Key considerations for foreign companies while setting up a subsidiary in India

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 2013[1]
• Companies (Registration of Foreign Companies), Rules, 2014[2]
• Income Tax Act 1961[3]
• GST 2017[4]
• SEBI Rules and Regulations[5]
• FEMA (Foreign Exchange Management Act) 1999[6]
• Foreign Exchange Regulations
• RBI Compliance Requirements[7] etc.

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.

1. 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, 2013[8], 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,

1. 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.
2. The full address of the registered or principal office of the Company.
3. A list of directors and Secretary of the Company that contains such particulars as may be prescribed.
4. The name and address of authorised person/persons who can accept documents on behalf of the company.
5. Full address of the principal place of business in India.
6. Particulars of earlier occasion/occasions of opening/closing of a place of business in India.
7. 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.
8. Any other prescribed information.

Apart from this, Companies (Registration of Foreign Companies), Rules, 2014[9] 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 SEBI[10]. 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:

• GST Reporting[11]
• TDS reporting as per the Income Tax Act[12]
• Adherence to SEBI rules and regulations[13]

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 Act[14]; 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 provision 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 Act[15], 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, FEMA[16] 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, 2000[17]in mind. Regulation 3of 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:

1. 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.
2. 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, 2014[18]; 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.

Conclusion

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.

FAQs

[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, 5^th 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, 5^th March 2023) ; RESERVE BANK OF INIDIA, https://www.rbi.org.in/scripts/FAQView.aspx?Id=26 , (last visited, 5^th 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)

[10]https://www.sebi.gov.in/sebi_data/commondocs/cir2803an1_p.pdf

[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, 5^th 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)

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