This article is written by Harsh Jain. The article discusses how can a foreign company have a fully owned subsidiary in India. Along with holding degrees in LLB, and LLM, Harsh is NET, JRF qualified. Harsh has successfully cleared Rajasthan Judicial Services, Mains Examination, Gujarat Judicial Services pre, SBI specialist officer scale II online exam and many other competitive examinations. Also, Harsh is pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata.

How can a foreign company have a fully owned subsidiary in India

Foreign Company

As defined under Section 2(42) of the Companies Act, 2013, If a company or a body corporate is incorporated or registered outside India, but it has a place of business in India and is doing business in India by itself either by being physically present in India or through electronic means or through agents or it conducts its business activities in India through any other means, then such company is recognised as a foreign company.

Subsidiary Company

As per Section 2(87) of Companies Act, It is a company whose composition of Board of Directors is controlled by another company also known as a holding company exercises control over more than fifty percent of total share capital either on its own or together with its other subsidiaries. If a company is a subsidiary of a subsidiary of a holding company then also it will be considered as a subsidiary of that company. If all or majority of the Board of Directors can be appointed or removed by a holding company, then such company will be deemed to be controlled by such holding company.

Fully owned Subsidiary Company

It is not defined anywhere in the Companies Act. But, as the name itself suggests, it is nothing but a subsidiary in which a holding company owns full (100%) of the shares. Since the holding company holds all the shares, it appoints its directors and controls the subsidiary company. Both the companies may or may not be a part of the same industry. It is a good option for a company which operates in more than one country and chooses to operate a business through a fully owned subsidiary in India, but the investment will be subject to FDI policies of India.

Advantages/ benefits of a fully owned subsidiary in India

Full control

Having full operational and strategic control over a subsidiary company is a great advantage for the holding company.

Greater cooperation

The holding and subsidiary companies can use a common financial system, and they can share their administrative and other expenses. This provides them a huge benefit by making things cost effective.

Keeping brand name

A WOS can keep its brand name with it, and the holding company can have a chance to branch out into new markets.

Limited liability

Here, both the companies have limited liabilities. The holding company does not have to bear the losses of the subsidiary company in case of losses to the WOS.

Protection of trade secrets

Both the companies get protection and security for their trade secrets, technical knowledge, and expertise as well as a great degree of control over the operations.

Disadvantages of a fully owned subsidiary

1. Financial performance of the holding company can be seriously affected by any execution error or malfeasance at the end of a subsidiary company.
2. There is a concentration of operational risk and a loss of operational flexibility.
3. There are problems in integrating people and processes of the subsidiary company in the system of holding company due to cultural differences.
4. Due to multi-level management, the process of making decisions can become very slow.

Modes available for forming a company

A company may choose to get registered as a private limited or a public limited company. According to Companies Act and FEMA guidelines, FDI is not permitted in Proprietorship, Partnership firms and One person companies. Investment in Limited liability partnerships also needs prior approval of RBI. Public limited companies also have many complications attached to them. Therefore, incorporating a private limited company is the simplest and quickest mode to set up a business in India for a foreign company. Moreover, further exemptions are available to private companies with lesser restrictions as compared to public limited companies. Thus, most of the foreign companies prefer to form a fully owned private limited company as a subsidiary.

Ways for operating business

In India, investments can be made, and businesses may be operated in a number of ways by the foreign companies like:

1. Liaison/representative office
2. Project Office
3. Branch Office
4. 100% Wholly owned subsidiary
5. Joint venture company

Investment by a foreign company in India

As per Consolidated FDI Policy Circular of 2017 applicable from 28th August 2017, investment can be made by a foreign company in India through:

• An automatic route, where approval of the government of India will not be needed by a non-resident investor for the investment.
• Government route: all FDI proposals will be cleared by individual ministries and administrative departments of the government of India in consultation with Department of Industrial Policy and Promotion (DIPP). Earlier it was done through Foreign Investment Promotion Board, but after the government abolished it on 24th May 2017.

A list of the Competent Authorities for grant of approval for foreign investment for sectors/activities requiring Government approval is available in the Consolidated FDI Policy Circular of 2017 applicable from 28th August 2017, provided on the official website of DIPP (here).

A list of various sectors in which 100% FDI is permitted by the government is provided in the Consolidated FDI Policy Circular of 2017 applicable from 28th August 2017, provided on the official website of DIPP (here). The government continuously updates both these list and rules and regulation regarding FDI according to changing policies to make business easier and easier in India and attract more and more investment in India.

For example: 100% FDI is permitted in certain sectors of agriculture, such as:

a) Floriculture, Horticulture, and Cultivation of Vegetables & Mushrooms under controlled conditions;

b) Development and Production of seeds and planting material;

c) Animal Husbandry (including breeding of dogs), Pisciculture, Aquaculture, Apiculture; and

d) Services related to agro and allied sectors.

In other sectors of agriculture, it is not available unless it is specifically provided by government.

Similarly, it is available for Defence Industry subject to Industrial license under the Industries (Development & Regulation) Act, 1951; and Manufacturing of small arms and ammunition under the Arms Act, 1959.

Minimum requirements for a company to incorporate as a private company

1. Minimum two shareholders [ Section 3(1) (b)].
2. Minimum of two directors [ Section 149 (1)(a), Companies Act]. At least one of the two directors must be a resident of India. [ Section 149 (3), Companies Act]
3. Digital signature certificates must be acquired by the directors (DSC) [ Companies (Appointment and Qualification of Directors) Rules, 2014, Rule 6(2)(a)].
4. All the appointed directors must have Director’s identification number (DIN) [ Section 152, 153, and 164, Companies Act, read with Companies ( Appointment and Qualification of Directors) Rules, 2014 in e-form DIR-3 and Companies Director Identification Number (Second Amendment) Rules, 2011].
5. A registered office in India [ Section 12, Companies Act].
6. Earlier there was a condition of having a minimum paid-up share capital of Rupees one lakh, but now this condition is removed.

Procedure for incorporation of a fully owned subsidiary

Basic conditions

• At Least 2 Promoters [Section 3(1) (b), Companies Act].
• At Least 2 Directors [ Section 149 (1)(a), Companies Act]. At least one of the two directors must be a resident of India. [ Section 149 (3), Companies Act].
• DSC for directors [ Companies (Appointment and Qualification of Directors) Rules, 2014, Rule 6(2)(a)].
• DIN for directors [ Section 152, 153, and 164, Companies act, read with Companies ( Appointment and Qualification of Directors) Rules, 2014 in e-form DIR-3 and Companies Director Identification Number (Second Amendment) Rules, 2011].
• Registered office in India [ Section 12, Companies Act].

Basic Documents Required

By an Indian

• Address Proof.
• PAN Card (Mandatory).
• ID Proof.

By a Foreign National

• Passport (Mandatory).
• Address Proof.
• ID proof.

Obtaining Digital Signatures

At least two directors must have a DSC. This is the first step you have to take as per Rule 6 (2)(a), Companies (Appointment and Qualification of Directors) Rules, 2014 when you register your company. More detailed rules regarding appointment and qualification of directors are available on here. More details regarding Digital Signature Certificate (DSC) is available on the official website of Ministry of Corporate Affairs (here). More details regarding registration of Digital Signature Certificate are available on the official website of Ministry of Corporate Affairs (here).

Obtaining DIN

All the directors of the company must have a DIN. To become a director you need to obtain a DIN as per Section 152, 153, and 164, Companies Act, read with Companies ( Appointment and Qualification of Directors) Rules, 2014 in e-form DIR-3 and Companies Director Identification Number (Second Amendment) Rules, 2011. You can see Companies Director Identification Number (Second Amendment) Rules, 2011, on the official website of MCA, here. If you have any questions regarding DIN or you want to know more about it, you can visit here on the official website of MCA.

Applying for the name

According to Section 4(4), Companies Act, read with Rule 9 of Companies (incorporation) Rules, 2014, you must make an application to the registrar of companies (ROC) in e-form INC-1 with a list of proposed names and prescribed fees. If a fully owned subsidiary of a foreign company wants to use the same prefix for incorporation of Indian company as it is for their foreign company, the foreign company will have to give a NOC on its letterhead regarding this. Detailed rules regarding applying for name and registration process can be seen here.

Drafting of Memorandum of Association (MOA) and Articles of Association (AOA)

Once you get the approval of ROC, next step is to draft Memorandum of Association and Articles of Association. Model Memorandum of association is given under Table A, B, C, D, and E of Schedule I of Companies Act and model Articles of Association is given under table F, G, H, I & J of Schedule I of Companies Act. For reference, you can visit the official website of MCA (here).

Following forms are to be filed after all the necessary documents are prepared

Following documents and information is to be obtained from subscribers

Following Documents and information must be obtained from the directors.

Following Documents and information is needed regarding registered office of the company

All the conditions of Section 12, Companies Act, must be fulfilled. Documents required for intimation of registered office at the time of incorporation are:

Declarations to be made by professionals in INC-8

As per Section 7(1)(b) of Companies Act and Rule 14, Companies (Incorporation) Rules,2014, Professionals like CS, CA, CWA, Advocates etc. are required to make declarations, along with their details, on a stamp paper of a value as prescribed by the rules, that all the requirements of Companies Act and Rules made by government related to it, are fulfilled.

Certification of Incorporation

After you have submitted above-mentioned documents and forms to ROC, and he is satisfied that the documents are complete, he will issue a Certificate of Incorporation in Form 11 to you.

Certificate of Commencement of the Business:

Once the certificate of incorporation is obtained, directors of the company have to make an application to the ROC for the Certificate of Commencement of Business in form INC-21 which is verified by CS/ CA/ Cost Accountant in practice.

Declarations to be made by professionals and risks involved for them

1. It is a requirement under e-form DIR-12 and INC-22 that the professional makes a declaration that he is engaged for the purpose of certification.
2. As per the requirements of e-form INC-22, a declaration must be given by a professional that he has verified all the particulars and attachments from the original records.
3. A declaration is to be made by the professional that all the attachments are clear enough to read, correct and complete.
4. According to the requirements of e-form INC-22, a declaration must be made by a professional that he has personally visited the registered office of the company.
5. Section 7(4) of the Companies Act says that after incorporation of the company is complete, all the original documents of the company must be preserved at its registered office. The professional is required to make a declaration while he hands over the original documents of incorporation.
6. If there is an omission of some material fact or some false or incomplete or misleading documents are submitted, the ROC may refer the matter to e-governance division of MCA after giving an opportunity of being heard to the concerned professional. MCA may initiate proceedings under Section 447 Companies Act, against him or may ask concerned professional institute to take requisite disciplinary action against him.

Other formalities

1. Arrange PAN no. of the company.
2. Arrange stationary of the company.
3. Open bank account of the company.
4. Printed copy of new MOA and AOA.

Conclusion

It is always better to be aware of the regulatory framework before starting a business in India. It is even more important for foreign companies to be acquainted with Indian laws, especially when they are planning to have fully owned subsidiary in India as the risk is higher and the procedure is more complicated as compared to Indian companies. It will be a lot easier if you adopt the best option out of available options and most beneficial modes of business available. You must also keep in mind all the sectors in which it is allowed to have a fully owned subsidiary as discussed above. It is possible for a foreign company to have a fully owned subsidiary in India after the new policies framed by the government. But if you will not follow the procedure as discussed in this article, it will be challenging to have one.