Setting up a Wholly Foreign Owned Subsidiary in India

Overview for Setting up Foreign Owned Subsidiary in India

India is among one of the fastest growing economies and has become favourite destination amongst foreign investors and NRIs who are looking to explore the rich opportunities which the country has to offer. India has a large market base and is blessed with rich resources; also with the recent changes in the rules and regulations related to Foreign Direct Investment (FDI), foreign investment has got a boost making it even more feasible for the foreign investors to set up a foreign company in the country.

A foreign national or company can establish a foreign company in India either as an Indian company or a foreign company. The basic difference between an Indian company and a foreign company is that while the later one is incorporated in its home country having a place of its business in India, the former one is incorporated in India itself. As per the statistics, at present there are approximately 3800 foreign companies operating in India, with the National Capital and Maharashtra having the maximum number. Foreign company in India is governed by the guidelines of RBI and Companies Act 2013 and as per Section 2(42) of the Companies Act 2013, the foreign company is defined as:

A foreign company is a company or a body incorporated outside India and

1. Has a place of business in India either by itself or through an agent, physically or through electronic mode; and
2. It conducts business activity in India.

If a foreign national has to set up its extension in India as an Indian company, he can do so either as:

1. Wholly owned subsidiaries, or
2. Joint Ventures with other Indian Companies (if 100% FDI is not permitted)

What is Wholly Owned Subsidiary Company in India by Foreign Company?

When a foreign national or a foreign company invests 100% FDI in an Indian company through an automatic route, then it becomes wholly owned subsidiary company of that particular foreign company i.e. its complete share capital lies in the hand of the foreign corporate body and the later can either be a private limited company or public limited company.

Minimum Requirement of Setting up a Wholly Owned Subsidiary Company in India by Foreign Company

The minimum requirement of setting up a wholly owned subsidiary is as following:

1. It must have at least 2 directors. As per the Companies Act 2013, NRIs, PIOs and foreign nationals as well as foreign residents can act as a director of a wholly owned subsidiary, however he or she has to first obtain a Director Identification Number (DIN) and a digital signature certificate.
2. It must have at least 2 shareholders.
3. It must have capital of at least 1 lakh.

Features of a Wholly Owned Subsidiary in India

The key features of a wholly owned subsidiary are as below:

1. A wholly owned subsidiary is regulated and governed by the Companies Act 2013.
2. As per the Indian law, a wholly owned subsidiary is allowed to undertake all types of business activities such as manufacturing, marketing and service industry.
3. In case there is 100 percent foreign direct investment is permitted, no prior approval of the RBI is required.
4. A wholly owned subsidiary is treated as a domestic company under Tax Law and thus is eligible for all exemptions such as deduction benefits etc as applicable to any other Indian company.
5. Funding of a wholly owned subsidiary can be made in the form of share capital and loan.

Process to Incorporate A Wholly Foreign Owned Subsidiary in India

In order to incorporate a wholly foreign owned subsidiary, one has to follow below mentioned procedures:

Step 1 - Obtain Directors Identification Number

The very first in incorporating a wholly owned subsidiary is to obtain Director Identification Number for its directors. The application for the same can be submitted online on the portal of Ministry of Corporate Affairs, which is later approved by the DIN Cell of the Ministry of Corporate Affairs. To obtain Directors Identification Number, one has to fill up form DIR 3 along with the scan copies of following documents:

1. Applicant’s photograph
2. Identity proof
3. A valid residential proof
4. A verification or a declaration in the prescribed format

Once the above documents are submitted and verified, DIN number is allocated immediately to the directors of the company.

Step 2 - Obtain Digital Signature Certificate

To obtain a digital signature certificate, any one of the proposed director can submit the application with the concerned Registrar of Companies (ROC). He or she has to furnish following documents along with the application in order to obtain the certificate:

1. Identity Proof: Copy of PAN Card or Passport is accepted as an identity proof. If the applicant is a foreign national, only copy of passport is accepted as identity proof, however for an Indian national, copy of PAN card is mandatory.
2. Residence Proof: Copy of Voter’s ID or valid driving license or a latest bank statement duly signed and certified by the bank is accepted as a residence proof.
3. Passport size photograph in the specified format i.e. JPEG format
4. Verification or Declaration in the prescribed format on a 10 Rs stamp paper. The document has to be duly notarized by a notary public.

Step 3 - Approval of the proposed company name

Once the Director Identification Number and Digital Signature Certificate are obtained, the next step is to get the approval for the proposed name of the wholly owned subsidiary. The approval for the same has to be obtained by submitting an online application to check the availability of the desired or proposed name. Along with the desired or proposed name, six proposed names in order of preference shall be mentioned in the application form and same has to be submitted to the Registrar of Companies (ROC). In case you intend to incorporate the wholly owned subsidiary as a private limited company, the proposed names should end with “Pvt Ltd”. Along with the proposed names, following documents need to be attached and submitted on the portal of Ministry of Corporate Affairs:

1. Board Resolutions: Board resolution is submitted by the parent company and is thus a declaration or intention to incorporate the wholly owned subsidiary in India and to authorize a director with a power to issue specific power of attorneys.
2. Power of Attorneys: Power of attorneys is given to authorize someone in order to represent the applicant in front of the concerned authorities.
3. No Objection Letter: If you intend to use the coin word of the parent company, No Objection Certificate from the parent company has to be submitted for use of the name of the parent company or a part of it.
4. Charter Documents: Certificate of Incorporation of the parent company has to be attached along with the online form and submitted on the portal.

Above documents should be notarized by a Notary Public in the country where its registered office is situated and also endorsed at the Indian Consulate in the country where the registered office of the entity is situated. Also, along with the above mentioned documents, two more documents are required, which are as below:

1. A brief write-up about the main objective that are proposed to be carried out by the wholly owned subsidiary.
2. Proof of ownership of the registered office of the company.

Step 4 - Drafting Memorandum of Association and Articles of Association

Memorandum of Association and Articles of Association are most important documents of an entity and in this case, they need to be drafted as per the guidelines of the Companies Act 2013. It is also important to pay the required stamp duty, which is required to be paid at the time of filing of incorporation related documents.

Step 5 - Filing incorporation documents with the ROC

The next step in the incorporation of a wholly owned subsidiary is to e-file the following documents with the ROC, once they are digitally signed by one of the proposed directors of the subsidiary:

1. INC-32: Simplified proforma for incorporating company.
2. INC-33: E-Memorandum of Association
3. INC-34: E-Article of Association

The above documents have to be submitted with the ROC as attachments along with the original copies of the Memorandum of Association and Articles of Association and Power of Attorneys from the subscribers to the MOA and AOA. The mentioned power of attorneys needs to be notarized and attested by the Indian Embassy in the foreign country. Once the ROC receives the application, it will scrutinize and verify the documents and if required, appoints a representative to make necessary changes, if any. Once the verification process is through and ROC is satisfied, it will then issue the Certificate of Incorporation of the company, which also acts and suffice as a registration proof of the wholly owned subsidiary in India. It is only when the Certificate of Incorporation is issued; the subsidiary can start its business activities.