Incorporation of Foreign Subsidiary in India

India is among the fastest growing economies of the world with plenty of business opportunities which make it a preferred destination for investment form NRIs, Foreign Nationals and Foreign Companies. There are many ways by which foreign investment can be done in India. One of the most successful and sought after ways is Incorporation of Foreign Subsidiary in India.

Meaning – Foreign Subsidiary company:

A subsidiary is a company with voting stock (that is more than 50%) controlled by another company, usually referred to as the parent company or the holding company. In cases where a parent company owns a foreign subsidiary, the subsidiary must follow the laws of the country where it is incorporated and operates. Hence, if a foreign subsidiary is incorporated in India, then it has to follow the applicable laws in India.

How to incorporate a Foreign Subsidiary in India?

Selecting the type of Company-

According to FEMA guidelines, Foreign Direct Investment (FDI) is not allowed in case of Proprietorship, Partnership Firm and One Person Company. Though investment in LLP’s is allowed, but it requires prior approval of the RBI.

Hence, the easiest and fastest way set up a business in India by NRI’s and Foreign Nationals/entities is through incorporation of a Private Limited Company.

Minimum requirements-

  • Capital: There is no minimum capital required to form a Private Limited Company in India.
  • Directors: Minimum two directors are required to incorporate a Private Company in India. Both should be individuals and at-least one of whom should be a resident of India. (A resident of India is a person who has stayed in India for at-least 182 days in the previous year).
  • Shareholders: Companies Act, 2013 requires that a Private Limited Company have a minimum of two shareholders. There is no condition for residential status of shareholders.  Shareholders can be either individuals or entities or a combination of both.

Procedure of Formation of Subsidiary in India:

1. Obtaining DSC and DIN-

The first step towards company incorporation is applying for the DSC (Digital Signature) and DIN (Director’s Identification Number) of the Directors. The primary documents required for obtaining the DIN and DSC are as under:

  • Proof of Identity (PAN for Indian Nationals and Copy of Passport for Foreign Nationals)
  • Copy of Driving License, Bank Statement or any utility bill (not older than two months)
  • Residence permits for foreigners, if residing in India.
  • Passport size photograph

All the above documents for foreign citizens and non-residents should be notarized and consuralized or apostilled by the competent authority, as the case may be.

2. Name Approval:

Selecting a unique and acceptable name for the proposed Company is one of the important steps in the whole Incorporation process. The name should be in consonance with the Object of the Company and should not be identical to existing entities or Undesirable by Law. 

3. Incorporation Application:

This is the final step in the Company Incorporation process. It requires filing of the Memorandum and Articles of Association of the Company digitally along with various other documents duly executed by the proposed directors and shareholders.

List of Incorporation documents to be executed:

  • Subscriber sheet of Articles of Association
  • Subscriber sheet of Memorandum of Association
  • Declaration by Director in form DIR 2
  • Declaration of Director in Form INC 9

Generally, the incorporation documents are required to be self-attested by Indian Nationals. However, in case of Foreign Nationals, the process is as under:

In the documents are signed outside India, then the  same have to be notarized by a Public notary of the residence country and consularized or apostilled by the competent authority, as the case may be.

If the documents are signed in India, then copy of Visa and stamped passport, proving his/her presence in India at the time of signing is required.

If the subscriber is a foreign entity, then the Incorporation documents should be signed by the representative of the foreign entity. An Authorization Letter duly stating the name of the Authorized Person and the number of shares subscribed should be notarized, consularized or apostilled, as the case may be in the home country of the subscriber company.

Once the Incorporation application is approved, the Registrar would issue a Certificate with a Corporate Identification Number (CIN). The PAN and TAN of the Company would also be allotted simultaneously.

Treatment of Share Capital invested by the Holding Company and required compliances:

Foreign Investments in Indian Companies are regulated by FEMA Guidelines and the Reserve Bank of India. Whenever the holding company invests funds in the share capital of the Indian subsidiary, it has to follow RBI guidelines along with compliances under Companies Act 2013.

RBI Compliances:

A two-stage reporting procedure is to be followed when a company is raising funds from a foreign investor:

  • On receipt of funds: The Company has to provide details in an “Advance Reporting Form” to the RBI within 30 days of receiving funds from foreign investor(s).
  • The company has to issue shares within 180 days from the date of receiving funds.
  • On allotment of shares: The company has to report in specified form (FC-GPR) to the RBI, within 30 days from the date of issue of shares along with:

– A Certificate from the Company Secretary certifying that the company has complied with the procedure for issue of shares as laid down under the Foreign Direct Investment (FDI) Scheme, and,

– A certificate from a Chartered Accountant indicating the manner of arriving at the price of the shares issued to the foreign investors.

Apart from the above, Annual return on Foreign Liabilities and Assets is required to be submitted reporting all the investments received during the year.

VenturEasy can help you with the Incorporation of Subsidiary in India. Get in touch with us at [email protected]

Government announces company incorporation with zero fees

With a new set of rules that simplify the process of company incorporation, the government aims to make it easier to do business in India. Here’s a look at the revised process.

 

On the eve of 69th Republic Day, the Government of India has taken another massive step to make it easier to do business in India. The Ministry of Corporate Affairs (MCA) has implemented various rules to simplify the process of company incorporation.

For the last few years, the government has been continuously pursuing initiatives to make the company registration process straightforward and uncomplicated.

The current reforms in the procedures can be described as the most significant ones till date.

Let us have a look at the current and revised processes for company incorporation:

  • Zero fees for incorporation:

To foster and promote new startups and businesses, the Ministry of Corporate Affairs (MCA) has announced zero fees of incorporation for SPICE Forms, e-MoA and e-AoA. This will enable the saving of a few thousand rupees, thereby encouraging more startups to formally register their company. Stamp duty will still be applicable at a rate depending upon the state of incorporation.

  • Introduction of Reserve Unique Name (RUN) Form:

The MCA has further simplified the name reservation process by introducing Reserve Unique Name (RUN) Form.

Earlier, company name could be reserved either in advance through the Name Reservation — INC-1 form or directly through the incorporation application (SPICE Form). Form INC-1 has now been replaced by RUN Form.

Past Scenario Current Scenario
Application for name reservation was being done through e-Form INC-1 which has provision of applying up to six names. Application for reservation will be done through RUN – a web-based form, where only one name choice can be provided at a time.
INC-1 required Director Identification Number (DIN) of at least two directors and at least one DSC to sign the e-form. RUN web-form does not require any prior DIN or DSC, thus making the process extremely quick and easy.
MCA fees for filing INC-1 is Rs 1,000 per form. If the proposed names are not in consonance with the Name Reservation Rules, the MCA provides one another chance of resubmitting the form with fresh names. MCA Fees for name reservation using RUN web-form is Rs 1,000 per form submission – irrespective of the name being approved or not.
The approved name was valid for a period of 60 days for both new and existing companies. An approved name is valid for a period of-          20 days from the date of approval, in case of new company.

–          60 days from the date of approval, in case of existing company.

Hence, proposed companies have the option to apply for the name reservation directly by themselves by submitting the simple RUN web-form and they would be intimated by the MCA on the approval through email. 

It is suggested that RUN Form be used when there is ambiguity on the preferred name being approved due to its similarity with existing companies or LLPs.

Direct application through SPICE form can also be used in cases when the proposed name is unique. It has high chance of acceptance and the applicant can save time and money.

  • Director Identification Number (DIN)

Earlier, DIN could be applied by the proposed director/applicant directly through e-Form DIR-3 or at the time of incorporation through the SPICE form.

However, the new rules state as under:

  • Directors of a new company can now apply for DIN only through the SPICE Forms. Details of such directors have to be filled in the SPICE Forms along with their proof of identity and address.
  • Existing companies can use Form DIR-3 for adding a new director. The new DIR-3 Form has the provision to furnish the CIN of the company for which the director is being appointed and a declaration that the DIN is being obtained for adding the person as a director to the mentioned company.

The government is definitely expecting a spur in company incorporations with the new set of rules, which aim at not only simplifying the procedures but also making them foolproof.

This article was also published on YourStory

How to convert Proprietorship to a Private Limited Company

Many small business owners start out as sole proprietors of their firms. Sole proprietorship is the most common and simplest form of business structure. This form of business has its own advantages: easy formation, limited paperwork, small capital requirement, and minimum compliance requirements.

As the business starts spreading its roots, the next logical move would be to expand operations to accommodate large business needs. The experience acquired as a sole proprietor helps the entrepreneur to build a stronger foundation for his business when he chooses to transform it into a Private Limited Company.

 

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convert Proprietorship to a Private Limited Company

Choosing to Register a Private Limited Company

As the revenues increase, many sole proprietors perceive the need to differentiate their personal accounts and tax filings from that of the business. There are several reasons why converting your sole proprietorship into a private limited company is a good idea.

The conversion allows you to enjoy the double benefits of keeping your goodwill and brand value intact while enjoying a legal existence. You are not only exempted from paying any stamp duty, but also from any capital gains tax on the property thus transferred.

Other key benefits include:

  • Business expansion
  • Better financing options
  • Greater public visibility and acceptance
  • Asset protection
  • Managing risks
  • Corporate tax benefits

The conversion process

The first step to converting your sole proprietorship firm into a private limited company is to incorporate a new private limited company.

At the time of the new Private Limited Company, it is appropriate to mention in the Memorandum of Association (MOA) that the company is a “takeover of a sole proprietorship concern.”

After the Company Formation, an agreement needs to be executed between the Company and the Proprietor for the takeover of the assets and liabilities of the proprietorship by the Company. The details of assets, liabilities and the consideration in exchange of such assets need to be specified in the agreement.

The agreement should be executed in a Stamp Paper of requisite value to make it a valid legal document.

As per the Income Tax Act, 1961, capital gains on such transfers are exempted if:

  • All the assets and liabilities of the sole proprietorship, immediately before the conversion, are transferred to the company
  • The proprietor’s shareholding is more than 50% of the total voting rights of the new company for a continuous period of not less than 5 years from the date of succession
  • The proprietor receives shares in the Company only in exchange of the net assets of the business.
  • In case any of these conditions are not complied with, the profits or transfer of assets shall attract capital gains tax.

Once the new private limited company comes into existence, the sole proprietorship can be duly terminated. The bank accounts in the name of the proprietary firm need to be formally closed and a new corporate account is to be opened for the Company.

Any contracts/ leases/ agreements signed by the proprietor need to be re-signed under the name of the newly incorporated company.

All tax and other registrations in the name of the Proprietorship need to be surrendered and new registrations should be obtained in the name of the Private Limited Company.

Authorized Capital and Paid Up Capital

One of the most important decisions while registering a new company is deciding the Capital of the Company.  For taking an informed decision regarding the capital of the company, one should understand two basic concepts relating to capital i.e.  Authorized Capital and Paid Up Capital.

Private Limited Comapny - Registration
Authorized Capital and Paid Up Capital

The following points of differentiation will give us a better understanding of the two concepts-

Meaning

  • Authorized Capital is the maximum amount of Share Capital that a company is authorized to have by its constitutional documents to issue to the shareholders. It is not necessary to issue the whole amount of the Authorized Capital; part of it can remain un-issued.
  • The amount of Share Capital that is issued to the shareholder and in exchange of which money is received from the shareholders is called the Paid Up Capital of the company.

Increase of Share Capital:

  • A Company can increase its Paid Up Capital by issuing further shares. However the Paid Up Capital cannot be more than the Authorized Capital.
  • A company can increase its Authorized Capital by altering its Memorandum of Association and increasing the Capital limit stated therein.
  • In view of the above, if a Company wants to increase its Paid Up Capital to an amount which is exceeding its Authorized Capital, then first the Authorized Capital has to be increased accordingly.

Payment of Stamp duty on Share Capital:

  • Stamp Duty is paid on the Authorized Share Capital of the Company.
  • Stamp duty is payable at the time of Company Incorporation and also at the time of increase in Authorized Capital.
  • Stamp duty is not required to be paid on the increase of Paid Up Capital of the company.
  • Rate of stamp duty on Authorized Capital varies from state to state.

Compliances under Companies Act, 2013:

  • Change in the Authorized Capital of the company requires filing of e-form SH7 within 30 days from the date of change.
  • Change in Paid Up Capital of the company requires filing of e-form PAS 3 within 30 days from the date of allotment of shares.

Foreign Directors in Indian Company

Any public limited or private company needs to have a board of directors constituted for the purpose of managing the day-to-day affairs of the Company. The reason for the existence of the board of directors is that there needs to be a body that is above the management and which can be accountable to the regulators and shareholders for the decisions taken by the management of the company.

Private Limited Company Registration - Ventureasy.com
Foreign Directors in Indian Company

Foreign Directors in Indian CompanyDirectors in Indian company: The Companies Act 2013 states that there should be minimum 2 directors in a private company and 3 in a public company. All the directors should be Individual Persons. All the Companies registered under the Act should have at least one Resident Directors (a person who has stayed in India for at least 182 days in the previous year.)

Foreign Directors in Indian Companies: The Companies Act 2013 doesn’t bar a foreign individual from being a director in an Indian company. However there are additional requirements to be fulfilled by the foreigner before he/she is appointed.

Every person should have a DSC in his name and a DIN allotted by the MCA before being appointed as a director. The list of documents required for DSC and DIN is an important factor to be kept in mind. Following are the documents that are required from a Foreign National –

  • Copy of Passport as ID Proof
  • Address proof- Bank statement, DL, Utility bill (not older than two months)
  • Employment/Business Visa (For foreign nationals residing in India)
  • Residence Permit (For foreign nationals residing in India)
  • Passport Size Photograph

All the above documents should be notarized by a Public Notary in the country of residence and should be Consularized /apostille by the concerned authority in the Foreign National’s home country.