Establishing a Foreign Subsidiary in India
A foreign subsidiary is a company incorporated in India but controlled by a foreign parent company. To establish one, the following steps must be undertaken:
- Choose a Business Structure
Foreign companies can set up subsidiaries as private limited companies, public limited companies, or limited liability partnerships (LLPs). - Obtain Approvals
Approval from the Reserve Bank of India (RBI) under the Foreign Exchange Management Act (FEMA) may be required, depending on the sector. - Incorporation Process
Register the company with the Ministry of Corporate Affairs (MCA) by submitting required documents such as the Memorandum of Association (MOA) and Articles of Association (AOA).
Key Compliance Requirements Under the Companies Act
- Board Composition
- A foreign subsidiary must have at least two directors, one of whom must be a resident of India.
- Independent directors are required for certain categories of companies.
- Annual Filings
- Financial Statements: Submit audited financial statements to the MCA annually.
- Annual Return: File Form MGT-7, detailing the company’s shareholding structure and compliance status.
- Meetings and Minutes
- Conduct at least four board meetings annually, with a maximum gap of 120 days between meetings.
- Maintain minutes of all meetings in prescribed formats.
- Statutory Audit
- Every company must appoint a statutory auditor to audit its financial records annually.
- The auditor’s report is a mandatory component of the company’s filings.
- Compliance With FEMA
Foreign subsidiaries must adhere to FEMA guidelines regarding capital infusion, repatriation of profits, and external commercial borrowings.
Reporting Obligations for Foreign Subsidiaries
- Registrar of Companies (RoC) Filings
- File periodic returns such as Form AOC-4 (financial statements) and MGT-7 (annual return).
- Foreign Liabilities and Assets (FLA) Reporting
- Report foreign direct investments (FDIs) and liabilities to the RBI annually.
- Tax Filings
- File income tax returns annually and comply with goods and services tax (GST) regulations if applicable.
Sector-Specific Regulations
Certain industries, such as finance, telecommunications, and pharmaceuticals, are subject to additional regulatory requirements. Companies must familiarize themselves with specific laws, such as the SEBI (Securities and Exchange Board of India) guidelines or the Drug Controller General of India (DCGI) regulations.
Penalties for Non-Compliance
Failure to comply with the Companies Act can result in:
- Monetary fines and penalties.
- Disqualification of directors.
- Legal proceedings against the company and its officers.
Best Practices for Compliance
- Engage Local Experts
Hiring legal and financial consultants with expertise in Indian corporate law can streamline compliance. - Leverage Technology
Use compliance management software to track deadlines and automate filings. - Conduct Internal Audits
Regular audits help identify potential compliance gaps and rectify them promptly.