Incorporation of Public Company & Private Company in India, Formation of Wholly Owned Subsidiaries by Foreign Entity by Foreign Companies, Foreign investors may set up wholly owned subsidiaries (either public or private company) under the Companies Act, 2013. This will ensure an independent legal status, different from its parent foreign company, limited liability and a separate existence if its own.
Incorporation of Public Company & Private Company in India
Things to be kept in mind before incorporation:
Activities allowed by the government:
There are certain activities in which foreign investment is allowed completely and in some activities it is partially allowed. Also, some commercial sectors are open to foreign investment under automatic route, which means no prior approval from government is required, while others require prior approval from government. There is also a list of activities in which foreign investment is completely prohibited. Therefore, this is an important aspect to be kept in mind before setting up of a wholly owned subsidiary in India
Minimum requirement of capital:
Till now, for incorporation of a private limited wholly owned subsidiary, minimum amount of capital required was Rs 1,00,000/- (Rupees One Lakh), while minimum capital required to set up a public limited wholly owned subsidiary was Rs 5,00,000/- (Rupees Five Lakhs). This cost was exclusive of setting up of infrastructure and other running cost of the proposed Indian company. However, with effect from end of May, 2015, the government has done away with the requirement of minimum capital for both, private and public limited companies. Hence, now foreign entities can set up their wholly owned subsidiaries without any initial capital, and can instead invest in setting up of infrastructure and promotion of their business.
There is a minimum requirement of directors and shareholders, as mentioned below:
A) Private Limited Company
- Minimum Shareholders: 2 (Two)
- Minimum Directors: 2 (Two)
B) Public Limited Company
- Minimum Shareholders: 7 (Seven)
- Minimum Directors: 3 (Three)
It must be noted here that while only individuals can become directors; a shareholder can also be a company (including foreign company). Also, at least one of the directors on the Board of the company must be resident in India
Relevant Parts of this article
- Setting Up of Business in India by Foreign Companies
- Incorporation of Joint Venture Company in India
- Formation of Foreign Institutional Investor by Foreign Entity
- Formation of Limited Liability Partnership by Foreign Entity
A wholly owned subsidiary, either public or private limited, will have to comply with all the laws, rules and regulations as applicable, including but not limited to the Companies Act, 2013, Foreign Exchange Management Act, 1999, Shops and Establishment Act, Income Tax Act, etc., failing to which may result in heavy penalties. This will result in increase in the running expenses of the Indian subsidiary as professional guidance shall be mandatorily required to stay compliant with all the applicable laws.
Steps for incorporation:
Approving Authority: Registrar of Companies (RoC) and Reserve Bank of India (RBI)
- Obtaining approval from FIPB (Foreign Investment Promotion Board), if required: If the activities of the Indian wholly owned subsidiary fall under Government approval route, then the approval from FIPB has to be obtained
- Obtaining DSC (Digital Signature Certificate) of proposed directors: Digital Signature Certificates (DSC) are the digital equivalent (that is electronic format) of physical or paper certificates. DSC is required to sign any electronic document like e-forms. DSC can be obtained from any licensed Certifying Authority
- DIN (Director Identification Number) of proposed directors: It is mandatory for proposed directors to obtain DIN (Director Identification Number) under the Companies Act, 2013. DIN can applied electronically in Form DIR-3 on the website of Ministry of Corporate Affairs (MCA), along with required documents and filing fee.
- Applying for availability of name: The fore most step in formation of a company (public or private) is to apply for availability of name of the proposed company. One must comply with the naming guidelines in this regard. Form INC-1 has to be filed with MCA for reservation of name of the proposed company.
- Drafting of Memorandum of Association (MoA) and Articles of Association (AoA): Memorandum of Association (MoA) is the charter of the company and it sets out its scope of activities. Articles of Association (AoA), on the other hand, regulate the internal working of the company. Both these documents are very crucial to the company and hence, are drafted with caution
- Filing incorporation documents (within 60 days of filing Form INC-1): Once the name is approved from the Registrar of Companies, documents for incorporation have to be filed in Form INC-7 and Form DIR-12, within 60 days of date of filing of form INC-1.
- Filing of documents for registered office of the company (within 30 days of incorporation): The company must have a place of business as its registered office. Form INC-22 has to be filed along with the required documents, either at the time of filing documents for incorporation or within 30 days of date of incorporation of the company
- Certificate of Commencement of Business: A company, after its incorporation, could commence its business only when the subscribed amount has been deposited by the subscribers in the bank account of the company. A declaration from subscribers of the company in Form INC-21 was to be filed within 180 days of its incorporation. In a recent amendment, government has done away with the above mentioned requirement of obtaining Certificate of Commencement of Business (effective from end of May, 2015).
New Form INC-29
In its effort to simplify the process of incorporating a company in India and to attract foreign investors, government introduced an integrated e-Form INC-29, which is available for online filing from May 1, 2015. Form INC-29 at a glance:
- A single form for application of DIN, name availability and filing of other incorporation documents;
- This facility is in addition to present procedure for incorporation of companies;
- Time for incorporation of company will be significantly reduced.
Must Read –
- How INC-29 can enable Ease of Doing Business in India
- Key Features of MCA New e-form INC-29
- MCA INC-29 Single E-Form
However, there are certain limitations of the same, which includes the following:
- DIN can be applied only for 3 (three) directors;
- Only 1 (one) name can be applied for, instead of 6 (six);
- If anyone of the above applications is rejected, then whole process will have to be started afresh.
Despite of such limitations, introduction of this integrated Form INC-29 for incorporating a company is a welcome step.
Must Read – How to apply for DIN
Post incorporation compliances (immediately after incorporation)
Foreign Exchange Management Act (FEMA), 1999
- Obtaining FIRC (Foreign Inward Remittance Certificate): As soon as the subscription amount from foreign subscriber is received in India, authorised dealer bank will issue FIRC
- Reporting to the Reserve Bank of India (RBI): The company is required to report to RBI in Form FCGPR, along with other documents, within 30 days of issue of shares and shares for the same have to be allotted within 180 days of the receipt of subscription amount.
Companies Act, 2013
In case of a wholly owned subsidiary, 100% shares of the Indian company are held by the foreign entity (in its own name as well as through a nominee). Therefore, declarations from registered shareholder and beneficial shareholder have to be filed in Form MGT-6, within 30 days of receipt of such declarations.