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.
- 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 Foreign Company Registration in India:
Step 1. Obtaining DSC and DIN-
The first step towards Foreign Company Registration in India 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.
Step 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.
Step 3. Incorporation Application:
This is the final step in the Foreign Company Registration 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.
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.
Nikita Bhatia is the co-founder of VenturEasy, an online platform for Company registration, book-keeping, accounting, tax consultancy and legal compliances in India. A Chartered Accountant and company secretary by profession, she has wide experience in the fields of audit, accountancy, taxation and corporate governance.
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