"Incorporating a Subsidiary in India: Key Steps and Considerations"

 When an Indian or foreign business entity aims to expand its operations in India, it often opts to establish either a 'subsidiary company' or a 'wholly owned subsidiary company.' The distinction lies in the degree of control exerted by the parent company. In a 'subsidiary company,' the parent company exercises more than fifty percent of the voting power, whereas, in a 'wholly owned subsidiary,' the parent company retains full control, holding 100% of the subsidiary company's shares.

Before proceeding with the incorporation of a subsidiary company in India, it is crucial to comprehend the concept of a subsidiary company, the process of its incorporation, the requisite documents, and the compliance obligations applicable to such entities.

"Incorporating a Subsidiary in India

1. Meaning of Subsidiary Company

According to section 2(87) of the Companies Act, 2013, a "subsidiary company" in relation to any other company (the holding company) is defined as a company where the holding company:

  • Controls the composition of the Board of Directors; or
  • Exercises or controls more than one-half of the total voting power either independently or alongside one or more of its subsidiary companies.

The process of incorporating a subsidiary company in India closely resembles that of any other company, albeit with additional documentation requirements at the time of incorporation.

2. Key Considerations in Deciding Formation of Subsidiary Company in India

a. Business Activities: A subsidiary is an appropriate business form if the parent company intends to conduct comprehensive business activities in India. For more limited activities like representative offices, sourcing, technical or marketing support, import-export, etc., alternative structures like Branch Office (BO), Liaison Office (LO), or Project Office (PO) may be considered.

b. Investment Objectives: Companies seeking to diversify or expand their business can opt for establishing a wholly owned subsidiary or a subsidiary company. Factors such as investment objectives, potential transactions, additional investors, joint venture partnerships, mergers, acquisitions, or business divestitures should be carefully considered.

c. Risk Reduction: The parent-subsidiary structure aids in mitigating regulatory risks as a subsidiary is a distinct legal entity responsible for its legal matters.

d. Operational Efficiency: Splitting a large company into smaller, more manageable entities may enhance operational efficiency.

e. Control and Ownership: The desired level of ownership and control influences the decision to form a subsidiary, wholly owned subsidiary, joint venture, or other business structures.

f. Regulatory Approvals and Compliances: Understanding the regulatory landscape and compliance requirements in India, both pre and post-incorporation, is essential.

g. Taxation: Tax implications should be carefully evaluated when forming a subsidiary company.

3. Steps for Incorporation of a Subsidiary Company

a. Name Reservation:

  • Submit SPICe+ Part A for name reservation, providing two preferred names with a rationale.
  • If the subsidiary's name includes or resembles the parent company's name, a No-Objection Certificate (NOC) must be submitted.

b. Obtaining Digital Signature Certificate (DSC) and Director Identification Number (DIN):

  • DSC is required for all directors and subscribers. Documents vary for individuals and non-individuals.
  • DIN must be obtained by directors before appointment. The SPICE+ form allows for applying up to three DINs.

c. SPICE+ Part B, SPICE+ MOA, SPICE+ AOA, and AGILE PRO:

  • File SPICE+ Part B and AGILE PRO within twenty days of name approval.
  • Provide company, director, and subscriber details along with proof of registered office address, share capital, and incorporation-related resolutions.
  • AGILE PRO facilitates GST, EPF, and ESI registration and bank account opening.
  • This process streamlines the incorporation of a subsidiary company in India, ensuring compliance with regulatory requirements and facilitating operational setup.

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