[India] Incorporating a Wholly Owned Subsidiary in India: A Comprehensive Guide
Incorporation of a Wholly Owned Subsidiary ("WOS") in India is a preferred option for many foreign companies intending to expand their business in India. The establishment of a WOS allows a foreign company to access the commercial and business benefits being provided the Indian Government. However, the incorporation of a WOS is a complex legal process involving compliance with various local laws in India. In this note, we have set out the key elements of the incorporation process in the following order:
(a) Understanding the WOS in India
(b) Pre-incorporation - Key Consideration
(c) Process of Incorporation
(e) Conclusion: An annual compliance
Understanding the WOS in India
A WOS in India can take the form of a private limited company, public company, partnership, or limited liability partnership. Each of these corporate structures has its own specific laws and compliance requirements. For the purpose of this discussion, we will focus on the incorporation of a private limited company as a WOS.
Under the Companies Act, 2013, a subsidiary company is defined as a company in which the holding company either controls the composition of the Board of Directors or exercises or controls more than half of the total share capital. Thus, a WOS in the form of a private limited company in India must comply with the requirements of the Companies Act, 2013. Additionally, if the investment made in the WOS by the foreign parent company qualifies as Foreign Direct Investment ("FDI"), compliance with the Foreign Exchange Management Act, 2013 ("FEMA"), and other regulations stipulated by the Reserve Bank of India ("RBI") will also be necessary. Compliance with local tax laws and other applicable regulations will also be required.
Pre-incorporation – Key Considerations
Establishing a private limited company as a WOS necessitates compliance with specific requirements outlined in the Companies Act, 2013. These include the number of shareholders, number of directors, paid-up share capital, registered office, and the selection of an appropriate name for the WOS.
A private limited company must have a minimum of two shareholders, with one being the parent entity (i.e., the foreign company). The company must also have a minimum of two directors, with one director permitted to be a foreign national. The other director must be an Indian resident and ideally an Indian citizen.
While the requirement for a minimum share capital for a private limited company has been removed, it is advisable to allocate at least INR 100,000 (approximately 1230 USD) as the paid-up share capital for the WOS.
The WOS will be registered as a private limited company in the specific jurisdiction where its registered office is located. Therefore, selecting an appropriate location to serve as the registered office address is crucial.
The selection of the WOS name is also significant. In most cases, foreign companies use their own name along with the term “private limited” when naming their WOS in India. It is advisable for the parent company to keep multiple name options ready, as delays in the incorporation process can occur if the chosen name is not available.
Process of Incorporation
The process of incorporating a private limited company in India is conducted online through the filing of electronic forms available on the Ministry of Corporate Affairs ("MCA") website. These forms require the upload of necessary documents and information. The Registrar of Companies ("ROC"), the authority responsible for granting registration to private limited companies, verifies the submitted documents.
The standard process of incorporation includes the following steps:
1. Collating documents related to directors: This involves obtaining the Director Identification Number ("DIN") and Digital Signature Certificate (DSC) for each proposed director of the WOS. Other personal identification documents for each director are also required. If a foreign director executes the documents from outside India, the documents will need to be apostilled. If the director’s documents are not readily available, they will need to be prepared, incurring additional costs and time for the parent entity.
2. Collating documents of the foreign parent company: To file the incorporation documents with the ROC, all the charter documents of the parent company, along with the board resolutions authorizing the WOS incorporation, must be procured. The parent company must also issue the relevant power of attorney to individuals for executing the incorporation-related documents in India.
3. Memorandum of Association ("MOA") and Articles of Association ("AOA"): The MOA and AOA serve as the charter documents for the private limited company in India. Drafting these documents in accordance with the format prescribed by the Companies Act, 2013 is essential. The ROC reviews the MOA and AOA before approving the WOS incorporation.
4. Reservation of the WOS name: The ROC must approve and reserve the chosen name of the WOS through an online process. An apostilled board resolution from the parent entity, along with a power of attorney for executing the necessary forms, must be submitted to the ROC for name reservation.
5. Collating documents for the registered office: Proof of the registered office address must be submitted, including documents such as property ownership papers, utility bills (electricity, water, or gas bills), and a no objection certificate from the premises’ owner if the registered office is leased.
6. Appointing an independent practicing Company Secretary: It is advisable to engage an independent practicing Company Secretary ("CS") to assist in filing forms with the ROC. In India, it is a legal requirement for all documents to be signed and uploaded by a CS on the MCA website.
7. Filing forms with the ROC: Once all the required documents are collated, the WOS must file the relevant forms with the ROC. These forms need to be signed and uploaded by the CS, and all documents must be digitally signed by both directors.
Upon submission of all the necessary documents, the ROC will issue a Company Identification Number ("CIN") and a Certificate of Incorporation ("COI") for the WOS. Subsequently, the WOS must obtain other relevant approvals and registrations, such as the Permanent Account Number ("PAN"), Goods and Services Tax ("GST"), Employees’ Provident Fund ("EPF"), and registration under the Shops and Establishment Act for its registered office.
Conclusion: Annual Compliance
The process of setting up a private limited company as a WOS has been outlined above. However, before initiating the incorporation process, certain prerequisites must be completed:
1. Identifying the nominee shareholder
2. Identifying the two directors
3. Identifying the registered office
4. Engaging with a Company Secretary (CS)
5. Drafting and finalizing the MOA and AOA
After the WOS is incorporated, the parent company must fulfill FEMA-related compliance requirements as mandated by the RBI before the share certificate can be issued in the parent entity’s name. Subsequently, the company must ensure that it fulfils corporate compliance obligations as set out under the Companies Act, 2013 within the specified timeframes. This includes conducting regular board resolutions, annual general meetings, and filing periodic documents on the MCA website.
In conclusion, establishing a WOS in India offers numerous opportunities for foreign companies, but it involves a meticulous and multifaceted process of incorporation and ongoing compliance. By understanding the key elements and adhering to the legal requirements, foreign companies can navigate the complexities.