Legal Compliance Guide for Subsidiary Firms in India

India, with its rapidly growing economy and expansive consumer market, has emerged as a preferred destination for multinational corporations to establish their footprint. One of the most common methods for international businesses to enter and operate in India is through setting up a subsidiary company. While the potential benefits are abundant, ensuring legal compliance is crucial for a smooth and sustainable operation. This article provides a complete guide to the legal compliance framework for subsidiary firms in India, with a primary focus on subsidiary company registration.

What is a Subsidiary Company?

A subsidiary company is one that is controlled by another entity known as the parent or holding company. In India, a foreign company can hold up to 100% of the shares of an Indian subsidiary, depending on the sector. A subsidiary can either be wholly owned or partially owned but must follow the regulatory framework under Indian law.

The most common form of subsidiary set up in India is a private limited company. It offers limited liability protection, allows foreign direct investment (FDI), and is suitable for small to medium-sized operations.

Subsidiary Company Registration Process in India

The journey of forming a subsidiary in India begins with the registration process, governed by the Companies Act, 2013. Below is a step-by-step outline of the procedure:

1. Determine the Business Structure: Foreign entities generally opt for a private limited company structure due to its operational flexibility and legal safeguards. This structure supports 100% foreign ownership in most sectors under the automatic route, eliminating the need for prior government approval.

2. Select and Reserve the Company Name: The proposed name must align with the guidelines issued by the Ministry of Corporate Affairs (MCA). It must not be identical or like existing entities or trademarks. The name is reserved through the RUN (Reserve Unique Name) service provided by the MCA portal.

3. Acquire Digital Signatures and Director Identification Numbers: To ensure secure online filing, digital signature certificates (DSCs) are required for all proposed directors and authorized signatories. Additionally, a Director Identification Number (DIN) must be obtained by each director who will be on the board of the Indian subsidiary.

4. Draft the Incorporation Documents: The incorporation documents include the Memorandum of Association (MOA) and Articles of Association (AOA), which define the scope and internal governance of the company. Other necessary documents include identification and address proof of directors, proof of the registered office, and declarations from subscribers.

5. File for Incorporation with the Registrar of Companies: Once all documents are in order, the application for incorporation is submitted via the SPICe+ form on the MCA portal. This integrated form streamlines the registration process by combining multiple services, including PAN, TAN, EPFO, ESIC, GSTIN, and bank account opening.

6. Obtain the Certificate of Incorporation: Upon verification and approval, the Registrar of Companies issues a Certificate of Incorporation. This certificate serves as legal proof of the company’s existence and includes the Company Identification Number (CIN).

Foreign Direct Investment (FDI) Compliance

Subsidiaries receiving investments from foreign entities must adhere to the FDI norms under the Foreign Exchange Management Act (FEMA), 1999. Depending on the industry, investments can fall under the automatic route or the government route. The automatic route requires no prior approval, while the government route mandates prior clearance from the ministry concerned.

After receiving the investment, the company must file Form FC-GPR with the Reserve Bank of India (RBI) within 30 days to report the allotment of shares to the foreign entity. Failing to comply with FDI reporting requirements can lead to penalties and legal complications.

Post-Incorporation Compliance Requirements

Setting up the company is just the beginning. Several mandatory compliance obligations must be fulfilled to maintain good legal standing:

1. PAN and TAN: The company must obtain a Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN) for tax-related activities.

2. GST Registration: If the company is engaged in the supply of goods or services and crosses the prescribed threshold limit, it must register for Goods and Services Tax (GST).

3. Bank Account Setup: A corporate bank account must be opened in the name of the company for all business transactions. This is typically done immediately after incorporation.

4. Shops and Establishments Registration: This state-specific registration is mandatory for operating a commercial establishment and should be obtained within a stipulated time frame after commencement of operations.

5. Employment Law Compliance: Hiring employees in India brings additional responsibilities. The company must register under various labor laws, including the Provident Fund (PF), Employees’ State Insurance (ESI), and the Professional Tax Act, wherever applicable. Additionally, compliance with the Minimum Wages Act, Payment of Bonus Act, and other employment laws are necessary.

Annual Compliance for Subsidiary Companies

To ensure continued legal operation, subsidiary companies must comply with several annual legal and financial obligations:

• Filing of financial statements and annual returns with the Registrar of Companies.

• Conducting a statutory audit of accounts by a certified Chartered Accountant.

• Holding a minimum of four board meetings annually and maintaining proper minutes.

• Filing income tax returns and transferring pricing documentation if applicable.

• Conducting an Annual General Meeting (AGM) within the stipulated timeline.

Failing to adhere to these requirements can result in penalties, disqualification of directors, or even the dissolution of the company.

Intellectual Property and Regulatory Compliance

A subsidiary operating in India must also consider protecting its intellectual property, such as trademarks, copyrights, and patents. Registering these assets under Indian law safeguards the company’s innovations and brand identity.

Moreover, compliance with sector-specific regulations is critical. For instance, companies in sectors such as finance, pharmaceuticals, telecom, and e-commerce may require additional licenses and approvals from respective regulatory bodies like SEBI, RBI, or TRAI.

Conclusion

India presents vast opportunities for growth and expansion for foreign businesses. However, establishing and operating a subsidiary firm requires careful routing of the legal and regulatory framework. From subsidiary company registration to ongoing compliance with tax, labor, and corporate laws, every step demands accuracy and diligence.

Understanding these legal obligations is the cornerstone of building a successful and compliant business in India. Engaging professional legal and financial advisors can help foreign companies remain compliant while focusing on growth and innovation in the vibrant Indian market.