Setting up a wholly owned subsidiary in India is a common practice for many MNCs or International companies. It acts as a base for all the foreign company's business in India and helps it in managing all its activities in an effective manner.
It also helps in reaching out to a new market and hiring new and cost-effective talent. For these reasons, even startups from various countries are setting up a subsidiary company in India.
There are also other economic reasons due to which foreign companies are willing to set up a subsidiary company in India, such as currently India is the fastest growing economy in the world.
India is one of the desirable destinations for investors, NRI’s, foreign individuals and foreign companies due to its wealth of resources. In the year 2021, the foreign investment in India was at an all-time high, and the numbers are considered to grow even higher in 2022, considering the various reforms in policies, regulations and investor-friendly climate.
This article is intended for NRI and foreign entrepreneurs or start-ups, who already have a company registered outside India and wants to register and operate a wholly owned subsidiary in India.
2 Ways of Setting Up a Wholly Owned Subsidiary in India by Foreign Company
A foreign company that wants to start its operations in India can follow any of the below-given methods.
- Register a foreign subsidiary company in India, as per the companies act 2013: This process can take up to 10 – 20 days.
- Acquire an existing company in India: This process can be completed quickly within 7 days and the company will be ready to start its operations within 10 days.
We will discuss both the above-mentioned methods but let’s first understand what a foreign subsidiary is as per Indian Laws.
What Is a Foreign Subsidiary Company in India?
A foreign subsidiary company in India is a company whose more than 50% of shares are owned by a foreign company, which is incorporated or located outside India.
For example, Apple Inc is a registered company USA (it is called a foreign company), Apple Private Limited is a registered Indian company whose 51% of the shares are owned by Apple Inc.
This means Apple private limited is a subsidiary company of Apple INC.
What Is a Wholly Owned Foreign Subsidiary Company in India?
A wholly owned foreign subsidiary company in India is a company whose 100% shares are owned by a single foreign corporation.
Let’s take our previous example: If Apple Inc owns 100% shares of Apple Private Limited, then Apple private limited is called a wholly owned subsidiary of Apple Inc.
Different Methods of Formation
As discussed earlier there are 2 methods
Incorporate A Fresh Company in India:
As per the companies act 2013, foreign companies can incorporate a subsidiary company in India. there are certain steps and documents required that need to be followed.
There are two entity types that a foreign company can incorporate into its subsidiary, 1. Public Limited Company, 2. Private limited company.
A public limited company is mostly chosen by big companies, whose presence is in more than 20 countries. Public limited companies need to follow the strict guidelines of the Reserve Bank of India (RBI) and other government bodies.
Private limited companies, on the other hand, have low compliances and regulations compared to Public limited companies, hence most of the foreign companies, incorporate private limited companies in India.
Process of Foreign Subsidiary Company Registration in India – In this article we have given the complete process of incorporation as well as documents required for the same.
Acquire An Existing Company in India:
This is the quickest method to start any business operations in India. If you have gone through the above-mentioned article, you would understand that there are many processes that need to be completed before you start the Indian operations.
Such as, opening a bank account after incorporation, completing the RBI Filings, getting the required licenses, etc. which would take at least a month to start the operations.
But, by acquiring an existing company you can start the operations immediately once the process of share transfer is completed.
Finding a company to acquire is a hectic process, but in India, there are many companies, whose company status is dormant, or they started a company to start their business, but things didn’t work out as per their plans.
You can acquire these companies, doing a simple share transfer from the promoters of the company.
Once the company is acquired, you can start your operations and other processes such as change of directors, changing the name of the company, or altering the MOA and AOA of the company can be parallel.
The disadvantage of this process: it can be costly, and it is hard to find a company that operates in the same industry, same state and is un-operational.
Advantages of Having a Wholly Owned Subsidiary in India
Distinct Legal Entity
A company is a corporation that possesses the numerous capacities of a person in the eyes of law. It owns assets, incurs debts and is capable of holding legal positions. A company’s shareholders aren't liable for its liabilities.
A company enjoys more ways of lending. It can issue debentures and either have them be secured or not. It may also accept deposits from the public, as well as banks and auto financiers. These usually behave favourably when providing loans to businesses.
A shareholder has permission to transfer his or her shares to any other person by simply filing a share transfer form.
Limited Liability means that members are liable for certain debts. The limited company has a number of benefits including the fact that it can be easier to raise money because of the limited liability status. Fewer risks, more opportunities!
A company, as a separate legal entity, is unaffected by the departure or death of any individual member. This means that when a founder leaves an organization, they are not taking their knowledge with them - because all information remains with the "company" and cannot be transferred to another person because it is the company that matters.
Foreign Direct Investment
100 per cent Foreign Direct Investment is allowed in many of the sectors through Company type business entities without any prior Government approval. FDI is not allowed in Proprietorship or Partnership, LLP requires prior Government approval.
A company is a separate legal entity that can own, buy and sell property in its name. No shareholder may have any claim on the property so long as the company is a functioning concern.
Capacity to sue and be sued
To sue means to bring a lawsuit in a court of law. A court is an authority your case is heard when one person sues someone else. As an independent legal entity, a company has the right to sue or be sued in its own name.
Here is an article that will help you understand the benefits of subsidiary company formation over an offshore development centre in India.
Investment Entry Routes in India
The initial investment in both the processes be it incorporation of a subsidiary company or acquiring an existing company and making it a subsidiary company will be treated as a Foreign Direct Investment (FDI) in the company.
There are two routes to accept foreign direct investment in India.
When the business activity of the subsidiary company falls under the sector where 100% FDI is allowed. It shall fall under the automatic route. This means Sectors in which 100% FDI is allowed do not require prior approval from the government or reserve bank of India.
The company needs to notify the RBI within 30 days of receipt of inward remittance and file the required documents within 30 days of the issue of shares.
Government Approval Route:
If the business activity of the subsidiary company falls under the sector where 100% FDI is not allowed under the automatic route, then applications from these entities falling under this category require prior approval from the government.
Most of the sectors in India fall under automatic routes. Here is a list of sectors that fall under the automatic and prior approval routes.
The Indian Government is aiming to attract foreign investment and is encouraging foreign businesses to set up wholly owned subsidiaries in India. This is the right time to set up a subsidiary in India.
The Government of India is working in collaboration with many foreign Governments to bring about a conducive environment for Foreign Direct Investment in India. This will help entrepreneurs to set up a subsidiary company easily and start its operations.
Can a foreign company acquire an Indian company?
Yes, A foreign company can fully acquire an Indian company in those sectors where 100% FDI is allowed. And make that company a subsidiary of the foreign company.
How much does it cost to get a company registered in India?
The government fee depends on the state in which the company is getting registered however, it will cost $500 to USD 1500 to set-up a whole company in India. this includes incorporation and basic registrations that are required.
How to company registration in India online?
A subsidiary company can be registered without travelling to India; However, you will need to provide soft copies of all the documents that are required to register a company in India.
How to incorporate a wholly owned subsidiary in India?
The incorporation of a wholly-owned subsidiary company in India is quite simple. It has 6 stages. 1. Getting the DSC for Directors. 2. Name application of the company 3. Preparation of MoA and AoA 4. Filing for Incorporation 5. Applying for PAN and TAN of the company 6. Getting the incorporation certificate .
What is wholly owned subsidiary in India?
Wholly owned subsidiaries are those in which the parent company holds 100 percent of the shares in the subsidiary, allowing the parent company to nominate the Indian subsidiary's board of directors or govern the subsidiary.
Is a subsidiary always wholly owned?
No, not all the subsidiaries are wholly owned. If company A holds more than 50% shares of company B, then company B becomes a subsidiary company of A. Most of the subsidiaries are not wholly owned.