India, with its rapid economic expansion and a vast pool of skilled professionals, continues to attract foreign investors, private equity, and foreign direct investment (FDI). With the world’s second-largest population and a thriving IT sector, India offers numerous opportunities for businesses and individuals from across the globe. This article aims to shed light on why forming an Indian subsidiary is not as challenging as it might seem. We’ll explore what an Indian subsidiary is, its significance, the eligibility requirements, necessary documentation, and the multitude of benefits that come with establishing an Indian subsidiary.
To begin, let’s clarify what we mean by an Indian subsidiary company. A subsidiary company in India is a business entity whose interests are either wholly or partially controlled or owned by another organization, often referred to as the “parent company” or “holding company.” The connection between the holding company and the subsidiary is typically determined by the share capital, both preference share capital and paid-up equity share capital, of the subsidiary. The subsidiary can be entirely or partially owned by the parent company. It’s essential to distinguish between a holding company and a parent company, as they play slightly different roles in the corporate hierarchy.
Why should foreign investors consider establishing an Indian subsidiary company? The importance of doing so extends to several key aspects, making it an attractive option:
i. Real Estate Acquisition: Indian subsidiary companies are allowed to purchase real estate in India, which can be an advantageous investment.
ii. Productive Workforce: India’s population is young and productive, providing a substantial labor force for businesses to tap into and develop a sizable clientele.
iii. Limited Liability: One of the key advantages of an Indian subsidiary of a foreign company is the limited liability it offers to shareholders. This limits their liability towards the company’s debts and obligations.
iv. Private or Public Corporation: Depending on the specific needs and objectives of the investor, an Indian subsidiary company can be structured as either a private or public corporation. This flexibility allows for a tailored approach to business operations.
While establishing an Indian subsidiary is not as challenging as it may seem, there are specific eligibility requirements that investors must meet to initiate the process. These requirements include:
i. Minimum Directors: A private company must have a minimum of two directors, one of whom should be an Indian citizen. This Indian director should have resided in India for at least 182 days in the preceding calendar year.
ii. Minimum Shareholders: A private limited company must have a minimum of two shareholders.
iii. Digital Signatures: Directors nominated for the company should possess valid certificates for digital signatures.
iv. Majority Foreign Ownership: Foreign investors must own the majority of the company’s shares to retain control and management within their hands.
v. Registered Office in India: The company’s registered office must be located in India. This requirement necessitates compliance with various Reserve Bank of India (RBI) and Foreign Exchange Management Act (FEMA) regulations when executing a corporate share subscription.
To get the process of establishing an Indian subsidiary underway, investors will need to prepare and provide specific documentation. These documents include:
i. Photographs: Photographs of every director and shareholder involved in the company.
ii. PAN Cards: Every Indian shareholder and director must possess a PAN (Permanent Account Number) card, which is a crucial identification document for tax purposes.
iii. Proof of Address: Proof of the registered office’s address is essential and can be substantiated with an electricity bill or utility bill.
iv. Electricity Bill or Bank Statement: An electricity bill or bank statement, dated more than two months ago, is required to confirm the registered office’s address.
v. No Objection Certificate (NOC): A NOC from the landlord is mandatory to confirm that the space can be used as the registered office for the company.
Registering a subsidiary company in India offers a wide range of benefits, making it an attractive option for foreign investors. Some of the notable advantages include:
i. Duration of Existence: Private limited companies in India enjoy perpetual existence, meaning the company can continue its operations even in the event of a shareholder’s demise.
ii. Brand Value Growth: A well-structured subsidiary company fosters brand value growth, as customers trust and have confidence in a reputable brand. This trust extends to employees, vendors, investors, and more, contributing to a robust brand presence.
iii. Foreign Direct Investment (FDI): FDI is permitted in various sectors and industries without the need for prior approval. This flexibility makes India an open and attractive market for foreign investors.
iv. Range of Growth: Private Limited Companies offer greater transparency in business operations, making them more accessible to angel investors, financial institutions, venture capitalists, and limited liability investors. This range of growth options can help businesses expand rapidly.
v. Limited Liability: Shareholders and directors of an Indian subsidiary company have limited liability. This means that their personal assets are protected from being seized by banks, creditors, or the government in case the company encounters financial difficulties or losses.
India’s appeal as an investment destination continues to grow, driven by its economic opportunities and an investor-friendly environment. The country has witnessed a surge in foreign direct investment (FDI) since the economic liberalization in 1991. The Foreign Exchange Management Act (FEMA), which replaced the Foreign Exchange Regulation Act in 1999, further facilitated investment in India.
The Reserve Bank of India (RBI) plays a pivotal role in regulating the establishment and registration of Indian subsidiary companies, ensuring a conducive environment for foreign investors. India’s growth prospects, coupled with a thriving entrepreneurial spirit, make it an exciting destination for businesses and individuals looking to expand their horizons.
In conclusion, establishing an Indian subsidiary is not as challenging as it may seem, and the benefits it offers, including limited liability, brand value growth, and a conducive environment for foreign investment, make it a compelling choice for investors seeking growth and opportunities in India’s dynamic economy. As the world continues to navigate economic changes and global trends, India’s role as a key player in the international business landscape is set to become even more prominent.