Wholly Owned Subsidiaries (WOS) provide an effective means for foreign entities to establish their operations in India. A WOS is a company where the entire share capital is held by a foreign parent company, allowing for complete control over the Indian operations. While this structure offers strategic advantages, it also imposes several compliance obligations under various laws, including the Companies Act, 2013, the Foreign Exchange Management Act (FEMA), and other applicable regulations. This article outlines the compliance requirements from the incorporation stage onward.
1. Compliance under the Companies Act, 2013
WOS must comply with various ongoing obligations under the Companies Act, 2013:
Board of Directors:
A WOS must have at least two directors, with at least one being a resident of India. The board is responsible for governance and strategic decisions.
Statutory Audits:
WOS must appoint a statutory auditor within 30 days of incorporation. The auditor must be a qualified Chartered Accountant registered with the Institute of Chartered Accountants of India (ICAI).
Annual Filings:
The WOS is required to file annual returns (Form MGT-7) and financial statements (Form AOC-4) with the RoC within prescribed timelines. These filings ensure transparency and accountability to shareholders and regulators.
Maintenance of Records:
Proper books of accounts, minutes of meetings, and statutory registers must be maintained at the registered office of the WOS. These records must be preserved for a minimum period as prescribed by law.
ISIN Requirement for Wholly Owned Subsidiaries
In accordance with the Amendment to The Companies (Prospectus and Allotment of Securities) Rules, 2014, and as per the Notification dated 27th October 2023, issued by the Ministry of Corporate Affairs, Government of India, it is now mandatory for every private company, other than a small company, to comply with specific securities issuance protocols. The key requirements are as follows:
Dematerialization of Securities: Every private company, excluding small companies, is required to issue its securities solely in dematerialized form. This means that all shares and other securities must be held in an electronic format, facilitating easier transfer and management of ownership.
Facilitation of Dematerialization: Companies must facilitate the dematerialization of all their securities, ensuring compliance with the provisions of the Depositories Act, 1996, along with the regulations established thereunder.
Definition of Small Company
For the purposes of this regulation, a small company is defined as a company, other than a public company, that meets the following criteria:
The paid-up share capital does not exceed four crore rupees.
The turnover, as per the profit and loss account for the immediately preceding financial year, does not exceed forty crore rupees.
It is important to note that certain companies are explicitly excluded from being classified as small companies, regardless of their paid-up share capital or turnover. These include:
Holding companies or subsidiary companies.
Companies registered under Section 8 of the Companies Act.
Companies or bodies corporate governed by any special Act.
Filing of Form MGT-6
In accordance with Section 89 of the Companies Act, 2013, Wholly Owned Subsidiaries (WOS) are required to file Form MGT-6 in the following circumstances:
Return to Registrar: The WOS must submit Form MGT-6 to the Registrar of Companies (RoC) within 30 days of receiving a declaration under Section 89. This declaration is provided by the registered owner of shares who does not hold the beneficial interest in such shares, which is submitted in Form MGT-4. Additionally, Form MGT-5 is used by the beneficial owner who holds or acquires a beneficial interest in shares but whose name is not entered in the register of members.
Timely Compliance: Failure to file Form MGT-6 within the prescribed 30-day period from the receipt of the declarations may result in penalties as outlined in the Companies Act. Therefore, it is imperative for WOS to maintain a systematic process for monitoring declarations received under Sections 89 and 90, ensuring timely filing of Form MGT-6.
Filing of Form BEN-2
A “WOS” (Wholly Owned Subsidiary) of a foreign company in India is required to file a “BEN-2” form with the Registrar of Companies (RoC) to declare its “Significant Beneficial Owners” (SBOs)
Corporate Governance:
Compliance with corporate governance norms is essential. This includes establishing committees such as the Audit Committee, Nomination and Remuneration Committee, and Stakeholders’ Relationship Committee, where applicable.
Changes in Share Capital:
Any changes in share capital, such as issuance of new shares or transfer of shares, must be filed with the RoC. This is crucial for maintaining accurate ownership records.
2. Compliance under the Foreign Exchange Management Act (FEMA)
FEMA governs foreign investment and foreign exchange transactions in India. WOS must adhere to the following compliance requirements:
Foreign Direct Investment (FDI):
WOS must comply with the FDI policy as prescribed by the Reserve Bank of India (RBI). Foreign entities can invest up to 100% in most sectors through the automatic route, while some sectors require prior government approval.
Reporting Requirements:
After receiving foreign investment, the WOS must file Form FC-GPR (Foreign Currency-Gross Provisional Return) with the RBI within 30 days of the issue of shares to report the receipt of funds.
FLA return- Every wholly owned subsidiary company in India, which receives FDI in any of the previous year is required to file a FLA return on or before 15th day of July every year for disclosing the foreign assets and liabilities.
External Commercial Borrowings (ECB):
If the WOS intends to raise funds through ECB, it must comply with the guidelines set by the RBI, including obtaining necessary approvals.
Foreign Exchange Transactions:
All foreign exchange transactions, including remittances to the parent company, must comply with FEMA regulations. Proper documentation must be maintained for all foreign exchange dealings.
3. Compliance with Other Applicable Laws
In addition to the Companies Act and FEMA, WOS must adhere to several other laws and regulations:
Goods and Services Tax (GST):
WOS must register for GST if their turnover exceeds the prescribed limit. Compliance with GST regulations includes filing periodic returns and maintaining proper records.
Labour Laws:
WOS must comply with various labour laws to ensure employee rights and welfare, including the Employees’ Provident Funds and Miscellaneous Provisions Act, the Payment of Wages Act, and the Industrial Disputes Act.
Sector-Specific Regulations:
Depending on the nature of the business, the WOS may need to comply with sector-specific regulations (e.g., banking, insurance, telecommunications), which may involve additional licenses or approvals.
Conclusion
Establishing a Wholly Owned Subsidiary (WOS) in India offers foreign entities significant strategic advantages. However, this process also entails navigating a complex landscape of compliance requirements. Compliance for a WOS is extensive, necessitating timely filing of statutory reports, tax returns, and regulatory disclosures. Adhering to the provisions of the Companies Act, the Foreign Exchange Management Act (FEMA), the Income Tax Act, and other applicable laws is critical for ensuring smooth operations and avoiding legal pitfalls.
Non-compliance can result in penalties, interest, and serious legal consequences, making it essential for companies to adopt a robust compliance management system. To mitigate risks and ensure full adherence to Indian regulatory requirements, businesses may also seek professional assistance. By maintaining compliance, WOS can build a strong foundation for their operations in India, positioning themselves for long-term success in this dynamic market.
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Disclaimer: This article has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. This article cannot be relied upon to cover the specific situation and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact Affluence Advisory Private Limited to discuss these matters in the context of your particular circumstances. Affluence Advisory Private Limited, Its Partners, Directors, Employees, and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this article or for any decision based on it.
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