Forming Subsidiary in India

Foreign companies can set up wholly-owned subsidiary in sectors where 100% foreign direct investment is permitted under the FDI policy. The wholly-owned subsidiary may be either of the following business entities:

  • Private Limited Company
  • Public Limited Company
  • Unlimited Company
  • Sole Proprietorship

Foreign Companies can also set up their operations in India through the business entities:

  • Liaison Office/Representative Office
  • Project Office
  • Branch Office

Such offices can undertake any permitted activities. Companies have to register themselves with Registrar of Companies (ROC) within 30 days of setting up a place of business in India.

Private Limited Company as a Subsidiary

A private company is a company which has the following characteristics:

  • shareholders’ right to transfer shares is restricted;
  • the number of shareholders is limited to fifty; and
  • an invitation to the public to subscribe to any shares or debentures is prohibited.

A Private Limited Company is the most popular form of business entity used for Foreign Investors in India, including USA investors in India. It takes some time to incorporate in India as there are various steps required in forming a private limited company in India. There are various steps required to establish a business in India, before and after incorporation, as mentioned hereinafter.

Public Limited Company as Subsidiary

A public company is defined as a company which is not a private company. The following conditions apply only to a public company:

  • It must have at least seven shareholders.
  • A public company is not authorized to start business upon the grant of the certificate of incorporation. In order to be eligible to commence business as a corporation, it must obtain another document called "trading certificate".
  • It must publish a prospectus or file a statement in lieu of a prospectus before it can start transacting business.
  • A public company is required to have at least three directors.
  • It must hold statutory meetings and obtain government approval for the appointment of the management.
  • There are several other provisions contained in the Companies Act 1956 which are applicable only to public companies and should be consulted.

Liaison Office

A Liaison Office (also known as Representative Office) can undertake only liaison activities, i.e. it can act as a channel of communication between Head Office abroad and parties in India. Liaison Offices are not allowed to undertake any business activity in India and cannot earn any income in India. Expenses of such offices are to be met entirely through inward remittances of foreign exchange by the Head Office of the Company. Permission to set up such offices is initially granted for a period of 3 years and this may be extended from time to time by the Reserve Bank of India.

Branch Office

A Foreign Company engaged in manufacturing or trading activities are allowed to set up Branch Offices in India with specific approval of the Reserve Bank. Such Branch Offices are permitted to represent the parent/group companies and undertake the following activities.

  1. Export/Import of goods
  2. Rendering professional or consultancy services
  3. Carrying out research work, in areas in which the parent company is engaged
  4. Promoting technical or financial collaborations between Indian companies and parent or overseas group company
  5. Representing the parent company in India and acting as buying/selling agent in India
  6. Rendering services in Information Technology and development of software in India
  7. Rendering technical support to the products supplied by parent/group companies.

Project Office

Reserve Bank of India has granted general permission to foreign companies to establish Project Offices in India, if they have secured a contract from an Indian company to execute a project in India, and

  1. The project is funded directly by inward remittance from abroad; or the project is funded by a bilateral or multilateral International Financing Agency; or
  2. The project has been cleared by an appropriate authority;
  3. A company or entity in India awarding the contract has been granted Term Loan by a Public Financial Institution or a bank in India for the project.