Wholly Owned Subsidiary of Foreign Company under Companies Act, 2013

BACKGROUND:

India is a preferred destination for investment from NRIs, Foreign Nationals and Foreign Companies due to its booming economy and wealth of resources. India is among the fastest growing economies in the world, slated for tremendous growth over the coming decades with plenty of business opportunities. Foreign investment into India is at an all-time high and is pegged to grow even higher with regulatory reforms and an investor friendly climate. In this context, we look at the process and procedure for a NRI or Foreign National or Foreign Company to invest or start, manage and grow a business in India.

This article is intended for those companies or startups that have registered their companies outside India and want to operate in India as part of a foreign company. A company can be registered as private limited or public limited. A private limited company is a closely held company and enjoys the 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 lot of rules and regulations framed by the Companies Act, 2013. Generally foreign Companies incorporate Private limited Company in India.

What are the forms in which business can be conducted by a foreign company in India?

A foreign company planning to set up business operations in India may:

• Incorporate a company under the Companies Act, 2013, as a Joint Venture or a Wholly Owned Subsidiary.(Discussed Below)
• Set up a Liaison Office / Representative Office or a Project Office or a Branch Office of the foreign company which can undertake activities permitted under the Foreign Exchange Management (Establishment in India of Branch Office or Other Place of Business) Regulations, 2000. (Discussed In another Article)

What is Foreign Company?

As Per Section 2 (42) of Companies Act, 2013

Foreign company is a company or body corporate incorporated outside India which

• has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
• conduct any business activity in India in any other manner

Simple definition give understanding that even a company incorporated outside India, has simple electronic present, which may be used for business in India is a foreign company

As Per Section 379

Where not less than 50% (fifty percent) of the paid-up share capital, whether equity or preference or partly equity and partly preference, of a foreign company is held by

• one or more citizens of India or
• by one or more companies or bodies corporate incorporated in India, or
• by one or more citizens of India and one or more companies or bodies corporate incorporated in India,

Whether singly or in the aggregate,

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

Example:

A company that is incorporated outside India (i.e. in a foreign country) is called Foreign Company. For example ABC Inc. USA.

BOARD 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 a minimum of two Directors and can have a maximum of fifteen Directors. It is recommended that at least one Director be an Indian Citizen and Indian Resident, while the other Board members can be of any nationality or residency.

PROCESS TO OBTAINS A DIGITAL SIGNATURE CERTIFICATE:

The foreign national or NRI must submit a copy of Passport size photograph, self-attested and notarized copy of his/her Passport and an address proof (Drivers License, Utility Bill, and Residency Card). Once, the digital signature certificate is obtained, DIN can be obtained for the foreign national or NRI and he/she maybe added to the Board of Directors during incorporation.

PROCESS TO OBTAIN DIN OF FOREIGN NATIONAL:

Whether PAN is mandatory for DIN of a Non Resident (NR)? How does a NRI provide an affidavit for DIN? As fathers’ name is mandatory for DIN, what if fathers’ name is not mentioned in the Passport? Does an NRI need to provide any documentary proof for fathers’ name? Similar queries pop in at the time of applying for the DIN of a NRI.

We have tried to summaries various requirements of DIN application of a foreign national applicant.

1. PAN is mandatory to obtain new DIN for all Indian Nationals. It is not mandatory for foreign national.

2. Passport is a mandatory requirement for proof of identity. Certified copy of the passport should be attached.

3. Proof of identify enclosed with e-Form DIR-3 should also contain the date of birth of the applicant and the same should match the date of birth indicate the Date of Birth then additional proof of Date of Birth, duly certified/ attested, should be attached

4. Address proof should not be older than 1 year from the date of filing of the e-Form.

5. Proof of father’s name is not required in the case of foreign nationals

6. Current occupation and Educational Qualification is required as per new notification dated 24th Dec, 2012. No documentary proof required.

7. In case, the country selected is other than India, and you do not have PIN Code, enter ‘NA’. In case of foreign nationals, state can be mentioned in address/ city.

8. In case of proofs which are in languages other than Hindi / English, the proofs should be translated in Hindi / English from professional translator carrying his details (name, signature, address) and seal. In the case of foreign nationals, translation done by the notary of home country is also acceptable.

9. Photo ID Proof (Any government license or document containing name in full, photo and date of birth. Document must be certified by Indian Consulate).

10. In case, the director is residing outside India, then the attached supporting documents like passport, etc should be attested by the following:

a.    Consulate of the Indian Embassy,

b.   Foreign public notary or

c.   Company secretary in full time employment / CEO / Managing director of the Indian company in which he / she proposed to be a director.

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 of two shareholders and a maximum of two hundred shareholders. Since, Reserve Bank of India allows 100% FDI in many of the sectors in India under the automatic route, the process for ownership of shares of an Indian Company by a Foreign National or Foreign Entity is simple.

WHAT IS WHOLLY OWNED SUBSIDIARY COMPANY?

A Wholly Owned Subsidiary company is an entity of which 100 per cent shares are held by another company. For example, if ABC Pvt. Ltd. owns 100 per cent shares of XYZ Pvt. Ltd. Then XYZ Pvt. Ltd. becomes a wholly owned subsidiary company of ABC Pvt. Ltd.

WHAT IS WHOLLY OWNED SUBSIDIARY COMPANY IN INDIA BY FOREIGN COMPANY?

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

This is possible where 100 per cent FDI is permitted and no prior approval of Reserve Bank of India is required.

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

Key advantages of a private company:

• Minimum Paid up capital only Rs. 100,000/-
• Minimum 2 Director and 2 Shareholders.
• Quorum of General Meeting only 2 Shareholders.
• Section 185 will not attract: There is no restriction on giving Loan or Guarantees or Security by Holding Company to its Wholly Own Subsidiary (WOS) Company.
  

Benefits:

• Maintenance of effective control over its subsidiaries.
• Transaction costs including the cost of negotiating and transferring information and capability to another firm, cost of personnel training, cost of losing the opportunity to having direct sales or getting the full amount of profit and the threat of creating a competitor in markets beyond the purview of the agreement might be avoided.
• It minimizes the dissemination risk

Drawbacks:

• Involves highest level of risk and commitment by the foreign investing companies

Key features of WOS:

• Wholly own Subsidiary is regulated by Indian Law; Companies Act, 2013.
• Where 100% FDI is permitted no prior approval of Reserve Bank of India (RBI) is needed.
• It is treated as domestic company under Income Tax Law and is eligible for all exemptions, deductions benefits as applicable to any other Indian Company,
• Funding can be made in the form of Share Capital and Loan.

Steps to incorporate a WOS in the form of a Foreign Company:

PROCEDURE:

THE PROCEDURE FOR INCORPORATION OF IS AS FOLLOWS:-

WHAT DOES THE ACT SAY REGARDING PRE INCORPORATION AND POST INCORPORATION?

PRE-INCORPORATION:

1. NORMAL CONDITIONS:

• At Least 2 Promoters: Promoters who will promote/ incorporate the company. Promoters will be body corporate (In case of WOS of Foreign Company Promoter will be Company Incorporated outside India).
• At Least 2 Directors: Directors should be individual only. No Body corporate/ HUF or Partnership Firm can be appointed as Directors. (At least one Director should be Indian Resident).

2. OBTAIN DIGITAL SIGNATURE– The Subscriber applying for availability of name and the proposed Directors need to have DSC. AS per Ministry of Corporate Affairs Class-II DSC is required for e-Filings under MCA21. Subscriber dan apply with any of DSC Vender i.e. E Mudra/ Siffy/ TCS etc.

3. OBTAIN DIN- As envisaged under section 153 an individual intending to become Director needs to obtain DIN. Process is given above.

4. APPLY FOR NAME:-

• As per section 4(4) read with rule 9 application is to be made in e-form INC-1 for reserving the name agreed to by the Promoters (Six proposed names can be given). It has to also be ensured that the name being sought for is available and it is lawful. No need to add the suffix Limited or Private Limited at the end of their name.
  

• In case of foreign WOS of Foreign Company, foreign company wants to use same prefix as per their Foreign Company for Incorporation of Indian Company. {NOC from the foreign Company on their letter head required to use prefix)
  

• The promoters should apply for the name of the company to be approved with the concerned ROC of the State where the company has to be formed in E Form- INC- 1 by payment of Rs. 1000 through Credit Card or Net Banking.
• One of the Promoters should fill up e-form INC-1, digitally sign by Promoter or Professional and then upload the e-Form on the MCA21 Portal. Before doing so, the following three points have to be complied with:

a. All the Promoters should have their DIN No.

b. At least one Promoter should have the DSC. (Class 2 Digital Signature)

c. The proposed names selected should fall in guidelines prescribed.

• Require to give in form INC-1 (Describing the Capital of Company, Main Objects, State in Which the Company is to be incorporated and to Affix the Digital of Applicant).

• The reservation by the Registrar of name applied for is valid for 60 days from the date of application. Hence if a company is proposed to be registered with the said name referred to above, the promoters shall produce the documents to the Registrar for registration with in a period of 60 days from the date of application for name. If Promoters fail to file all the relevant form for incorporation within 60 days, then name will not be Available for you, Promoter have to file form INC-1 again for approval of Name.
  

After Name Approval Process:      

Once Name is approved by ROC, following are the Pre-Incorporation Steps:

5. DRAFTING OF MEMORANDUM OF ASSOCIATION (MOA) AND ARTICLE OF ASSOCIATION (AOA):

Drafting of Memorandum of Association (MOA) and Article of Association (AOA) is generally a step subsequent to the availability of name made by the registrar It should be noted that the main objects should match with the objects shown in e-Form   INC-1 and must reflect in the name of company (Name should be like that a lay man can estimate the objects of company by Name of Company).

These two documents are basically the charter and internal rules and regulations of the company. Therefore, it must be drafted with utmost care and with the advice of the professional. The Directors/ promoters with the help of professional draft MOA and AOA.

AOA (Draft Attached at the end):

Article of Association contains the internal regulations of the Company so care should be taken while drafting it. The model articles are given under table F,G,H,I & J of Schedule I. Now under Companies Act, 2013 requirement for making alteration to certain clauses of AOA can be made more stringent by way of inserting entrenchment provision.

Also ensure that the MOA & AOA are not ultra-virus the law (Section 6)

The Format of MOA is given in the Tables A,B,C,D & E prescribed in SCHEDULE- I to be signed by subscribers –

Format of MOA and AOA revised from time to time because of change in Companies Act and recently Companies Act 2013 laid down another form of MOA which has total Six clause. Procedure for drafting MOA of company start from First clause which contain name of the Company example XYZ Private Limited or XYZ Private Limited etc. Second clause state to mention state in which registered office of the proposed company will be situated example NCT of Delhi for Delhi or State of Haryana for Haryana etc.

Third clause of  MOA contains object of company i.e. Main Objects for which company will Incorporate and Incidental Objects which will help company to attain Main Objects.

Clause Four of moa clearly mention Liability Clause of Company.

Clause Fifth of MOA contain the Authorized Capital of the Company.

Clause Sixth of MOA contain the Subscription Clause.

– Subscribers Clause will have to take into consideration and mention following.

• Name
• Fathers name
• Occupation
• Resident Address
• Share subscribed
• Affix one Passport Size Photo
• Signed in given column.

Signing of MOA & AOA: – The MOA & AOA should be signed by Subscribers(Section7(1)(a)), who shall add their photo, name, address, occupation in presence of at least 1 witness:

One person who will act as witness and will sign in the witness column and mention:

“I hereby witnessed that subscribers signed in my presence on Date____________, at ___________, further I have verified their identity details (Through ID)for their identification satisfy myself of their identification particular as filled in”

Below this witness must mention:

• Name
• Address
• Description
• Signature

Subscriber sheet must be mentioned Date & Place at the end. The word subscribers here used is because of the reason that these subscribers will subscribe for the shares in the company at time of incorporation and will invest the minimum capital i.e. Rs. 1, 00, 000. They will contribute the amount by way of cash or cheque when the company gets incorporated and shares will be allotted to them followed by the share certificates.

6. ONCE DOCUMENTS PREPARED THEN FOLLOWING FORMS ARE REQUIRED TO FILE:

Form	Attachments
INC-7	1.      Memorandum of Association2.      Articles of Association 3.      Affidavit from Subscribers in INC-9 4.      Specimen signature in INC-10 5.      Declaration by professional INC-8 6.      Copy of PAN Card 7.      Copy of ID proofs 8.      Copy of Address Proofs 9.      Affidavit for non-acceptance of deposits 10.  Directorship/Promoter ship in other companies(if more than 3) 11.  Copy of License received from Competent Authority. 12.  Board Resolution of Foreign Company (Body corporate subscriber) 13.  Certificate of Incorporation & proof of registered office (Foreign Body corporate subscriber) 14.  Entrenched Articles 15.  Proof of Nationality(In case of foreign national) 16.  Declaration by foreigner if he does not possess PAN (as per MCA circular 16/2014)	MANDATORY
	17.  NOC in case there is change in the promoters18.  Principal approval taken from RBI for carrying NBFC activity	AD-HOC
DIR-12	1.      Consent in DIR-2 along with ID & Address proof2.      Affidavit from Directors in INC-9
INC-22	1.      Utility Bill, not older than 2 months old (Apostle from the Foreign Country)2.      Proof of registered office address 3.      No objection certificate in case registered office is not taken on lease

 # OBTAIN FOLLOWING DOCUMENTS/INFORMATION FROM SUBSCRIBERS: –

S. NO.	PROVISION	PARTICULARS	REMARKS
A.	Section 7(1)(c)+ Rule 15	Affidavit in form INC-9	Apostle from Foreign Company.
B.	Section 7(1) (e)+ Rule 16	Specimen signature with photo duly verified by notary/Banker in INC-10 of Authorized Person	Apostle from Foreign Company.
C.	MCA Circular 11/2013	Affidavit for non-acceptance of deposits	Apostle from Foreign Company.
D.	Section 7(1)(e) + Rule 16	In case subscriber is a Body Corporate: –   ·      Board Resolution for subscribing shares, making investment & Authorizing a person to subscribe & Sign MOA ·      For person authorized, documents required in point A to C shall also be required. ·   Because foreign Body Corporate, copy of registration & proof of registered address is also required.	·   Authorized person cant become subscriber to MOA & AOA in individual capacity at the same time (Proviso to rule13(4))
E.	Section 7(1)(e)+ Rule 16	Following information is also required from subscriber: –  ·      Place of Birth(District & State) ·      Educational Qualification ·      Occupation ·      Duration of stay at present address, if less than 1 year then previous address ·      Email ID & phone no.	Address, e-mail id & phone no. should be of subscriber only and not professional.

 OBTAIN FOLLOWING DOCUMENTS/INFORMATION FROM DIRECTORS:

S. NO.	PROVISION	PARTICULARS
A.	Section 7(1)(c)+ Rule 15	Affidavit in form INC-9 (Apostle from foreign Company).
B.	MCA Circular 11/2013	Affidavit for non-acceptance of deposits
C.	Section 7(1)(g)+ Rule 17	·      Consent to act as Director in DIR-2 along with ID & Address proof  ·      Interest in other firms & entities (reg. No, name, amt. & percentage of investment, Designation)
D.	Form DIR-2	Following information is also required from subscriber: –  ·      Email ID & mobile no. ·      Occupation ·      PAN no. ·      No. companies in which acting as director including name of Companies in which acting as MD/WTD/CEO/CFO/CS/ manager ·      Particulars of membership & CP no., in case member of professional institute

OBTAIN FOLLOWING DOCUMENTS/INFORMATION SITUATION OF REGISTERED OFFICE:

Situation of Registered Office: – The address of registered office may be intimated by the Promoters at the time of Incorporation or as per section 12 within maximum 15 days of Incorporation. In case address of registered office is not decided then address for correspondence needs to be given. The documents/information required in case the address of registered office is to be intimated at the time of Incorporation are: –

S. NO.	PARTICULARS
A.	Complete address of Police station in whose jurisdiction the registered office is situated
B.	Utility Bill, not older than 2 months old(electricity/gas/telephone/mobile bill)
C.	Proof of registered office address(Conveyance/lease deed/rent agreement along with rent receipts)
D.	No objection certificate in case registered office is not taken on lease

DECLARATION BY PROFESSIONALS IN INC- 8 – FORMAT ATTACHED

Pursuant to section 7(1) (b) and rule 14 of the Companies (Incorporation) Rules, 2014:

Require to take a Declaration from Professionals Like: (CS-CA-CWA-Advocate), Giving declaration that, all the requirements of Companies Act, 2013 and the rules made there-under relating to registration of the company under the Act and matters precedent or incidental thereto have been complied with. On Stamp Paper, Value of Stamp Paper as per the State stamp Act (State: Where register office of Company will be situate). In DELHI value of Stamp paper is Rs.10 /-.  Professional will sign the declaration and will mention Date, Place and Membership No.

CERTIFICATION OF INCORPORATION:

After the above forms are approved, a certificate of incorporation is issued by the Registrar of Companies in form INC 11 in electronic form and is mailed to the company at its registered Email ID.

CERTIFICATE FOR COMMENCEMENT OF BUSINESS

 After incorporation of the Company, an application is to be made for Certificate of Commencement of Business. A declaration is filed by the Directors in form INC 21 to Registrar of Companies of Companies, verified by Company Secretary in practice, Charted Accountant, or Cost Accountant in practice;

 CAUTION TO BE TAKEN BY PROFESSIONALS

1. Obtain engagement letter from subscriber: – As per certification in e-form DIR-12 & INC-22, a professional declares that he has been engaged for the purpose of certification Therefore it is advisable to obtain an engagement letter.

2. Verification of original records pertaining to registered office: – As per certification in e-form INC-22, a professional declares that he has verified all the particulars(including attachments) from original records.

3. Ensure all attachments are clear enough to read: – As per certification in e-form DIR-12 & INC-22, a professional declares that all attachments are completely and legibly attached.

4. Ensure registered office of the company is functioning for the business purposes of the company: – – As per certification in e-form INC-22, a professional declares that he has personally visited the registered office.
   

5. Take a declaration to the effect that all the original documents have been handed over after incorporation. Since as per section 7(4) copies all documents/information as originally filed should be preserved at the registered office of the company, therefore a professional should take a declaration while handing over the incorporation documents.

6. MCA Circular 10/2014: – According to this circular ROC/RD in case of omission of material fact or submission of false/incomplete/ misleading information can after giving opportunity to explain refer the matter toe-governance division of MCA, which in turn may initiate proceedings under section 447 and/or ask the respective professional institute to take requisite disciplinary action.

OTHER FORMALITIES:

POST CONVERSION REQUIREMENTS
A.	Arrange PAN No. of the company
B.	Arrange stationary of the Company
C.	Open bank account of Company.
D.	Printed copy of new MOA & AOA.

(Author – CS Divesh Goyal, ACS is a Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com)

Read Other Articles Written by CS Divesh Goyal