Setting Up a Wholly Owned Subsidiary or Subsidiary Company in India by a Foreign Company: A Legal and Regulatory Analysis

1. Introduction

India’s liberalised foreign investment framework permits foreign entities to establish a corporate presence through incorporation of a subsidiary or a wholly owned subsidiary under the Companies Act, 2013. With the progressive reforms in the Foreign Direct Investment regime and the consolidation of FEMA regulations, India has become a preferred destination for foreign corporations seeking structured and compliant market entry. The establishment of a subsidiary structure ensures operational flexibility, separate legal identity, and regulatory clarity, provided statutory and sectoral conditions are duly complied with.

2. Governing Legal Framework

The incorporation and functioning of a foreign-owned subsidiary in India is primarily governed by the Companies Act, 2013, read with the Foreign Exchange Management Act, 1999. The Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 regulate foreign investment in equity instruments. Additionally, the Consolidated FDI Policy issued by the Department for Promotion of Industry and Internal Trade provides sectoral caps and entry routes. Regulatory oversight is further exercised by the Reserve Bank of India and, where applicable, sectoral regulators such as IRDAI, SEBI, RBI, or TRAI depending upon the nature of business activity undertaken.

3. Concept of Subsidiary and Wholly Owned Subsidiary

Section 2(87) of the Companies Act, 2013 defines a subsidiary company as one in which the holding company controls the composition of the Board of Directors or exercises or controls more than one-half of the total voting power. A wholly owned subsidiary is a company whose entire share capital is held by the foreign parent entity, subject to the limits prescribed under the FDI policy. In both cases, the subsidiary incorporated in India is treated as a separate legal entity distinct from its foreign parent.

4. Permissibility of Foreign Direct Investment

Foreign direct investment in India is permitted either under the automatic route or the government approval route. Under the automatic route, no prior approval of the Government is required and the investment can be made directly, subject to post-investment reporting requirements. Under the government route, prior approval from the competent authority is mandatory before infusion of capital. The applicable route depends upon the sector in which the Indian subsidiary proposes to operate.

5. Sectoral Caps and Restrictions

Foreign investment is permitted up to specified limits depending upon the sector. Certain sectors permit one hundred percent foreign investment under the automatic route, while others impose caps or require government approval. There are also specific sectors where foreign investment is completely prohibited, such as lottery business, gambling and betting activities, chit funds, nidhi companies, real estate business excluding development activities, and atomic energy. Regulated sectors such as insurance, defence, and banking are subject to additional regulatory conditions and compliance norms.

6. Incorporation Procedure under the Companies Act, 2013

The process of incorporation of a wholly owned subsidiary or subsidiary company in India is undertaken through the integrated SPICe+ mechanism provided by the Ministry of Corporate Affairs. The proposed directors must obtain Digital Signature Certificates and Director Identification Numbers. The name of the proposed company is reserved through the prescribed procedure. The Memorandum of Association and Articles of Association are drafted in accordance with the proposed business activities and FDI conditions. Upon filing the incorporation forms along with required declarations and documentation, the Registrar of Companies issues the Certificate of Incorporation, thereby creating a separate legal entity under Indian law.

7. Capital Infusion and FEMA Compliance

After incorporation, foreign investment must be received through authorised banking channels in accordance with FEMA regulations. Shares must be allotted within sixty days from the date of receipt of subscription money. The company is required to file Form FC-GPR through the RBI’s FIRMS portal within thirty days of allotment of shares. The pricing of shares must comply with the valuation guidelines prescribed under the Non-Debt Instruments Rules and must be supported by a valuation certificate issued by a qualified professional. Non-compliance with reporting obligations may attract penalties under Section 13 of FEMA.

8. Annual and Ongoing Compliance Obligations

An Indian subsidiary with foreign investment is required to comply with annual reporting obligations under both the Companies Act, 2013 and FEMA regulations. Under company law, it must hold Board Meetings and Annual General Meetings within prescribed timelines and file annual financial statements and annual returns with the Registrar of Companies. Under FEMA, it must file the Annual Return on Foreign Liabilities and Assets. In cases involving related party transactions with the foreign parent, transfer pricing provisions under the Income Tax Act, 1961 become applicable and documentation requirements must be strictly followed.

9. Downstream Investment Considerations

Where the Indian subsidiary makes further investment into another Indian entity, such investment is classified as downstream investment and must comply with the conditions applicable to foreign investment. The Indian entity making such downstream investment must ensure adherence to sectoral caps, pricing guidelines, and reporting requirements prescribed under FEMA regulations.

10. Taxation Aspects

A wholly owned subsidiary incorporated in India is treated as a domestic company for taxation purposes and is liable to pay corporate income tax in accordance with the Income Tax Act, 1961. Dividend distribution is taxable in the hands of shareholders. Transactions between the Indian subsidiary and its foreign parent are subject to transfer pricing regulations to ensure that they are conducted at arm’s length. Double Taxation Avoidance Agreements between India and the parent company’s jurisdiction may provide relief against double taxation.

11. Alternative Modes of Entry

Instead of incorporating a subsidiary, a foreign company may establish a liaison office, branch office, or project office in India subject to approval from the Reserve Bank of India. However, these structures are restricted in scope and do not enjoy the flexibility and operational independence that a subsidiary company provides. Consequently, incorporation of a wholly owned subsidiary is generally regarded as the most comprehensive and legally secure mode of entry into India.

12. Conclusion

A foreign company is legally permitted to establish a wholly owned subsidiary or subsidiary company in India, subject to compliance with the Companies Act, 2013, FEMA regulations, the Consolidated FDI Policy, and applicable sectoral laws. The Indian subsidiary functions as a separate legal entity and is subject to domestic corporate governance, taxation, and regulatory requirements. While India offers a liberal foreign investment regime, strict adherence to reporting, valuation, and sector-specific compliance norms is essential to avoid regulatory consequences. A carefully structured and compliant subsidiary model provides foreign investors with operational autonomy, limited liability protection, and strategic control over Indian business operations.

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Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including Newspapers, Journals, Bare Acts, Case Materials , Charted Secretary, Research Papers etc

LegalMantra.net team