INTRODUCTION
India is becoming one of the most attractive business destination in the world, especially due to the propelling pace of the economy and highly lucrative market and customer base. Therefore, it can be said that for foreign companies the Indian market offers great opportunities.
Setting up a presence in India (foreign subsidiary, limited liability partnership, branch office or liaison office) is a complex process. Any company wanting to set up business in India must be fully aware of the India's regulatory and legal compliances. This article outlines the key challenges encountered when establishing a foreign subsidiary in India and highlights the factors that can lead to delays in launching your business operations.
WHAT IS A FOREIGN SUBSIDIARY?
A foreign subsidiary (in India) means the Indian subsidiary of a foreign company. The parent company may be located anywhere in the world (except India) and the subsidiary (fully or partially owned) is set-up in India.
Setting up a foreign subsidiary requires adherence to the Indian laws and regulations. The Companies Act 2013 read with the relevant Companies rules is the governing law that provides detailed process for incorporation of a Company in India. The Companies Act 2013 is the legal framework that governs the establishment, functioning, and regulation of all companies in India.
There are various technical & practical challenges faced while incorporating a foreign subsidiary. We have below outlined some of these challenges:
1. Choosing the most beneficial Legal structure of the Company
When incorporating a subsidiary in India, the first and the most crucial step is deciding the company's legal structure. According to the Act, companies can be incorporated in the form of a Private Company, Public Company, Section 8 Company and One person Company. The choice depends upon a variety of factors including size of the company, ownership structure, liability of members, listing status, restriction on transfer of rights and shares, and number of members. Please note that we have assumed that initial decision of choosing between Limited liability Corporation (company), Limited Liability Partnership (LLP), Branch office or Liaison office has already been taken. We have analysed the same in another article published by the same authors.
The company cannot change the structure in the middle of the incorporation process, and post set up of the company the process becomes time-consuming and expensive. Therefore, it is suggested that proper due diligence and professional consultancy must be sought before finalizing the type of business structure.
A poor choice can result in Tax burdens, missed incentives, higher compliance costs or increased personal liability. The wrong structure might complicate foreign investment options and lead to difficulty in raising capital and attract investors.
2. Name Reservation
The foremost step in the process of incorporation is the Name reservation of the proposed entity. It's essential to ensure the proposed name is unique, avoiding any conflicts with already registered companies or trademarks. A foreign subsidiary may be allowed to use the existing name of the holding company with the addition of word India or name of any Indian state or city.
The Indian government has been working towards Ease of Doing Business (EODB) and has launched new applications forms like SPICe+, Part A and Part B. The proposed company needs to file SPICe+ Part A to reserve the name. The name once approved will be valid for 20 days and within the due date of 20 days the company has to submit the incorporation application (in form Spice Part B and Agile Pro) otherwise the name lapses. Practically, a lot of global teams are not made aware of these timelines, and since they have not worked on the incorporation application in parallel with name approval, their approvals lapse.
Once the name is reserved under any type of company it gets reserved for a period of 20 days and the name becomes unavailable for reservation for that period for others. Name approval, through an additional application, may further be renewed after expiry of initial 20 days for 20 or 40 additional days.
3. Marking Physical Presence: Registered office address
As per law, a physical registered office address in India at the time of incorporation is mandatory. This address will be used for official communication and for other regulatory registrations. The proposed entity is required to inform the Registrar of Companies ("ROC") regarding its proposed registered office premises along with complete specific documents which include sale deed/lease agreement, Copy of utility bill evidencing availability of utility services and photos of the premises with the presence of one director. The photo of director is a newly added requirement and makes the process complex.
A company before incorporation cannot legally enter into contracts in it's own name, which complicates the process of leasing or purchasing the physical office space. Pursuant to which the Parent company is required to enter into an agreement with the owner of the premises for its subsidiary which causes potential delays to the incorporation formalities.
Although the incorporation form provides for an option to mention a communication address of the proposed company however for that also the location and address has to be pre-decided. It is possible for the parent entity to request for a communication address from the lessor and ultimately enter into the lease agreement directly with the Indian subsidiary once incorporated.
4. Infusion of Capital – Determining Authorised and paid-up capital
Every company under incorporation in India needs to decide the Authorised Share Capital and Paid up Share Capital.
Authorised share capital means the maximum number of shares that
a company can legally issue to its shareholders. It's set in
the company's Charter Documents i.e. Articles of Association
and Memorandum of Association. Currently, the maximum authorized
capital for a company is not defined. Company cannot
issue shares beyond the authorised share capital
of the Company.
Paid-up capital is the actual amount of money a company has
received from shareholders in exchange for shares of stock. At any
point of time, paid-up capital will be less than or equal to
authorised share capital.
When deciding the authorized share capital of a company at the time of incorporation, founders and promoters shall have to consider factors like Business plan and Growth Strategy, working capital along with Capital required for expansion, Investments and operations, Industry and Market factors and the considerations of the company's shareholders.
Misjudging these factors could limit the company's flexibly and ability to scale. If the parent company is going to fund the Indian subsidiary by infusing capital, then initially authorised capital should be increased. Certain companies choose to use the Invoice route to fund Indian subsidiary, and, in those cases, there would be no requirement to complete necessary documentation on each funding.
5. Appointing a Resident Director – A key regulatory requirement
Indian regulations mandate every Company must have at least one resident director i.e. who has stayed in India for a total period of at least 182 days during the financial year. If any person is incorporating a new company or an existing company in which all the directors are not residents of India, it is mandatory to appoint a resident director in the board of directors. The resident director shall have the same responsibilities and duties similar to the other directors. A foreign resident who has stayed in India for long enough, may also in some cases qualify as the resident director.
When hiring a resident director, companies must take care and precaution. Hiring an unethical or fraudulent person may result in Legal liabilities, operational disruption, loss of trust in the company by employees or public, reputation damage or even management deadlock due to disagreement between resident and other directors.
A company can safeguard their interest. The India Entry experts engaged with can ensure this. Identifying a trustworthy, qualified and willing individual to serve as a resident director can be challenging. The candidate must have a thorough understanding of the local business environment and be willing to commit to the requirements of the role. Companies may need to engage local recruitment agencies or head hunters, adding to the complexity and cost.
6. Verification Issues
Companies during the process of Incorporation often encounter several challenges relating to the verification processes, particularly concerning the delivery of One-Time Passwords (OTPs) at the time of submission of Incorporation application and the creation of Digital Signature Certificates (DSCs). It is mandatory to obtain Digital Signature Certificates (DSCs) for all the directors. And to obtain DSC, the person has to undergo various verifications like mobile, email and video verifications to confirm their identity.
For Foreign nationals, the issues can be particularly challenging due to different time zones, unfamiliarity with the local systems, the issues for non- delivery of OTPs on mobile phones & mails, compatibility issues and technical difficulties in completing video verifications. Planning for these hurdles and allowing extra time can help minimize disruptions. Further one should ensure complete control & safe keeping of the DSC of Directors as the same can be used for signing/ authorising any documents on behalf of the directors.
7. Apostille and Notarisation of documents
Another big challenge which causes delay in the formation of the company is the requirement to get all the documents which are signed outside India, to be notarized or apostilled by the competent authority for marking the authenticity of documents.
At the time of incorporation of a foreign subsidiary a lot of documents are required to be apostilled/notarised such as:
- Charter documents of Foreign Company
- Proof of Identity and Address of Foreign nationals.
- Documents executed outside India for incorporation application, etc.
It is important to take note of how long the country of residence of the foreign holding companies takes to get the documents apostilled/notarised in order to plan the possible time to incorporate the company in India and avoid last minutes delays. It can range from 1-6 weeks. Further, in some cases, the documents may not be required to be apostil stamped and only notarised documents may be acceptable to the Indian Ministry of Corporate Affairs. Please note that notarisation is much easier as compared to apostil stamping and therefore careful consideration should be given whether the home country falls under apostil stamping or notarisation.
8. Document Loss in Translation: language barriers
At the time of incorporation, a foreign company setting up a subsidiary in India is required to submit a variety of documents like board resolution passed by the foreign company (Parent Entity) authorising setting up of a subsidiary in India.
Many important documents like the Board resolutions or the company charter documents of the holding company are originally drawn in the official language of the country. These documents are required to be translated into English so precisely so that the intent and content of the provision of these documents does not change and get lost in translation.
The holding company needs to get these documents translated by a certified translator which is a timeconsuming process. Sometimes, due to language barriers communication between the parties in each country gets lost and create chaos leading into delay in filings and incorporation of the company.
9. KYC documents of foreign Directors/ Authorised representatives
At the time of incorporation, the first directors need to submit their KYC (Identity check) documents. In accordance with incorporation forms, KYC documents include Proof of Identity i.e. Passport and Proof of Address i.e. Utility bills (not older than 2 months for all the directors)in which complete name of the individual and complete address of residence has to be mentioned. If the address & identity is available on the passport, it may be used for Identity & address proof.
It has been observed that in most countries the utility bills do not include the full residential address/ complete name of the individual, which complicates the process of providing valid proof of address. Copy of Bank Statement is also a valid proof of residence. However, the foreign nationals are often concerned about their Privacy and feel uncomfortable sharing those details for incorporation process. This can make it challenging to obtain the necessary documents for compliance with the incorporation requirements.
10. Remittance of Funds: FIRC and 6 Pointer KYC for Nominee Shareholder
The remittance of funds to India during the incorporation of a subsidiary involves several regulatory checks and processes that both Indian and overseas banks must complete. Two critical steps in this process are the issuance of the Foreign Inward Remittance Certificate (FIRC) and the completion of the 6-pointer KYC for nominee shareholders.
The 6-pointer KYC process involves a detailed verification of investor's (whether individual or body corporate) identity, address and relationship with the bank in the home country. For nominee shareholders, completing the 6-pointer KYC is essential to confirm their legitimacy and to ensure they meet the regulatory requirements set by Indian authorities.
It is important to note that the Indian banks issues these documents on basis of their interaction with the Overseas bank of the parent company through MT199. Further the professionals or the parent company have no control over the responses of Overseas banks to timely respond to Indian banks. Also, it has been observed that sometimes Overseas banks do not understand this process and they do not respond to the Indian banks. According to RBI guidelines, Indian banks cannot provide the Foreign Inward Remittance Certificate (FIRC) and KYC documents to the company without first receiving confirmation from the foreign bank. This can sometimes create challenges in the process.
Conclusion
Incorporating a foreign subsidiary in India presents several challenges, from name reservation and office setup to capital infusion and verification processes. By understanding and addressing these hurdles, companies can streamline their entry into the Indian market. Effective planning and professional guidance are crucial for navigating regulatory requirements and avoiding delays, ensuring a smooth and successful establishment of business operations in India.
Proper professional consultancy must be sought before formation of the company in order to align the objectives of forming the company and achieving the most desired business outcomes and yield best results. Planning on the above steps also ensures that the global team can save their valuable time spent on coordinating the incorporation process.
Additionally, there are many Post approval compliances that also need to be adhered to in the process of incorporation.
Once a company is incorporated, a set of compliance-related formalities must be completed to maintain compliance as per the Companies Act, 2013. Non-compliance could lead to fines and penalties on the Directors and the Company. Some compliances include:
- Opening of Bank Account for the Company: Post
incorporation, the Company is required to open bank account in its
own name and deposit the subscription money. Opening a bank account
in India requires execution and submission of ample number of
documents. In addition to that, in case of foreign nationals the
documents for the authorised representatives are required to be
apostilled/notarised outside India.
Executing these documents and submitting the originally signed with Indian banks is also a challenging task for foreign nationals. However, there are some banks in India that accept the digitally signed documents making it easier to submit the documents. (Our team can help with details) - Filing Form INC 20A (Commencement of Business): Every Company is required to file e form INC-20A to the ROC within 180 days from the date of incorporation to intimate the Indian Ministry about the receipt of subscription money and commencement of business. A company cannot start business in India without filing this form. Therefore, setting up the bank account and then remitting money from aboard and coordinating with Indian and foreign bank to issue FIRC and KYC and crediting the funds into the bank account of Indian entity takes time. This process often leads to delays in reporting to the Indian Ministry about the company's intention to start its business.
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.
