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Starting a Foreign Company’s Subsidiary in India


Starting a Foreign Company’s Subsidiary in India

With a population of over 1.2 billion people, India is the largest democracy and one of the most promising emerging markets in the world. Therefore, there is immense interest among international businesses to tap the emerging opportunities in India and be among the early movers into the rapidly growing market. In this article, we look at ways a foreign company / foreign national can start a business in India and/or invest in businesses in India, and the related regulatory framework.

Investing in a Business in India by way of Equity

A foreign national (other than a citizen of Pakistan or Bangladesh) or an entity incorporated outside India (other than entity incorporated in Pakistan or Bangladesh) can invest in India by acquiring shares of an Indian company, subject to the FDI Policy of India. Investment in equity shares of an existing business can be broadly divided into two categories: investment under automatic route and investment under the Government approval route. The automatic route requires no requirement of any prior regulatory approval for investment in equity shares of an Indian business and only post facto filing/intimation with the Reserve Bank of India within 30 days of receipt of investment money in India and filing of prescribed documents and particulars of allotment of shares within 30 days of allotment of shares to foreign investors. Investment in activities/industries where the automatic route is not available can be made with the approval of the Government under the Government Approved FDI method. The Foreign Investment Promotion Board (FIPB) grants such approvals.

Foreign Direct Investments that are allowed in India

Foreign Direct Investment of up to 100% is allowed under the automatic route in many activities/sectors in India. However, foreign investment in any form prohibits in a company or a partnership firm or a proprietary concern or any entity, whether incorporated or not which is engaged or proposes to engage in the following business: i) Business of chit fund; or, ii) Nidhi Company; or, iii) Agricultural or plantation activities (excluding floriculture, horticulture, development of seeds, animal husbandry, pisciculture, cultivation of vegetables, mushrooms, etc., under controlled conditions, services related to agro & allied sector and tea plantations); or, iv) Real Estate Business, or construction of farmhouses (Does not include development of townships, construction of residential/commercial premises, roads or bridges); or, v) Trading in Transferable Development Rights (TDRs).

Reporting to Government under Automatic Route

A two-stage reporting procedure has been introduced for the purpose of reporting Foreign Direct Investment in India. First, on receipt of money for investment from a foreign investor, the Company should report to the Regional Office of RBI under whose jurisdiction its Registered Office is located, a report containing information about the investment must be filed. Next on the issue of shares to the foreign investor, within 30 days a report in the prescribed format has to be filed with the Regional Office of RBI. Further, a Certificate from the Company Secretary of the Company accepting investment and a Certificate from Statutory Auditors or Chartered Accountant in the required format is to be submitted.

Procedure for starting a Foreign Company’s Subsidiary in India

For the incorporation of a Private Limited Company in India, the following are required from the client: i) supporting documents, minimum of two directors (One Indian Director who is also an Indian Resident) and an acceptable name for the company. Once, the above are available, Digital Signature Certificate and Director Identification Number (DIN) is obtained by IndiaFilings on behalf of the client from the Ministry of Corporate Affairs. On obtaining the DIN and the Digital Signature, request for company name availability is made to the Ministry of Corporate Affairs. After obtaining the name approval, draft the Memorandum of Association and file it within 60 days to complete the incorporation process.
It requires a minimum of two shareholders for a private limited company. Hence, the holding company in a foreign country must pass a Board Resolution for the incorporation of Company in India and for the subscription of shares of the proposed Private Limited Company. The foreign holding company can hold 99.99% of the shares of the Indian Company while 0.01% of the issued shares of the Private Limited Company can be held by an Indian, in trust with the foreign Company. After the company incorporation and obtaining the Incorporation Certificate, open the bank accounts and obtain the necessary licenses. Simultaneously, make the filings with RBI to indicate FDI in India through the automatic route.

Unique documents required for incorporation of foreign company’s subsidiary in India

The following are some of the unique requirements for incorporating a Private Limited Company with Foreign Directors. It requires an Identity and address proof for the Director, passport or any other Government-issued license or registration containing a photo, name in full and date of birth is acceptable. Submit any of the following address proofs such as Passport, Driving License, Bank Account Statement or Utility bill containing name and address. Then, clearly photocopy the above documents need and certify the documents as a true copy by the Indian Consulate in the country of the holding company or must be apostilled. If the documents are not in English, then a certified translation is also necessary. Courier the above documents to India.  Also, the holding company in a foreign country for the incorporation of a subsidiary in India must pass a Board Resolution.