India has become a popular country for business expansion among foreign companies. In 2022, the country emerged as a foreign direct investment (FDI) powerhouse, and it secured the third-highest foreign investment. As the 2023 World Investment Report mentions, the total FDI in India touched $49.3 billion in 2022 from $44.7 billion in 2021 — an impressive growth of 10 percent.
Clearly, many foreign companies find setting up a subsidiary in India a viable option that gives them access to the vast South East Asian market.
However, setting up a subsidiary company in India is a long and complex process, and it can take months before you can actually begin operations. There are rounds of approvals and compliance requirements by the labour law that you must adhere to before setting up a subsidiary company in India.
So what’s the solution?
You can partner with Rapid, a trusted EOR platform in India that helps tech companies avoid the hassle of setting up an entity in India. While Rapid does all the heavy lifting of hiring the best tech talents in the country, you can focus on what matters most to you —- your business growth.
What is a Subsidiary Company in India?
A subsidiary company in India is owned and managed by another company, which is called the parent company or the holding company. The parent company holds a controlling interest in the subsidiary company, meaning it possesses or controls more than half of its stock.
Subsidiaries are separate and distinct legal entities from their parent companies. They need to follow the laws where they are headquartered and incorporated, and they also maintain their own executive leadership.
Benefits of the Subsidiary Company in India
There are several benefits of setting up a subsidiary in India. These include:
1. Separate Legal Identity
An Indian subsidiary company benefits from a separate legal identity, which can provide significant liability protection.
2. Management Structure
A subsidiary company in India has a management structure of its own, different from the parent company. This can provide greater autonomy and flexibility in decision-making.
3. Continuous Inflow of Funds
The parent company can provide a continuous flow of funds by subscribing to new shares of the subsidiary company, which can save it from the cost of debt.
An Indian subsidiary will have the same tax structure as a domestic company in India. This can provide tax advantages to the parent company.
5. Joint Ventures
A subsidiary company in India can allow joint ventures with other companies.
6. Cost Synergies
The incorporation of a wholly-owned subsidiary in India can provide cost synergies by using a common financial system, sharing administrative costs and other expenses between parent and subsidiaries.
7. Economic Growth
Subsidiary companies generate a lot of job opportunities, thereby increasing the economic growth and the income of the country.
Different Subsidiary Companies in India
1. Wholly-owned subsidiary
In incorporation of a wholly-owned subsidiary in India, the parent company owns 100% of the subsidiary's shares. However, wholly-owned subsidiaries can only be formed in sectors that allow 100% FDI.
Note that in India, up to 100 % investment is allowed in non-critical sectors like mining and agriculture through the automatic route that doesn't require a security clearance from the Ministry of Home Affairs (MHA). However, for sensitive sectors like media and defence, prior clearance is needed from the MHA.
2. Joint Venture
A joint venture is a type of subsidiary where two or more companies come together to form a new company. Usually, the parent foreign company partners with an Indian company in this type of subsidiary relationship. In India, joint ventures can be formed as a separate legal entity.
3. Liaison Office
A liaison office is a type of subsidiary set up to promote the parent company's business interests in India. It is not allowed to engage in any commercial activity in India.
4. Branch Office
A branch office is a type of subsidiary set up to carry out the same business as the parent company. It is allowed to engage in commercial activities. The branch office needs to be registered with the Registrar of Companies. It has the same legal obligations as a wholly-owned subsidiary.
How to Open a Subsidiary Company in India: Document Checklist
1. Address Proof
Document for office address proof. This can be anything like a rental agreement or an electricity bill.
2. Identification Documents
For foreign nationals, a passport copy is a mandatory requirement along with address proof and the latest bank statement. All documents need to be attested by the Indian consulate. For Indian nationals, a PAN card is mandatory. Other documents needed are address proof and photo ID proof like a passport or driving licence.
3. Capital Commitment Letter
The foreign company needs to submit a capital commitment letter committing to finance the subsidiary company.
4. Compliance Letter
The foreign company must produce a compliance letter from its local jurisdiction certifying that the company abides by all the compliance requirements.
5. Power of Attorney
The parent company must produce a power of attorney during the registration process. The power of attorney should allow one of the directors or a chosen person to operate on behalf of the company.
6. Certificate of Incorporation
The parent company needs to produce a certificate of incorporation from the country where it is incorporated.
How to Open a Subsidiary Company in India: A Step-by-Step Guide
1. Understand the business structure
The foreign company needs to first determine the type of business structure they want —- this could be a wholly-owned, branch office, project office, a joint venture or a liaison office. Each type of subsidiary has its pros and cons, so consider all the options to make an informed decision.
2. Registration of Your Company
Get your subsidiary company registered with the Registrar of Companies in the state where it is located. This includes a lot of paperwork, so gather all the documents like board resolutions, memorandum of association etc. before proceeding with the registration.
3. Gather Approvals
You might need to take additional government approvals before registering your company. Some of the approving authorities in India are the Reserve Bank of India (RBI), Ministry of Corporate Affairs, the Foreign Investment Board etc.
4. Get Tax Registration Done
Open a bank account for the subsidiary and get clearance from the RBI before you can proceed for the tax registration with the Good and Service Department for GST as well as other tax registration formalities with the Income Tax Department.
5. Look for Regulatory Compliance
Check for other regulator compliance mandates such as the environmental department, labour law department etc.
How Rapid Can Help in Hiring in India Without Creating a Legal Entity
While the door is always open for setting up an entity in India, and the process mentioned previously on how to open a subsidiary company in India will guide you to get started, setting up an entity in India is a complex and time-consuming process. It will take you 6-9 months to set up an entity in India before the subsidiary can become functional. However, you can still access the tech talent of India without setting up a subsidiary company in India.
Hiring remote employees with a trusted EOR like Rapid is easy and fast if you want to access India's rich tech talent pool and get operational without the hassle of establishing a subsidiary.
Want to learn more? Schedule a call today!