proving his/her presence in India at the time of signing is required.

    If the subscriber is a foreign entity, then the Incorporation documents should be signed by the representative of the foreign entity. An Authorization Letter duly stating the name of the Authorized Person and the number of shares subscribed should be notarized, consularized or apostilled, as the case may be in the home country of the subscriber company.

    Once the Incorporation application is approved, the Registrar would issue a Certificate with a Corporate Identification Number (CIN). The PAN and TAN of the Company would also be allotted simultaneously.

    Treatment of Share Capital invested by the Holding Company and required compliances:

    Foreign Investments in Indian Companies are regulated by FEMA Guidelines and the Reserve Bank of India. Whenever the holding company invests funds in the share capital of the Indian subsidiary, it has to follow RBI guidelines along with compliances under Companies Act 2013.

    RBI Compliances

    A two-stage reporting procedure is to be followed when a company is raising funds from a foreign investor:

    On receipt of funds: The Company has to provide details in an “Advance Reporting Form” to the RBI within 30 days of receiving funds from foreign investor(s).

    The company has to issue shares within 180 days from the date of receiving funds.

    On allotment of shares: The Company has to report in specified form (FC-GPR) to the RBI, within 30 days from the date of issue of shares along with:

    • A Certificate from the Company Secretary certifying that the company has complied with the procedure for issue of shares as laid down under the Foreign Direct Investment (FDI) Scheme, and,
    • A certificate from a Chartered Accountant indicating the manner of arriving at the price of the shares issued to the foreign investors.

    Apart from the above, Annual return on Foreign Liabilities and Assets is required to be submitted reporting all the investments received during the year.

    Advantages of Setting up a Foreign Subsidiary

    Some of the major advantages of setting up a foreign subsidiary include:

    Access to New Markets for Your Products and Services 

    Setting up a foreign subsidiary establishes a legal entity in another country. Legal entities can market their products and services to the local population. They can also import and export goods.

    Additionally, companies with a local presence can expand their brand recognition to new markets so that they can potentially increase their profits.  

    Foreign countries present enormous opportunities for growth, and even some of the lesser known have viable economies that represent strong markets that can help a business grow.  

    More Affordable Options for Manufacturing 

    In certain markets, setting up a foreign subsidiary can give you access to lower costs for goods and labor.

    Many also have a highly developed manufacturing infrastructure that enables not only lower materials costs but lower costs to produce goods in bulk, which of course can help you minimize overall production costs.   

    Access to Technical Skills  

    Many foreign countries – increasingly in Asia – provide great access to advanced technology and new ways of thinking about technical issues. For example, Japan offers a high level of technical knowledge that continues to attract foreign investment.  

    Access to Local Knowledge 

    By establishing a legal entity in a foreign country, a business can make new business relationships with local partners and set up joint ventures that take advantage of localized knowledge. 

    Increased Expansion Opportunities 

    In some situations, entering a new country can provide greater expansion and increased revenue that would not have been possible in the home country, especially when the domestic market is flooded with competition.  

    Streamlined Processes and Incentives 

    Some countries openly welcome foreign investment and make the process to incorporate a company simple. They may even provide incentives to encourage foreign investment, such as: 

    • Tax incentives 
    • No minimum capital requirement 
    • Special economic zones 
    • Free trade zones 
    • Faster incorporation processes 
    • No or few restrictions on foreign ownership of companies 

    Disadvantages of Setting up a Foreign Subsidiary

    Some of the most notable disadvantages of setting up a foreign subsidiary include:

    Increased Cost and Time 

    Setting up a foreign subsidiary can often take significant time and money, which often bars many foreign companies from making this investment.

    The paid-up capital requirement varies by country and industry, but sometimes it is quite substantial. For example, in Singapore, the paid-up capital requirement for an insurance intermediary firm is $300,000, and the same is $100,000 for travel agencies.

    Prohibitions on Foreign Ownership

    Some countries regulate certain industries and prohibit foreign ownership. In some situations, no foreign ownership is permitted while in others, ownership must primarily be local but a foreigner can invest a certain percentage into the business.

    Some countries have been historically reluctant for companies to be wholly foreign-owned. For example, the United Arab Emirates required a foreign investor to have a local partner with at least 51% ownership stake before setting up a foreign subsidiary until the law was changed in 2019.

    There are still certain industries in the UAE that limit the presence of foreign workers.

    Complicated Immigration Requirements 

    Working in a foreign country often results in complicated immigration requirements. It may be difficult to obtain a work visa or permit for you or your staff. It may take several weeks for approval.

    Visas may only provide for short stays, and often there are limited on what business activities can be undertaken.

    Complex Compliance Requirements 

    One of the biggest challenges to setting up a foreign subsidiary is doing so in a compliant manner. There are often very complex rules related to hiring staff, managing payroll, complying with tax requirements and declaring the activities of your business.

    Required documents/information

    1. Name of subscribers (holding co.)
    2. Name of Individual subscriber
    3. Name of nominee shareholder on behalf of foreign holding Company
    4. DIN of proposed directors (minimum 2), if already having.
    5. Mobile No., E-mail I.D, Place of Birth, Educational Qualification and occupation of Proposed Directors/subscribers/nominee shareholder.
    6. Proposed names (in order of preference) of the company.
    7. Main object of the proposed company.
    8. Proposed authorized & paid-up capital of the company.
    9. % shareholding of subscribers
    10. Face value of shares
    11. Self-attested copy of PAN Card ofdirector/subscriber/nominee (for Indian nationals).
    12. Self-attested copy of ID Proof of proposed Directors(Voter ID/ Passport/ Driving License) of director/subscriber/nominee
    13. Self-attested copy of Residential Proof of Proposed Directors/promoters/nominee (Bank Statement/Electricity Bill/Telephone Bill/Mobile bill) (not older than two (2)Months) of director/subscriber/nominee
    14. Self-attested copy of aadhaar cardof director/subscriber/nominee (for Indian nationals)
    15. Self-attested copy of passportis mandatorily required in case of foreign nationals.
    16. Details of Directors in other Companies:
      • Name of the Company(s)
      • Designation
      • Shareholding percentage
      • Nominal Value of Shares
      • Other Interest, if any.
    1. Land line No of directors/promoters, if having.
    2. Copy of electricity / telephone/gas/mobile Bill (not older than two (2) Months) of proposed registered office address,
    3. Latest passport size 3 colored photograph of each proposed director/subscriber.
    4. DSC of subscribers.

    For more information on foreign subsidiary company, consult Vyapar formations.

    Our team will guide you through the complete process of foreign subsidiary required for your company.


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