In this blog post, Kavinesh RM, a student of Lloyd Law College, Greater Noida, who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, writes about the procedure for incorporation of a subsidiary in India by a foreign company. 

Introduction

India is the largest democracy and one of the most promising emerging markets in the world. In this article, we look at the ways for incorporating a subsidiary company in India by any foreign country. There are certain rules and procedures which must be followed. The Companies that are incorporated outside India are known as Foreign Companies.  As per the 2013 Act, a ‘subsidiary’ is an entity of which the holding company controls more than one-half of the total share capital (either directly or indirectly) or controls composition of the board of directors[1].

 

Subsidiary Company as per Companies Act, 1956

As per Section 4(1), (b) (ii) of the Companies Act 1956, if a company holds more than half of the nominal value of equity share capital of another company, then such another company is a subsidiary of the first mentioned company.

There is an interesting case on the above subject. In the case of Oriental Industrial Investment Corporation of India vs. Union of India (1981)51 Com Cases 487(Del), the effect of Section 4 and Sections 255, 256 and 257 came up for consideration.

In this case, the High Court observed, inter alia, that the contention of the counsel for the Union of India that “the control of Oriental over the composition of the Board of Poonam Hotels which they exercise by virtue of their agreement dated August 1975 is in contravention of the provisions of Sections 255,256 and 257 of the Act which overlooks the important fact that Section 255 excludes from its purview cases which have been otherwise expressly provided in the Act. The words “save as otherwise expressly provided in this Act” used in Section 255(1) (b) are of commanding significance. Section 4(2) is an express provision for the appointment of the directors on the Board of Subsidiary. This provision is not hit by Section 255 because it is expressly excluded.”

The High Court also observed that “there is no denying the fact that the right of the members of a public company to appoint directors of their choice at a general meeting is greatly abridged when there comes into being a relationship of a Holding and Subsidiary Company. But this restriction is inherent in the definition of the Holding Company. It is firmly embedded in Section 4 of the Act. The ability to control the conduct of the Subsidiary is the hallmark of the Holding Company. The Holding Company is the controlling company. The controlled company is called a Subsidiary.”

 

Incorporation procedure

For incorporating a subsidiary, the following requirements must be fulfilled.

• Two directors are required to apply for DSC (Digital Signature Certificate).
• All the directors are required to apply for DIN (Director’s Identification No.).
• The applicant is required to apply for the name of the company in Form INC-1.
• After obtaining name approval from ROC, an applicant is required to file form INC-7 (Application for Incorporation of Company (Other than OPC)), form DIR-12 (Particulars of appointment of directors and the key managerial personnel and the changes among them) and form INC-22 (Notice of situation or change of address of the registered office of the company) along with Memorandum and Articles of Association of the Company.
• After filing of the incorporation documents, ROC fees and Stamp duty is required to be paid online (This is based on the authorized capital of the company).
• After the payment of ROC fees and Stamp Duty, ROC verifies the filed documents. Form INC-22 and DIR-12 are approved through the Straight Through Process (STP) and INC-7 form is verified in detail. ROC may suggest some changes in the form or attachment. We will have to make changes accordingly.
• Once ROC is satisfied, Certificate of Incorporation is sent through email.

 

Required documents

The following documents are needed to incorporate a subsidiary in India.

 

Office address

1. Address proof (electricity bill or rent agreement and latest electricity bill in case of rented accommodation)

 

Indian National

1. PAN Card (mandatory)
2. Address Proof (Electricity Bill, Telephone Bill, Bank statement or passbook or rent agreement and latest electricity bill in case of rented accommodation)
3. Photo ID Proof (Passport, Driving License, Voter ID or Aadhar Card)

 

Foreign National

1. Passport (Mandatory)
2. Address Proof (Indian Consulate must certify electricity Bill, Telephone Bill, Bank statement or passbook or rent agreement and latest electricity bill in case of rented accommodation. Document)
3. Photo ID Proof (Any government license or document containing name in full, photo and date of birth. Document must be certified by Indian Consulate)[2]

 

Setting up as a Foreign Company

      Foreign Companies can set up their operations in India through:

• Liaison Office/Representative Office
• Project Office
• Branch Office

Such offices can undertake any permitted activities. Companies have to register themselves with Registrar of Companies (ROC) within 30 days of setting up a place of business in India.

 

1. Liaison Office/Representative Office

Liaison office acts as a channel of communication between the principal place of business or head office and entities in India. Liaison office cannot undertake any commercial activity directly or indirectly and cannot, therefore, earn any income in India. Its role is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers. It can promote export/import from/to India and also facilitate technical/financial collaboration between the parent company and companies in India. Approval for establishing a liaison office in India is granted by Reserve Bank of India (RBI).

 

2. Project Office

Foreign Companies planning to execute specific projects in India can set up temporary project/site offices in India. RBI has now granted general permission to foreign entities to establish Project Offices subject to specified conditions. Such offices cannot undertake or carry on any activity other than the activity relating and incidental to the execution of the project. Project Offices may remit outside India the surplus of the project on its completion, general permission for which has been granted by the RBI.

 

3. Branch Office

Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India for the following purposes:

• Export/Import of goods.
• Rendering professional or consultancy services.
• Carrying out research work, in which the parent company is engaged.
• Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
• Representing the parent company in India and acting as buying/selling agents in India.
• Rendering services in Information Technology and development of software in India.
• Rendering technical support to the products supplied by the parent/ group companies.
• Foreign airline/shipping Company.

A branch office is not allowed to carry out manufacturing activities on its own but is permitted to subcontract these to an Indian manufacturer. Branch Offices established with the approval of RBI may remit outside India profit of the branch, net of applicable Indian taxes and subject to RBI guidelines, permission for setting up branch offices is granted by the Reserve Bank of India (RBI).[3]

 

Conclusion

The Indian economy poses as an attractive investment arena to the rest of the world. Amongst the various forms of business organization recognized under Indian law, it is not uncommon for most multinational corporations to establish their presence in India by way of incorporating a subsidiary.[4] The Companies Act, 1956 (the Act) governs the legal framework applicable to companies in India, as some of them have been mentioned above. Hence the steps to incorporate a subsidiary in India by a foreign company are cleared in the article.

 

Footnotes:

[1] http://cacareerupdates.blogspot.in/2015/05/subsidiary-company-under-companies-act.html

[2] http://trak.in/tags/business/2015/04/06/incorporate-a-wholly-owned-subsidiary-india-process/

[3] http://www.dbatra.com/setting-up-business-in-india.html

[4] http://www.supremecourtcases.com/index2.php?option=com_content&itemid=1&do_pdf=1&id=22264