A subsidiary (sub) is a business entity or corporation that is fully owned or partially controlled by another company, termed as the parent, or holding, company. Ownership is determined by the percentage of shares held by the parent company, and that ownership stake must be at least 51%.
What are the Attributes of a Subsidiary?
A subsidiary operates as a separate and distinct corporation from its parent company. This benefits the company for the purposes of taxation, regulation, and liability. The sub can sue and be sued separately from its parent. Its obligations are also typically its own and are not usually a liability of the parent company.
The minimum level of ownership of 51% guarantees the parent company the necessary votes to configure the subsidiary’s board. This allows the parent to exercise control in company decision-making.
Parents and sub-companies need not operate in the same location, nor be in the same line of business. Subsidiaries may also have their own sub-companies; the line of succession forms a corporate group with varying degrees of ownership.
Types of Subsidiaries in India
In India, there are two primary categories of subsidiaries:
Wholly-Owned Subsidiary
In a wholly-owned subsidiary, the parent company possesses 100% ownership of the subsidiary's shares. However, it's important to note that wholly-owned subsidiaries can only be established in sectors that permit 100% Foreign Direct Investment (FDI).
Subsidiary Company
In this category of subsidiary, the parent company owns 50% of the subsidiary's shares.
Before proceeding with the establishment of a subsidiary in India, obtaining approval from the Reserve Bank of India is a crucial prerequisite. This regulatory step ensures compliance with the country's foreign investment regulations and safeguards the interests of all stakeholders involved.
Advantages of Indian Subsidiary Company
There are several compelling advantages associated with registering a subsidiary company in India:
Entry into the Indian Market
India's competitive environment offers a plethora of investment opportunities that attract foreign entrepreneurs to establish their subsidiary companies in the country.
Foreign Direct Investment (FDI) in India
FDI involves investments by foreign companies in Indian private companies through share subscriptions or acquisitions. In 2020, the Indian government introduced a provision requiring prior approval for investments from countries sharing a border with India, making Indian subsidiary registration an attractive option for foreign investors.
Perpetual Succession
The concept of perpetual succession ensures that a company's existence remains intact regardless of events like changes in management, transfers of membership, or insolvency. The company continues to operate seamlessly, providing stability and continuity.
Limited Liability
Limited liability is a significant advantage that encourages individuals to opt for company formation over other business structures. This principle extends to Indian subsidiary companies, protecting the personal assets of shareholders and directors. The company bears responsibility for its debts to third parties, shielding the personal assets of its stakeholders.
Scope of Diversification
Establishing an Indian subsidiary company provides a strategic avenue for foreign businesses to expand their operations. This contributes to the growth and development of the Indian economy and introduces a wide range of goods and services, fostering healthy competition.
Separate Legal Identity
According to the Companies Act, a company is recognized as a distinct legal entity separate from its shareholders and directors. This legal status empowers the company to engage in agreements with other competent entities as an artificial legal person. It also grants the company the ability to initiate legal actions and respond to allegations before the judicial system in its own name, without direct involvement from its members or directors.
Property Ownership and Rental
A subsidiary company, being a legal entity, possesses the authority and right to purchase or rent properties in India for its business activities. To prevent potential conflicts among company members, it is advisable to acquire such properties in the name of the company itself, aligning with the principle of perpetual succession.
Regulatory Authorities for Indian Subsidiary Company Registration
Ministry of Corporate Affairs (MCA is responsible for setting and enforcing the rules and regulations governing company registration and compliance. Registrar of Companies (ROC) offices handle the procedures related to company incorporation, ensuring companies follows legal requirements. Reserve Bank of India (RBI) regulates foreign currency exchange aspects for Indian subsidiary companies, ensuring adherence to financial regulations.
Requirements and Key Facts about Company Registration in India
The process of registering a company in India is governed by the Companies Act, 2013, which outlines various pre-incorporation and post-incorporation requirements. Here are the essential elements to consider when registering a company in India:
Company Name: Your new business requires a unique name that is distinct from existing businesses' names or trademarks
Shareholders: The parent company can hold 100% of the shares, or any combination of two foreign nationals can be shareholders. It is not mandatory to have an Indian resident as a shareholder.
Share Capital: India does not impose a minimum capital requirement for company registration.
Directors: A minimum of two directors is mandatory, with at least one director being an Indian resident. Nominee directorship services can be provided if required.
Registered Address: Every company in India must have a registered address that is officially recorded in government records. Virtual office address services are available to meet this requirement.
Annual General Meeting (AGM): According to the Companies Act, every Indian company must conduct at least one general meeting annually, in addition to two board meetings.
Company Secretary: It is mandatory to file three secretarial returns each year, which are handled by a company secretary. IndiaFilings can assist with this requirement. A statutory auditor must also be appointed.
Taxation
GST (Goods and Services Tax) is applicable to domestic sales, with monthly GST returns and one annual tax return required.
Following incorporation, companies are subject to a profit tax rate of approximately 25.36%.
Professional fees, including government fees for company registration
Annual Compliance
India has unique compliance requirements, including mandatory statutory audits even for smaller companies.
Companies must appoint a statutory auditor and submit annual filings.
Navigating these requirements is crucial for establishing and operating a company in India under the Companies Act, 2013.
Procedure for Indian Subsidiary Company Registration
Setting up an Indian subsidiary company involves several key steps and compliance requirements: Here's a step-by-step guide on how to register a company's subsidiary in India:
Determine the Type of Company
Decide on the type of subsidiary company you want to establish.
Obtain Digital Signature Certificate (DSC)
Since the registration process is conducted online, you must obtain a Digital Signature Certificate (DSC) for the proposed directors of the company. The DSC is used to electronically sign the necessary documents during the registration process.
Apply for Director Identification Number (DIN)
The directors of the subsidiary company must obtain a Director Identification Number (DIN) from the Ministry of Corporate Affairs (MCA). This can be done by submitting the DIN application online.
Name Approval
Please choose a unique name for your subsidiary company and apply for its approval through the MCA's online portal. Ensure that the chosen name adheres to the naming guidelines provided by the MCA.
Draft Memorandum of Association (MoA) and Articles of Association (AoA)
MoA and AoA are legal documents that outline the company's objectives, rules, and regulations. Prepare these documents following the Companies Act 2013.
File Incorporation Documents
Once your chosen name is approved, you must file the incorporation documents, including the MoA, AoA, and other required forms, with the Registrar of Companies (ROC) through the MCA's online portal. The incorporation process is typically done using the SPICe+ form on the Ministry of Corporate Affairs portal.
Payment of Registration Fees
Pay the necessary registration fees to the ROC based on the authorized capital of the subsidiary company.
Obtain a Certificate of Incorporation (COI)
If all the submitted documents and information are in order, the ROC will issue a Certificate of Incorporation. This certificate officially confirms the registration of the subsidiary company.
Apply for Permanent Account Number (PAN) and Tax Registration
After obtaining the CoI, apply for a Permanent Account Number and a Tax Deduction and Collection Account Number from the Income Tax Department for the subsidiary company.
Open Bank Account
Finally, open a bank account in the name of the subsidiary company in India.
Compliance with Other Regulations: In addition to the company registration process, ensure compliance with other relevant regulations.
Obtain a GST Number
Goods and Services Tax (GST) registration is required after completing the above steps, mainly if the company engages in various business activities. Every Indian company must apply for a GST number for taxation purposes.
Initiating Business Operations:
The company can commence its business operations once all the preceding steps are completed.
Compliance Requirements for Indian Subsidiary Registration
To establish a legal and valid Indian subsidiary company, compliance with specific regulations is mandatory:
Foreign Exchange Management Act (FEMA): Foreign companies based in India must adhere to foreign exchange laws and regulations outlined in the Foreign Exchange Management Act, 1999.
Companies Act, 2013: All Indian subsidiary companies must comply with the Companies Act, 2013 provisions.
Reserve Bank of India (RBI) Compliances: RBI imposes several foreign exchange management compliances on Indian subsidiary companies.
Income Tax Act, 1961: Indian subsidiaries must file income tax returns every year. The corporate tax rate in India is currently 25%.
Annual Returns: Companies are required to file annual returns with the MCA and the Registrar of Companies.
SEBI (Listing Obligations and Disclosure Regulations): If the subsidiary lists its securities on a stock exchange, it must comply with SEBI regulations.
Taxation of Indian Subsidiary Companies
Indian subsidiary companies are subject to specific taxation policies:
Taxes are levied on all income earned within or outside India, including dividends from foreign subsidiaries.
Tax rates for foreign subsidiaries in India include 50% for royalty received for technical services from the government or any Indian entity and 40% for other income.
A surcharge of 2% is applied if the company's income falls between Rs. 1 Crore and Rs. 10 Crores; for payments above Rs. 10 Crores, a 5% surcharge is levied.
A 4% health and education cess is added to the total tax amount.
Concessional tax rates apply to Indian subsidiaries in specific sectors, such as oil exploration, air transportation, and shipping businesses.
FDI in Private Limited Company
100% Foreign Direct Investment is allowed in most sectors. A few sectors, however, require prior approval from the Central Government for foreign investments. These sectors include private security agencies, civil aviation, mining, print media and broadcasting, satellite establishment and operation, pharmaceuticals, and trading of food products.
Foreign entities can establish wholly-owned Indian subsidiaries with 100% ownership, subject to specific qualifications.
For a Private Limited Company
No minimum capital requirement
Minimum of 2 directors (at least one must be a resident of India)
Minimum of 2 shareholders
For a Public Company
Minimum of 3 directors
At least seven shareholders
Indian Subsidiary FAQ's
A subsidiary company is a business entity controlled, in part or entirely, by a foreign parent company. The registration process for such a company in India is governed by the Companies Act of 2013.
There are two primary types:
Wholly-owned subsidiaries, where the parent company owns 100% of the shares
Subsidiary companies, where the parent company owns at least 50% of the shares.
Some advantages include entry into the Indian market is:
Foreign direct investment opportunities
Perpetual succession
Limited liability
Scope for diversification
Separate legal identity
The Ministry of Corporate Affairs (MCA), Registrar of Companies (ROC), and Reserve Bank of India (RBI) are the regulatory authorities involved in the process.
Yes, India has strict rules for company names, and they must be unique and distinct from existing businesses names or trademarks.
The parent company can hold 100% of the shares, or at least two foreign nationals can be shareholders. An Indian resident shareholder is not mandatory.
India does not impose a minimum capital requirement for company registration.
A minimum of two directors is mandatory, with at least one director being an Indian resident. Nominee directorship services can be provided if necessary.
Every Indian company must have a registered address officially recorded in government records. Virtual office address services are available to fulfill this requirement.
According to the Companies Act, every Indian company must conduct at least one general meeting annually, in addition to two board meetings.
A Company Secretary is essential for handling three secretarial returns each year. They also help with statutory compliance, including annual filings.
Taxes are levied on income earned within or outside India. Rates vary, but the current corporate tax rate in India is approximately 25.36%. GST (Goods and Services Tax) is applicable to domestic sales.
FEMA outlines foreign exchange laws and regulations that foreign companies in India must adhere to.
Yes, foreign entities can establish wholly-owned Indian subsidiaries with 100% ownership, subject to certain qualifications.
Sectors like private security agencies, civil aviation, mining, print media and broadcasting, satellite establishment and operation, pharmaceuticals, and trading of food products require prior approval for foreign investments.
2% surcharge is applied if the companys income falls between Rs. 1 Crore and Rs. 10 Crores; for incomes above Rs. 10 Crores, a 5% surcharge is levied.
Sectors like oil exploration, air transportation, and shipping businesses enjoy concessional tax rates.
Perpetual succession ensures that a company remains intact despite changes in management, membership transfers, or insolvency, providing stability and continuity.
Yes, Indian subsidiary companies, as legal entities, can purchase or rent properties for their business activities, aligning with the principle of perpetual succession.
