Incorporation of wholly owned subsidiary in India

Indian Continent is one of the desirable places of earning profits for the foreign investors like NRIs, Foreign Nationals, and Foreign Companies due to it flourishing, thriving and prosperous economy and availability of resources. India is among the fastest growing economies in the world and because of its tremendous growth and business opportunities most of the foreign national are inclined towards the established of various industries in India to earn their livelihood.

In this context, through this article we will look at the process and procedure for a NRIs, Foreign National and Foreign Companies in order to incorporate, manage and grow a business in India. This article is intended for those companies and startups that have registered their companies outside India and want to operate in India as a part of foreign companies.

A company can be registered as a private company or a public company depending upon the desirability of the person who wants to incorporate the company. A private limited company is closely held company and enjoins privileges given by the Companies Act, 2013. A public limited company is a company, where public is interested and it is required to comply with the lots of rules and regulations framed by the Companies Act, 2013. Generally, foreign companies incorporate private limited company in India.

• Provisions on which Business can be conducted by a foreign company in India: A foreign company planning to set up business in India may:
• Incorporate a company under the Companies Act, 2013 as a joint venture or wholly owned subsidiary.
• Set up Liaison Office/ Representative Office or a Project Office or a Branch Office of the foreign company which can be undertake activities permitted under the Foreign Exchange Management( Establishment in India of Branch Office or Other Place of Business) Regulations, 2000.
• Definition of Foreign Company: A foreign company in simple definition can be understood as company incorporated outside India is known as foreign company. Taking consideration from the law point of view it is defined under:

Section 2(42) of Companies Act, 2013 which says, “A foreign company means any company or body corporate incorporated outside India which-

1. Has a place of place of business in India whether by itself or through an agent, physically or through electronic modes; and

2. Conduct and business activities in India in any manner.

As per Section 379, “where not less than 50% of the paid up share capital, whether equity, or preference or partly equity or partly preference, of foreign company is held by:

• One or more citizen of India, or
• By one or more companies or bodies corporate incorporated in India, or
• By one or more citizen of India and one or more bodies corporate incorporated in India,

Whether singly or in the aggregate, such company shall comply with the provisions of the Chapter- XII and such other provisions of this Act as may be prescribed with the regard to the business carried on by it in India as if it were a company incorporated in India.

For Illustration: A company that incorporated outside India (i.e. in a Foreign Country) is called Foreign Company. For example: XYZ Inc. U.S.A.

• Definition of Wholly Owned Subsidiary Company: A Wholly Owned Subsidiary Company is an entity of which 100% shares are held by another company. For example, if ABC Pvt. Ltd. owns 100% shares of the XYZ Pvt. Ltd. Then XYZ Pvt. Ltd. becomes a wholly owned subsidiary of company of the ABC Pvt. Ltd.
• What is Wholly Owned Subsidiary Company in India by Foreign Company?

When foreign company makes 100% FDI (Foreign Direct Investment) in India through an automatic route, the Indian company becomes the Wholly Owned Subsidiary of that Foreign Company. Let’s say, ABC Inc. USA owns 100% shares in XYZ Pvt. Ltd. Then XYZ Pvt. Ltd. becomes the Subsidiary company.

This is only possible where 100% FDI (Foreign Direct Investment) is permitted and no prior approval is required from the Reserve Bank of India.  For more details this RBI circular https://www.rbi.org.in/scripts/FAQView.aspx?Id=26 can be read.

A Wholly Owned Subsidiary Company can be defined as an entity whose entire share is capital is held by the foreign corporate bodies. A Wholly Owned Subsidiary Company can be formed as a private, limited by share, limited by guarantee or an unlimited liability company. Considering the various exemptions available to a private company limited by shares (a “private company”) under the India’s Companies Act, 2013 (the “Act”), it is recommended that a Wholly Owned Subsidiary Company be established as a private company.

• Attributes of Wholly Owned Subsidiary Company are: there are some of the key features of the wholly owned subsidiary company which are numerated as under:

• Wholly Owned Subsidiary Company is regulated by the Indian Law i.e. Companies Act 2013.
• All types of business activities are permitted such as manufacturing, marketing, service industry.
• Where 100% FDI (Foreign Direct Investment) is permitted no prior approval of RBI (Reserve Bank of India) is required or needed.
• It is treated as Domestic Company under Tax Law and is eligible for all exemptions, deduction benefits as applicable to any other Indian Company.
• Funding can be made in the form of share capital and Loan.

Minimum Requirement: there are following minimum requirements in order to incorporate wholly owned subsidiary company in India and i.e.

1. Minimum two Directors.
2. Minimum two Share Holders.
3. Minimum Paid Up Capital of 1 lakh rupees.

• Boards of directors: Companies Act, 2013 permits NRIs, PIOs, Foreign Nationals, and Foreign Residents to act as a director of an Indian Company. To become a director of an Indian company, the person must first obtain a Director Identification Number (DIN) after obtaining Digital Signature Certificate.

A Private limited company must have minimum of two directors and can have maximum of fifteen directors. It is recommended that at least one director be an Indian Citizen and Indian Resident, while other Boards members can be of any nationality or residency.

• Process to Obtain Digital Signature Certificate: the foreign nationals or NRI must submit a passport size photograph, self attested and notarized copy of his/her passport and address proof (Drivers License, Utility Bill, and Residency Card). Once, the digital signature certificate is obtained, DIN can be obtained for the foreign nationals or NRI and he/she maybe added to the Board of Directors during incorporation.

• Shareholding: the shareholding of the Indian company can be held by a foreign national or foreign entity, subject to the FDI norms in India. Companies Act, 2013 requires that a Private Limited Company have a minimum number of two shareholders and a maximum of two hundred shareholders. Since RBI (Reserve Bank of India) allows 100% FDI (Foreign Direct Investment) in many of the sectors of in India under the automatic route, the process for ownership of shares of an Indian Company by a Foreign Nationals or Foreign Entity is simple.
• Procedure for incorporation is as follows: In order to incorporate wholly owned subsidiary company the incorporator must follow up the following steps to incorporation of the company i.e.

 Stage I- Obtaining Directors Identification Number (DIN) and Digital Signature:

Directors Identification Number (DIN): Prior to incorporation of a company, the proposed directors of the company are required to obtain Director Identification Number (“DIN”) from the Ministry of Company Affairs by making an online DIN application in form DIR 3 is approved by the DIN Cell of the Ministry of Corporate Affairs.

The said form DIR 3 is to be filed with the scan copies of the applicant’s photograph, identity proof, a valid residential proof and a verification/ declaration in the prescribed format to be given by the applicant (who is apply for the DIN). Upon online submission of the form DIR 3 and outline payment of the fee, a payment DIN to the director will be allotted immediately.

Digital Signature Certificate (“DSC”): any one of the proposed director is required to obtain digital signature certificate (DSC) in India for online of E- form with the concerned Registrar of Companies (“ROC”). For obtaining DSC an application is made under the signature of the director who intends to obtain the DSC along with the copy of his identity proof and a copy of his residence proof.

Following documents are required to make DIN application and DSC for each of the proposed directors:

1. Identity proof: For identity proof, a copy of passport or copy of permanent account number card (PAN card) is required to be provided. Please note that in case of a foreign national only passport is acceptable as identity proof and in case of an Indian national copy of PAN card is must.

2. Residence proof: For residence proof, a copy of voter’s identity card or valid driving license or latest bank statement duly certified by the respective bank or utility bill (not older than two months) is required to be provided.

3. One passport size color photograph in jpeg format. In addition one more photograph is required which should be separately pasted on a plane paper.

4. Verification/ Declaration in the prescribed format on a 10 Rupees stamp paper, duly notarized by a notary public.

All the aforementioned documents should be attested by a notary public in the country of residence of the applicant.

Stage-II:  Application for name approval of the proposed company with ROC

In case of WOS of foreign company, foreign company wants to use same prefix as per their foreign company of incorporation of Indian company, NOC form the foreign company on their letter head required to use prefix.

After obtaining the DIN and DSC the as aforesaid, an online application for the availability of the proposed name (in the prescribed E-from INC-1), along with six proposed names in order of preference (may be less than six), each one indicating, as far as possible, the main objects (principal activities) of the company, shall be submitted to the ROC. The name of a private company should end with the words of “Private Limited”.

If the proposed company is the subsidiary of body corporate incorporated outside the India. INC – 1  is required to be e-filled along with the following attachment at the website of Ministry of Company Affairs, India:

1. Board Resolutions by the parent company (separately form the each subscriber to the proposed entity) indicating its intention to incorporate subsidiary in India and authorizing a director to issue specific power of attorney.

2. Power of Attorneys (separately from each other subscriber to the proposed entity) authorizing someone to represent the subscriber before the concerned authorities and official in the matter of incorporation.

3. No objection letter from the parent company (separately from each of such entity whose name or part thereof will be used in the name of the proposed entity) for use of the name of the parent company or the part thereof in the same of the proposed company.

4. Charter Documents of the parent company i.e. Certificate of Incorporation of the parent company.

 Please note that all of the documents aforesaid is to be notarized by a Notary Public in the country where the registered office of the entity is situated and further Apostilled/ endorsed at the Indian Consulate in the country where the registered office of the entity is situated.

1. A brief write-up on the main objects proposed to be carried out by the company.

2. Proof of ownership of the registered office of the company. In case the property is not taken on lease by the companies himself, a no objection certificate would be required.

Stage-III: Drafting and Stamping of Memorandum and Articles of Association (“MOA and AOA”) 

MOA and AOA are to be drafted in compliance with the provisions of the Act. Adequate stamp duty would be required to be paid thereupon based on the authorized capital of the company. The stamp duty on MOA and AOA shall be paid along with the filing fee payable at the time of filing of incorporation related documents.

Stage- IV: Incorporation Documents to be filled with the ROC

After the same approval, the following forms have to be e-filed with the ROC after having been digitally signed by any of the proposed directors.

For incorporating a company SPICe can be use:

INC-32 – simplifed proforma for incorporating company.

INC-33 – E- Memorandum of Association.

INC-34 – E-Article of Association.

 All the aforesaid incorporation documents are to be submitted with the ROC as attachments of the SPICe along with:

1. The original copies of the MOA and AOA with the subscriber pages duly executed on by or on behalf of the subscribers and witnessed.

2. Power of the Attorneys from the subscribers to the MOA and AOA appointing representatives to incorporate the company and to make corrections in the MOA and AOA. The said powers of the attorney are required to be notarized and attested by the Indian embassy abroad.

The ROC will then scrutinize the above mentioned documents and if necessary, directs the authorized person to make necessary corrections therein. The ROC after being satisfied that all the documents are complete’ issues the certificate of the incorporation of the company, which is the conclusive proof of registration of the company in India.