Setting up a Subsidiary in India: How Can Foreign Companies Set Up Subsidiaries In India?

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February 21, 2023

Setting up a Subsidiary in India: How Can Foreign Companies Set Up Subsidiaries In India?

India is one of the world's fastest-growing economies and a very lucrative market for foreign companies. Setting up a subsidiary in India could be a viable approach for foreign companies to expand their operations and gain exposure to this large customer base. 

But the process of setting up a subsidiary in India can be complicated and time-consuming, particularly for companies unfamiliar with the country's regulatory and legal landscape. 

Today, we will present an overview of the key steps involved in establishing a subsidiary in India, as well as guidance to support foreign companies in successfully navigating the process.

Reasons why foreign businesses want to set up a subsidiary in India

Following are some of the main reasons why foreign companies want to establish a subsidiary in India:

1. Access to a major market

India is the world's second-most populated country, with over 1.3 billion people. Establishing a subsidiary in India gives foreign companies access to a huge and developing market with a rapidly emerging middle class that drives demand for a broad range of products and services.

2. Lower production costs

India is famous for its low-cost labour, which can enable foreign companies to substantially lower their cost of production. Establishing a subsidiary in India can also help companies take advantage of tax incentives, subsidies, and other perks provided by the Indian government to encourage foreign direct investment.

3. Skilled workforce

India has a highly educated and skilled workforce, with a strong emphasis on education in science, technology, engineering, and mathematics (STEM). Establishing a subsidiary in India gives foreign companies access to this skilled workforce, which can be used to fuel growth and innovation.

4. Favourable business atmosphere

In recent years, India has made tremendous progress in improving its business atmosphere, with an emphasis on simplifying rules and eliminating bureaucratic bottlenecks. Establishing a subsidiary in India can offer foreign companies a more attractive business environment than in many other emerging markets.

5. Strategic location

India's strategic location at Asia's crossroads makes it an excellent location for companies seeking to expand their operations in the region. Establishing a subsidiary in India can give foreign companies a strategic location from which to enter other booming markets in Southeast Asia and beyond.

What are the types of subsidiaries in India?‍

Here are the types of subsidiaries that foreign companies can establish in India:

1. Wholly-owned subsidiary

A wholly-owned subsidiary is a separate legal entity that is entirely owned by a foreign company. It is accountable for its own operations, obligations, and earnings and has its own board of directors, stockholders, and management team.

2. Joint venture

A joint venture is a business entity that is owned jointly by two or more parties, commonly a foreign company and an Indian partner. Joint ventures can take the form of a company or a partnership, and they can be formed for a single project or on a continuous basis.

3. Liaison office

A liaison office is a representative office established by a foreign company in India to promote communication and create business contacts. Liaison offices are not allowed to carry out commercial activity and can only conduct promotional and liaison services.

4. Branch office

A branch office is a business entity established by a foreign company to conduct its activities in India. Branch offices must be registered with the Registrar of Companies and are liable for the same legal and regulatory obligations as wholly-owned subsidiaries.

5. Project office

A project office is a temporary office established by a foreign company to carry out a particular project in India. Project offices are governed by certain rules and must be registered with the Reserve Bank of India.

Steps to Set Up a Foreign Company’s Subsidiary in India

Here are the key steps involved in setting up a foreign company's subsidiary in India:

1. Choose the right business structure

Foreign companies must determine what sort of subsidiary they want to establish, such as a wholly-owned subsidiary, a joint venture, a liaison office, a branch office, or a project office. Each sort of subsidiary has its own set of features and drawbacks, and businesses should carefully weigh their options before making a decision. 

2. Register the company

The subsidiary company must be registered with the Registrar of Companies (ROC) in the state where it will be situated. This includes submitting a variety of documents, such as the memorandum and articles of association, board resolutions, and other disclosures.

3. Obtain necessary approvals 

Depending on the nature of the business, foreign companies might require additional approvals from government authorities such as the Ministry of Corporate Affairs, the Reserve Bank of India, and the Foreign Investment Promotion Board. 

4. Open a bank account

The subsidiary company must open a bank account in India and receive the required Reserve Bank of India clearances. 

5. Obtain tax registration

The subsidiary company must register with the Goods and Services Tax (GST) department, as well as with other tax authorities, such as the Income Tax department. 

6. Register for other regulatory compliances

Foreign companies must also verify that their subsidiaries are in compliance with other regulatory standards, such as labour laws, environmental rules, and industry-specific frameworks or regulations.

Essential documents for incorporation of foreign company’s subsidiary in India

Here are the essential documents required for the incorporation of a foreign company's subsidiary in India:

1. Passport and address proof of the proposed directors

The proposed directors of the subsidiary company must provide a duplicate of their passports as well as address proof, such as an electricity bill.

2. Memorandum of Association (MoA) and Articles of Association (AoA) 

The MoA and AoA are legal documents that explain the company's objectives and policies. These must be filled out and submitted to the Registrar of Companies (ROC) along with the required fees and documents. 

3. Certificate of Incorporation of the parent company

Foreign companies must present an incorporation certificate from the country where the parent company is incorporated.

4. Board resolution of the parent company

The parent company's board resolution must approve the incorporation of the subsidiary company in India and nominate the proposed directors. 

5. Power of Attorney

During the registration procedure, the foreign parent company must produce a power of attorney permitting one of the prospective directors or a chosen representative to act on the company's behalf. 

6. Certificate of compliance

Foreign companies must present a compliance certificate from the jurisdiction in which the parent company is incorporated, certifying that the company complies with local laws and regulations. 

7. Capital commitment letter

The foreign parent company must submit a letter committing to finance the subsidiary company with the required capital.

8. PAN and TAN 

A PAN and TAN must be obtained from the Income Tax Department by the subsidiary company. 

9. GST Registration

If the subsidiary company sells products or provides a service, it must register for GST.

Conclusion 

Establishing a subsidiary in India is a delicate process, but it could provide significant benefits to foreign companies wishing to expand their activities in India. With proper planning and execution, foreign companies can successfully establish subsidiaries in India and capitalise on the country's tremendous potential for growth and development.

Frequently asked questions 

1. Can a foreign company incorporate a subsidiary in India without having a physical presence in the country?

Yes, a foreign company can establish a subsidiary in India without having a physical presence there by appointing an authorised representative. 

2. What are the benefits of a foreign company establishing a subsidiary in India? 

Some of the benefits of establishing a subsidiary in India include access to a huge and booming market, lower operating costs, and a favourable regulatory environment for foreign investments.

3. What are the tax implications for foreign companies setting up subsidiaries in India?

Foreign companies establishing subsidiaries in India may attract corporate income tax, withholding tax, and other taxes. To avoid double taxation, India has signed double taxation avoidance treaties with a number of countries.

4. How long does it take a foreign company to establish a subsidiary in India? 

The time required for a foreign company to establish a subsidiary in India depends on a variety of factors, including the kind of subsidiary, the nature of the business, and the efficiency of the registration procedure. In most cases, the incorporation process requires approximately 2-3 months.

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