India is the fastest growing economy in the world, hence, for foreign companies, the market of India is a highly lucrative one and so setting up a subsidiary in India can be a huge opportunity to capture the customer base available. It is pertinent to note that companies must be fully aware of India's regulatory and legal compliances. Hence, this article is aimed at providing an outline of compliance requirements that a foreign company needs to follow when it intends to set up a subsidiary in India.
Understanding the Legal and Regulatory Framework for Setting Up a Subsidiary in India
The Statutes and Regulations that must be complied with for Setting a Subsidiary in India by a Foreign Company are:
- Companies Act 20131
- Companies (Registration of Foreign Companies), Rules, 20142
- Income Tax Act 19613
- GST 20174
- SEBI Rules and Regulations5
- FEMA (Foreign Exchange Management Act) 19996
- Foreign Exchange Regulations
- RBI Compliance Requirements7
The Companies Act in India does not pre-empt the decision as to what structure might be appropriate for a company in India. This is because such a pre-emption will only put companies in India, at a disadvantage in comparison to their competitors. Such restrictions can strictly inhibit sound corporate planning, formation of joint ventures, international operations or restructuring of companies. For setting up a foreign subsidiary in India, a few key definitions must first be taken care into consideration as per the Companies Act 2013.
- As per Section 2 (46) of the Companies Act, 2013, a holding company is:
"(46) holding company, in relation to one or more other companies, means a company of which such companies are subsidiary companies;"
- Although, as per Section 2(87) of the Companies Act, 20138, a subsidiary company or subsidiary in relation to any other company (that is the holding company), means a company in which the holding company either controls the composition of the Board of Directors or exercises or controls more than one half of the share capital either at its own or together along with one or more of its subsidiary companies; and thereafter the proviso clarifies that such class or classes of holding companies as may be prescribed should not have layers of subsidiaries beyond such number as may be prescribed. Further, the explanation clause clarifies that a company shall be deemed to be the subsidiary of the holding company, even if the control that is referred to in sub-clauses (i) and (ii) is of another subsidiary of such a holding company.
- The definition of a Foreign Company, on the other hand, has been given in Section 2 (42) of the Companies Act. It states that a "foreign company"; means any company or body corporate incorporated outside India but has a place of business in India, whether by itself or through any agent, either physically or in an electronic mode or conducts any business activity in India in any other manner.
Key Considerations for Foreign Companies While Setting up a Subsidiary in India
Furthermore, important compliances must be fulfilled while setting up a foreign subsidiary in India by Foreign Companies, under Sections 380 and 381 of the Companies Act 2013.
As per Section 380 of the Companies Act, 2013; every foreign company shall, within thirty days of the establishment of its place of business in India, deliver to the Registrar,
a. A certified Copy of the charter, statutes, or memorandum of articles of the company or any other instrument that constitutes or defines the constitution of the company, and in case the documents are not in English, then a certified translated copy of those in English.
b. The full address of the registered or principal office of the Company.
c. A list of directors and Secretary of the Company that contains such particulars as may be prescribed.
d. The name and address of authorised person/persons who can accept documents on behalf of the company.
e. Full address of the principal place of business in India.
f. Particulars of earlier occasion/occasions of opening/closing of a place of business in India.
g. A declaration that none of the directors or authorised representatives have been neither convicted nor debarred from opening or managing a company in India or abroad.
h. Any other prescribed information.
Apart from this, Companies (Registration of Foreign Companies), Rules, 20149 must be complied with.
Corporate Governance Requirements for Foreign Subsidiaries in India
One major CG consideration for Subsidiaries is Clause 49 of the Listing Agreement of SEBI10. The Company has to comply with the Corporate Governance Provisions mentioned therein before it can be listed on any of the Security Markets in India.
Taxation of foreign subsidiaries in India
Annual compliance has to be followed in terms of Tax for foreign subsidiaries in India. Following must be met with and performed each and every year:
Considering that when incorporated under Indian Law, the subsidiary will be an Indian Company, ITR-6 will be applicable. As per Section 139 (1) (a) of the Income Tax Act14; every person, being a company or a firm shall file for a return of income on or before the due date of their income or income of such other person during the previous year of tax assessment, in the prescribed form and verified in such prescribed manner and setting forth prescribed particulars as may be prescribed. The proviso states that every company or firm shall furnish on or before the due date, the return in respect of its income or loss in the previous year.
And TDS provisions of the Income Tax Act are applicable in relation to services availed and manpower employed. So, employment laws and applicable provisions of Income Tax Act have to be complied with. And as already stated, a company incorporated under Companies Act15, will be treated at par with any Indian Company and so will be the applicability of rules and regulations.
Foreign exchange regulations for foreign subsidiaries in India
For Foreign Exchange Regulations, FEMA16 and related Rules and Regulations must be complied with. But as a foreign subsidiary might lend or borrow from its foreign-based holding company on a regular basis, it is important to keep Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 200017 in mind. Regulation 3 of the aforementioned regulations clearly specify that other than the Rules and Regulations made under FEMA, no person resident in India is allowed to lend or borrow in foreign exchange from a person either resident in or outside the territory of India, otherwise than the permission of Reserve Bank following sufficient reasons for the same. Regulation 5 of the aforementioned regulations provides for borrowing and lending in Foreign Exchange by persons other than the authorised dealer. Sub-regulation (3) provides that, an importer in India may, for import of goods into India, avail the foreign currency credit for a period that does not exceed 6 months.
Compliance requirements for foreign subsidiaries in India
After establishing a subsidiary in India, there are numerous compliances that are to be met, regardless of whether it has been incorporated as a public or private company. Two key compliances after incorporation are:
a. As per Section 173 (1) of the Companies Act 2013; every company must hold its first board meeting, within 30 days of incorporation. And after that, it must convene at least four board meetings of its Board of Directors every year in such a manner that there must not be a gap of more than 120 days between its consecutive board meetings.
b. In the first board meeting, as per Section 184 (1) of the Companies Act 2013; and then in the first board meeting of every financial year or after there has been any change in disclosures, then in the first meeting thereafter; a director must disclose their interest or concern in any company or companies or body corporate or firm or association of person. As per Rule 9 (1) of Companies (Meetings of Board and its Power) Rules, 201418; every director must disclose their concern or interest in any company or companies or body corporate (including shareholder interest), firms or other association of persons in Form MBP 1.
There are other compliances given in the Companies Act 2013; that must be followed along with other statutes and regulations.
The aforementioned compliances are not exhaustive and are meant to provide only a brief overview of the important regulatory provisions related to Foreign Subsidiaries in India. There must also be some additional statutes and regulations applicable subject to the specific industry, the nature of the business and other relevant factors. Failure to comply with those can result in huge fines, penalties as well as a significant amount of loss in reputation as well. Thus, it is highly important that before taking any steps towards setting up a subsidiary in India, foreign companies must be well aware of these applicable, laws, provisions, rules and regulations and they must be taking steps in the required direction. This will make it easier for them to enjoy the benefits of operating in a market like India's and at the same time will do away with any potential risk of non-compliance.
Frequently Asked Questions
Q. What are the advantages and disadvantages of setting up a subsidiary in India?
India is one of the most attractive business destinations in the world, especially owing to its demographic advantage and propelling pace of the economy. The government is coming up with pro-business policies, and investment opportunities as well as inviting foreign companies to collaborate on domestic projects. Hence, by opening up a subsidiary in India, foreign companies can reap number of benefits available to businesses. Rampant corruption along with the amount of delay in getting approval from government authorities are some of the bottlenecks that serve as disadvantages. Although, recently the government has been taking a lot of steps to decrease the approval time for the formation of a wholly-owned subsidiary in India. Such steps include the initial requirements of Direct Identification Number (DIN), introduction of a new form for instant company name approval (RUN) and new SPICE form.
Q. What are the key factors to consider while selecting a location for a subsidiary?
Ans. Although there are some key factors that a business must consider while selecting a new location, two most important factors are:
- Accessibility: In case the business operations require frequent deliveries, it is important to consider that how are the local transport links of a country, especially the main roads and motorways. Also, as property rental and purchase prices will be more in highly dense and more commercialized areas, outskirt locations can be a good option providing that transport links are good.
- Security: Crime rates are an important factor as these can contribute towards the cost in the form of high insurance premiums. Hence, it is important that information regarding these issues must be taken into consideration. Knowing the chances of crime, in the areas that you are looking to expand in, can certainly help businesses make certain important decisions.
Q. What are the labor laws and regulations that need to be complied with by Foreign Subsidiaries in India?
Ans. There are a plethora of labour legislations in India, although the upcoming Labour Codes must be well-read in advance. Laws related to minimum wages, working hours as well as employee benefits must be well kept in mind. Several labour legislations that employers might comply with, include, the Employees' State Insurance Act, the Maternity Benefits Act, the Industrial Disputes Act, the Contract Labour (Regulation and Abolition) Act, Trade Unions Act etc. These legislations together work in tandem to govern the hours of work, conditions of employment, minimum wage, maternity benefits, gratuity, bonus and all other such pertinent issues related to benefits given etc.
Q. What are the corporate governance requirements for foreign subsidiaries in India?
- Public Limited Companies listed on Indian Stock Exchanges have to comply with several Corporate Governance requirements under the Companies Act 2013. These practices are influenced by mandatory requirements, voluntary guidelines, and market forces.
- Board Evaluation is a unique Corporate Governance Requirement in India, and a Nomination and Remuneration Committee must be responsible for identifying qualified directors and evaluating their performance. Companies must also rotate their auditors as mandated by the Companies Act 2013 and comply with the Companies (Audit and Auditors) Rules, 2014.
- Recently, the Companies (Audit and Auditors) Rules were amended to include additional requirements in the Auditor's report, which were released through a notification by MCA on 24th March 2021. Compliance with these and other Corporate Governance Requirements, as per Clause 49 of the Listing Agreement and Companies Act 2013, is necessary.
1. The Companies Act, 2013; No. 18, Acts of Parliament, 2013 (India)
2. Companies (Registration of Foreign Companies), Rules, 2014, Notification of Ministry of corporate affairs, 2014 (India)
3. The Income Tax Act, 1961; No. 43, Acts of Parliament, 1961, (India)
4. The Central Goods and Services Act, 2017, No. 12, Acts of Parliament, 2017, (India)
5. SECURITY AND EXCHANGE BOARD OF INDIA, https://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListing=yes&sid=1&ssid=2&smid=0 , (last visited, 5th March 2023)
6. The Foreign Exchange Management Act, 1999, No. 42, Acts of Parliament, 1999 (India)
7. RESERVE BANK OF INIDIA, https://rbi.org.in/Scripts/BS_viewfemanewnotification.aspx , (last visited, 5th March 2023) ; RESERVE BANK OF INIDIA, https://www.rbi.org.in/scripts/FAQView.aspx?Id=26 , (last visited, 5th March 2023)
8. The Companies Act, 2013; Sec. 2 (87), No. 18, Acts of Parliament, 2013 (India)
9. Companies (Registration of Foreign Companies), Rules, 2014, Notification of Ministry of corporate affairs, 2014 (India)
11. The Central Goods and Services Act, 2017, No. 12, Acts of Parliament, 2017, (India)
12. The Income Tax Act, 1961; No. 43, Acts of Parliament, 1961, (India)
13. SECURITY AND EXCHANGE BOARD OF INDIA, https://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListing=yes&sid=1&ssid=2&smid=0 , (last visited, 5th March 2023)
14. The Income Tax Act, 1961; Sec. 139 (1) (a), No. 43, Acts of Parliament, 1961, (India)
15. The Companies Act, 2013; No. 18, Acts of Parliament, 2013 (India)
16. The Foreign Exchange Management Act, 1999, No. 42, Acts of Parliament, 1999 (India)
17. Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000; Notification of RBI, 2000 (India)
18. Companies (Meetings of Board and its Power) Rules, 2014, Notification of Ministry of Corporate Affairs, 2014 (India)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.