Setting up a subsidiary in India allows foreign companies to establish a significant business presence and leverage India’s growing market. A subsidiary company operates as a separate legal entity and provides flexibility in terms of operations, limited liability, and potential tax advantages. The Companies Act, 2013 and Foreign Exchange Management Act (FEMA) govern the process, ensuring a straightforward incorporation with specific compliance requirements.

Here’s a comprehensive guide to setting up a subsidiary in India, including the process, regulatory requirements, and compliance obligations.

1. Types of Subsidiaries in India

Foreign companies can establish the following types of subsidiaries in India, each with unique benefits:

• Wholly Owned Subsidiary (WOS): The foreign parent company holds 100% of the shares in the Indian subsidiary, giving it full control over the entity’s operations. This is possible in sectors that allow 100% Foreign Direct Investment (FDI) under the automatic route.
• Joint Venture (JV): The foreign company partners with an Indian entity, sharing ownership and management. This structure is beneficial when 100% ownership is not permitted or to leverage local expertise and resources.

2. Advantages of Setting Up a Subsidiary in India

• Separate Legal Entity: A subsidiary is treated as a separate legal entity, distinct from its parent company. This provides the parent company with limited liability and protects it from liabilities arising from the subsidiary’s operations.
• Operational Flexibility: Subsidiaries have the freedom to manage their own operations, finances, and strategies while aligning with the parent company’s goals.
• Tax Benefits: Subsidiaries may benefit from India’s tax treaties with other countries, access tax incentives for specific industries, and avoid double taxation on profits.
• Easy Repatriation of Profits: India allows easy repatriation of profits and dividends from subsidiaries, subject to compliance with FEMA guidelines.

3. Prerequisites for Setting Up a Subsidiary

• Minimum Directors and Shareholders:
  • At least two directors, one of whom must be a resident of India.
  • A minimum of two shareholders; the foreign parent company can be the sole shareholder in a wholly owned subsidiary.
• Registered Office: The subsidiary must have a registered office in India, where official communications and documentation will be sent.
• Capital Requirement: There is no minimum capital requirement for private limited companies, making it easy to incorporate a subsidiary with any amount of initial capital.

4. Steps to Set Up a Subsidiary in India

A. Obtain Digital Signature Certificate (DSC) and Director Identification Number (DIN)

• Digital Signature Certificate (DSC): All directors of the proposed subsidiary must obtain a DSC for electronically signing documents. This is particularly important for foreign directors.
• Director Identification Number (DIN): Directors must also obtain a DIN, which is required to be a director in an Indian company.

B. Name Reservation Using RUN (Reserve Unique Name) Form

• RUN Form: File the RUN form on the Ministry of Corporate Affairs (MCA) portal to reserve the name of the subsidiary. The name must include “Private Limited” for private companies and should not conflict with any existing names in India.
• Approval: The name will be approved by the ROC if it complies with the naming guidelines and is unique.

C. Filing of SPICe+ Form (Simplified Proforma for Incorporating Company Electronically Plus)

• SPICe+ Form: This comprehensive form streamlines the incorporation process by integrating name reservation, incorporation, DIN, PAN, and TAN applications into one.
• Submission Requirements: Attach necessary documents, including the Memorandum of Association (MOA), Articles of Association (AOA), and identity and address proofs of directors and shareholders.

D. Submission of MOA and AOA

• Memorandum of Association (MOA): The MOA outlines the subsidiary’s objectives, scope of business, and relationship with the parent company.
• Articles of Association (AOA): The AOA sets out the subsidiary’s internal rules, management structure, and governance policies.

E. Payment of Fees and Stamp Duty

• The company must pay the requisite registration fees and stamp duty, which vary based on the state in which the subsidiary is being incorporated and the authorized capital.

F. Certificate of Incorporation and Corporate Identification Number (CIN)

• Upon successful submission of documents, the ROC issues a Certificate of Incorporation, which includes a Corporate Identification Number (CIN). This officially establishes the subsidiary as a legal entity in India.

G. PAN, TAN, and Bank Account Opening

• Permanent Account Number (PAN): Obtain a PAN for tax purposes.
• Tax Deduction and Collection Account Number (TAN): Apply for a TAN, which is required for tax deductions.
• Bank Account: Open a bank account in the subsidiary’s name, which will be used for business transactions and remittances.

5. Compliance Requirements for Subsidiaries in India

Once established, subsidiaries must comply with several ongoing obligations under Indian law.

A. Annual ROC Filings

• Annual Return (Form MGT-7): Submit the annual return with details of directors, shareholders, and registered office within 60 days from the Annual General Meeting (AGM).
• Financial Statements (Form AOC-4): File the subsidiary’s audited financial statements, including the balance sheet and profit and loss statement, within 30 days from the AGM.

B. Board Meetings and Annual General Meeting (AGM)

• Board Meetings: Subsidiaries must hold at least four board meetings a year, with a maximum gap of 120 days between two consecutive meetings.
• Annual General Meeting: The AGM must be conducted within six months of the end of the financial year to present the annual accounts to shareholders.

C. FEMA Compliance

• Foreign Exchange Transactions: Subsidiaries must adhere to FEMA regulations on foreign exchange transactions, including remittances, FDI, and dividend distribution.
• Annual Return on Foreign Liabilities and Assets (FLA Return): Submit the FLA return to the RBI by July 15 each year, providing details on foreign investment and liabilities.

D. Tax Compliance

• Income Tax Returns: File annual income tax returns by September 30 for companies requiring a tax audit and pay advance tax if applicable.
• Transfer Pricing Compliance: Subsidiaries must comply with Indian transfer pricing regulations for any transactions with the parent company or other related parties, adhering to the arm’s length pricing principle.
• Goods and Services Tax (GST): Register for GST if the subsidiary is engaged in the sale of goods or services, and file periodic GST returns.

E. Corporate Social Responsibility (CSR)

• If the subsidiary meets the prescribed thresholds for net worth, turnover, or profits, it must allocate a percentage of its profits to CSR activities as required under the Companies Act, 2013.

F. Statutory Audit

• The subsidiary must appoint an external auditor within 30 days of incorporation and conduct annual audits of its financial statements.

6. Tax Benefits and Incentives for Subsidiaries

• Lower Corporate Tax Rates: The corporate tax rate in India for domestic companies, including foreign subsidiaries, is 22% (plus surcharges) under the optional tax regime.
• Tax Treaties: India has tax treaties with various countries, allowing subsidiaries to claim relief from double taxation, reducing the tax burden.
• Special Economic Zones (SEZs): Subsidiaries operating in SEZs can benefit from income tax exemptions and other incentives.
• Sectoral Incentives: Certain industries, like renewable energy, IT, and manufacturing, offer tax exemptions and incentives that subsidiaries can take advantage of.

7. Potential Challenges and Considerations

• Regulatory Complexity: Subsidiaries must navigate India’s complex regulatory environment, requiring adherence to numerous rules, guidelines, and compliance standards.
• Cultural Differences: Adapting to cultural and operational differences is essential for seamless integration and successful local operations.
• Transfer Pricing Risks: Cross-border transactions with the parent company can trigger transfer pricing scrutiny, requiring documentation and compliance with the arm’s length principle.
• Compliance Costs: Ongoing compliance can add to operational costs, including regular filings, audits, and mandatory meetings.

Conclusion

Setting up a subsidiary in India offers foreign companies a flexible and strategic pathway to participate in one of the world’s largest and fastest-growing markets. By understanding the registration process, compliance requirements, and potential benefits, foreign companies can build a successful and compliant business presence in India. With the right planning and adherence to regulatory guidelines, a subsidiary can contribute significantly to a foreign company’s global growth strategy.