How to setup a wholly owned Subsidiary in India? NRO, Process of Incorporation [2024]

Setting up a wholly owned Subsidiary in India – What and Why explained

Imagine a company, let’s call it “XYZ Company” seeking to capitalize on the burgeoning Indian market. While direct operations might seem tempting, navigating the intricacies of a foreign market can be daunting. This is where the concept of a wholly owned subsidiary (WOS) comes into play.

A WOS is essentially a separate legal entity established in India, fully owned and controlled by XYZ Company (the parent company). In simpler terms, XYZ Company sets up a new company in India, with complete ownership and decision-making authority. But why go through this process? What are the benefits to setup a wholly owned subsidiary in India?

Here are some compelling reasons to consider a WOS:

• Market Entry and Local Presence: Setting up a WOS allows XYZ Company to establish a local legal entity, fostering trust and credibility with Indian consumers and partners. This can be crucial for navigating regulations and building brand recognition in the Indian market.
• Limited Liability Protection: A significant advantage of a WOS is the limited liability it offers to the parent company. XYZ Company’s liability is restricted to the capital it invests in the WOS, shielding its global assets from potential risks associated with the Indian subsidiary’s operations.
• Operational Flexibility: A WOS provides XYZ Company with operational flexibility. It can tailor its business practices and strategies to suit the specific needs and regulations of the Indian market, allowing for a more responsive and localized approach.
• Access to Local Incentives: Depending on the industry and location, WOS might be eligible for government incentives and subsidies offered to promote foreign investment and economic development in India.
• Tax Advantages: While the tax landscape is complex, WOS structures can offer certain tax benefits in specific scenarios. Consulting with a tax advisor is crucial to understand the potential tax implications of establishing a WOS.

Who is considered as a Foreign Entity? 

A foreign entity includes international organizations, foreign governments, and any agency or division of a foreign government, as well as any company, business association, partnership, trust, society, or any other entity or group not formed or organized to conduct business in India. If someone works for or represents a foreign entity, they are regarded as a foreign person—even an Indian citizen.

Who is considered as an Indian Entity?

An Indian entity is a body corporate incorporated by any current law, a limited liability partnership established under the Limited Liability Partnership Act, 2008, a partnership firm registered under the Indian Partnership Act, 1932, or a company as defined by the Companies Act, 2013.

What is a Wholly Owned Subsidiary (WOS)? 

A corporation whose common stock is entirely held by another company is known as a totally owned subsidiary. A business may acquire another business to form a wholly-owned subsidiary.
A corporation whose common stock is 51% to 99% held by a parent company is referred to as a majority-owned subsidiary. To cut expenses and minimize risks, the parent firm may decide to purchase a majority stake in the initiative instead of buying it completely. The business that is majority owned may subsequently be referred to as an associate, affiliate, or associate company. A wholly-owned subsidiary might make it easier for the parent business to continue operating in a variety of markets, geographies, and adjacent sectors. These elements aid in the parent company’s hedging against shifts in the market, trade policies, or geopolitics.
There are no minority shareholders in a wholly-owned subsidiary because the parent business owns every share in it. The parent firm, which may or may not have direct influence over the management and operations of the subsidiary, grants license for the subsidiary to operate. It could become an unconsolidated subsidiary as a result.

What is a NRO Account?

A Non-Resident Ordinary (NRO) Account is a famous way for many Non-Resident Indians (NRIs) to manage their deposits or income earned in India such as dividends, pension, rent, etc. You can receive money from this account in international or Indian currencies. Nevertheless, as NRO Accounts are maintained in Indian currency and cannot be freely repatriated into any foreign currency, only Indian money may be withdrawn. Together with an Indian resident, you may only apply for an NRO Account on a Former or Survivor basis. You can create an NRO account with another non-resident Indian, if you’d like. Additionally, transferring funds from your existing NRE account to your NRO account is rather simple.

Any foreign entity seeking to set up a wholly owned subsidiary in India, has different structures available to suit their business needs.

 It’s important to carefully evaluate the pros and cons of each structure before making a decision. Factors such as the nature of your business, regulatory requirements, and timelines will all play a role in determining the best structure for your company. There are other key considerations involved with each structure such as repatriation requirements, RBI filings, Valuation reports & apostilling documents.

Steps For Incorporation of a Wholly Owned Subsidiary in India

The Companies Act 2013 does not define a wholly owned subsidiary. Whereas a “subsidiary company” is defined as “a company in which the holding company— (i) controls the composition of the Board of Directors; or (ii) exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies: Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed,” the Companies Act, 2013 does not define a wholly owned subsidiary. According to the Foreign Exchange Management, 2013, a foreign company may establish a company in India under the Companies Act 2013 by incorporating a wholly owned subsidiary, joint venture, or associate, or by establishing a liaison office, project office, or branch of the foreign company.

Prior to Incorporation Conditions

The participation of at least two directors and two shareholders is the absolute minimum needed to launch a Wholly Owned Subsidiary. As long as one of the directors is an Indian citizen and resident of India, the corporations Act, 2013 permits NRIs, PIOs, and foreign nationals to serve as directors of Indian corporations. The residence status of shareholders is not subject to any constraints. 

Detailed Procedure for Incorporation (Step by Step)

1. The Digital Signature Certificate (DSC) application
Obtaining a class-3 DSC requires all directors to provide photos, proof of address, proof of email address, and the prospective director(s)’ Indian mobile phone.

2. Request for Approval of Name
Moreover, the Ministry of Corporate Affairs (MCA) must authorise one of the two names under which Part A of the SPICe+ form must be lodged. The MCA must receive copies of the NOC/Board decisions and the necessary paperwork, which includes the Charter-Memorandum of Association (MOA), Articles of Association, INC 9 AGILE Form, KYC papers, and, if relevant, a copy of the trademark registration certificate, fully notarized or apostilled.

3. Wholly Owned Subsidiary incorporation
Furthermore, in order to register the Wholly Owned Subsidiary, SPICe+ forms Part B and C must be completed on the MCA website. The following services are also provided by the form: 

• Enterprise formation 
• Director Identification Number (DIN) assignment
• The Company’s Permanent Account Number (PAN) is issued
• The Company’s Tax Collection Account Number (TAN) is issued
• Choosing a bank account 
• Registration for Goods and Services Tax (GST)

After-Incorporation Conditions

Following the Wholly Owned Subsidiary’s incorporation, the following compliances must be met:

1. Meeting of the board
The first board meeting must take place within 30 days of the company’s establishment.

2. Auditor Appointment: 

The board must appoint the Wholly Owned Subsidiary’s initial auditor within thirty days of the organization’s formation date. The auditor will remain in office until the conclusion of the company’s annual first shareholder meeting.

3. Declaration of business commencement:

Following bank account establishment but prior to the start of company activities, all subscribers must deposit the agreed-upon subscription amount (as per MOA). Following the deposit of this subscription sum, the company has 180 days from the date of incorporation to file a Declaration of Commencement of Business in form INC-20A with the Registrar of Companies (RoC).

4. Naming the board: 

Every office and place of business owned by the Wholly Owned Subsidiary should have the firm name, registered office address, Corporate Identification Number (CIN), contact details, GST Number, etc. displayed outside.

5. Share certificates: 

The corporation will issue the certificates to subscribers after approving their format.

6. Updating the Statutory record: The Wholly Owned Subsidiary is responsible for obtaining licences and registrations from various governmental bodies as needed, and they must be maintained current in the company’s record.

Structures for setting up WHOLLY OWNED SUBSIDIARY

	Structure I – Using NRO Account	Structure II – Direct foreign investment	Structure III – Transfer of India co.
Steps	Foreign shareholders to subscribe to MOA of Indian company using money from NRO account.	Foreign shareholders to subscribe to MOA of the Indian company.	Company to be incorporated with Indian shareholders Transfer of shares to foreign shareholders.
Directors	Min 2 directors – at least 1 Indian director	Min 2 directors – at least 1 Indian directo	Min 2 directors – at least 1 Indian director
Shareholders	Min 2 shareholders – Foreign shareholders to use money in NRO account for initial capital investment	Min 2 shareholders – Foreign shareholders to use foreign money for initial capital investment	Min 2 Indian shareholders
Additional steps	None	None	Indian director to step down and foreign director to be appointed  Indian shareholders to transfer their shares to foreign shareholders

Key Considerations for Structures

Particulars	Structure I – Using NRO Account	Structure II – Direct Foreign Investment	Structure III – Transfer of domestic co.
Repatriation	Income on shares in Indian company can be remitted only to NRO account •Repatriation from NRO account restricted to USD 1mn per year	Freely repatriable	Freely repatriable
Requirement of apostilled documents	KYC documents of foreign director and foreign shareholder need to be apostilled and notarised  • MOA and AOA need to be apostilled and notarised	• KYC documents of foreign director and foreign shareholder need to be apostilled and notarised  • MOA and AOA need to be apostilled and notarised	• KYC documents of foreign director need to be apostilled and notarise
RBI filings on investment	Not applicable	Form FC-GPR to be filed on incorporation	• Form FC-TRS to be filed on transfer of shares to foreign shareholders  • Form FC-GPR to be filed for additional investment by foreign shareholders
Valuation report	Not required	Not required	Required for transfer of shares
Approx. timelines	3 weeks (Not considering additional time for obtaining apostilled and notarized documents)	3 weeks (Not considering additional time for obtaining apostilled and notarized documents)	3 weeks + 2 weeks for transfer (Not considering additional time for obtaining apostilled and notarized documents)

Conclusion

Maintaining a wholly-owned subsidiary in India and meeting all regulatory compliance requirements can be laborious for foreign-headquartered corporations. You must also concentrate on accelerating the expansion of your company.

How Treelife Can Help with the Registration of Indian Subsidiary Companies?

Treelife makes it easier to start an Indian subsidiary business by providing all-encompassing assistance at every critical stage. We expedite the whole registration procedure, from choosing a distinctive name to acquiring necessary Director Identification Numbers (DIN) and Digital Signature Certificates (DSC), to helping with PAN and TAN applications and opening a special business bank account.

Our knowledgeable staff makes sure that all laws and regulations are followed, including the Income Tax Act of 1961, the Companies Act of 2013, the Foreign Exchange Management Act (FEMA), and RBI compliances. We make it easier for you to file yearly returns, assist you with complying with SEBI (Listing Obligations and Disclosure Regulations), and offer tax services to help you understand Indian tax laws. You may securely and effectively launch and expand your Indian subsidiary business with Treelife as your partner.

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FAQs on  Setting Up a Wholly Owned Subsidiary (WOS) in India:

1. Who can set up a WOS in India?
   Any foreign entity, including companies, organizations, partnerships, etc., can establish a WOS in India.
2. What are the different structures for setting up a WOS?
   There are three main structures:

• Opening an NRO account: Suitable for smaller businesses, but repatriation of profits is restricted.
• Direct investment: Offers full control, but requires more paperwork and compliance.
• Acquiring an existing Indian entity: Faster option, but involves due diligence and potential legal complexities.

3. What are the key steps involved in incorporating a WOS?

1. Obtain Digital Signature Certificates (DSCs) for directors.
2. Get name approval from the Ministry of Corporate Affairs (MCA).
3. File SPICe+ forms for incorporation, PAN, TAN, GST, etc.
4. Hold the first board meeting within 30 days.
5. Appoint an auditor within 30 days.
6. File Declaration of Commencement of Business within 180 days.
7. Display company details at all offices and places of business.
8. Issue share certificates to subscribers.
9. Obtain necessary licenses and registrations from government bodies.
10. Maintain statutory records and comply with ongoing filing requirements.
11. What are the minimum requirements for directors and shareholders?
    At least two directors are required, with one being an Indian resident. There are no restrictions on shareholder residency.
12. What are the repatriation requirements for profits earned by a WOS?
    Repatriation rules depend on the chosen structure and business activities. Consult with a professional for specific guidance.
13. What are the RBI filings required for a WOS?
    RBI filings depend on the type of business, transactions, and foreign exchange involved. Seek professional advice to ensure compliance.
14. Are there any valuation reports or document apostilles required?
    Valuation reports might be needed for investments exceeding specific thresholds. Apostilles may be required for foreign documents submitted to Indian authorities.
15. What are the pros and cons of each WOS structure?
    Each structure offers different advantages and disadvantages in terms of cost, control, compliance, and repatriation flexibility. Carefully evaluate your specific needs before choosing.
16. What are the ongoing compliance requirements for a WOS?
    Annual filings, board meetings, tax returns, and maintaining statutory records are crucial for compliance.
17. Where can I find more information and assistance with setting up a WOS?
    Consult with a qualified legal or financial professional specializing in foreign direct investment (FDI) in India. They can guide you through the process, ensure compliance, and address specific concerns.