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Setting up a Wholly Owned Subsidiary (WOS) in India is a strategic move for foreign investors aiming to establish full control over their Indian operations. However, this process involves navigating through several legal and regulatory requirements governed by Indian laws. Understanding these frameworks is essential to ensure compliance, operational efficiency, and smooth business growth.
The Indian government has simplified foreign investment procedures significantly, but adherence to the Companies Act, FEMA, RBI, and tax regulations remains mandatory for all foreign-owned subsidiaries.
Company Incorporation and Registration
A Wholly Owned Subsidiary must be registered under the Companies Act, 2013 as a private limited or public limited company. The registration process involves:
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Name Reservation: The proposed company name must be approved through the MCA (Ministry of Corporate Affairs) portal.
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Digital Signatures (DSC): Required for all proposed directors.
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Director Identification Number (DIN): Each director must obtain a DIN before appointment.
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Filing Incorporation Documents: Key forms such as SPICe+ (INC-32), e-MoA (INC-33), and e-AoA (INC-34) are submitted online with required documents.
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Certificate of Incorporation: Issued by the Registrar of Companies (ROC) once verification is completed.
At least one director must be a resident of India, and the subsidiary must have a registered office address within the country.
Foreign Direct Investment (FDI) Compliance
Foreign investment in India is primarily regulated under the Foreign Exchange Management Act (FEMA), 1999, and policies issued by the Reserve Bank of India (RBI). There are two key routes for investment:
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Automatic Route: No prior approval required; applicable for most sectors such as IT, manufacturing, and services.
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Government Route: Prior approval needed for sectors like defense, telecom, and print media.
Once the investment is made, the company must report to the RBI within 30 days of receiving foreign funds and issue shares within 60 days. The subsidiary is also required to file the Form FC-GPR through the RBI’s FIRMS portal.
Failure to comply with FEMA reporting can lead to penalties and delayed approvals, making accurate filings crucial for maintaining compliance.
Shareholding and Capital Structure
In a Wholly Owned Subsidiary, 100% of the share capital is held by the foreign parent company. The capital can be infused as:
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Equity Shares
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Compulsorily Convertible Preference Shares (CCPS)
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Compulsorily Convertible Debentures (CCDs)
The issue price of shares must comply with the valuation guidelines prescribed by the RBI. A certified valuation report from a SEBI-registered merchant banker or chartered accountant is often required.
Capital can be repatriated later through dividend distribution or share buyback, subject to compliance with FEMA and RBI norms.
Taxation Framework
A Wholly Owned Subsidiary in India is treated as a domestic company for tax purposes. Major tax aspects include:
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Corporate Tax: Currently 25% for companies with turnover below ₹400 crore and 30% for others.
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MAT (Minimum Alternate Tax): Applicable at 15% of book profits.
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Withholding Tax: Deducted on payments such as royalties, interest, or fees to the parent company.
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Transfer Pricing Compliance: Mandatory for international transactions between the subsidiary and its parent.
India also has Double Taxation Avoidance Agreements (DTAA) with several countries, allowing foreign companies to claim relief and avoid being taxed twice on the same income.
Repatriation of Profits and Dividends
A Wholly Owned Subsidiary can repatriate profits to its foreign parent through dividends, royalties, or technical service fees. However, this must comply with FEMA and income tax rules.
Key points:
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Dividends can be freely remitted after payment of applicable corporate taxes.
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No dividend distribution tax (DDT) applies, but withholding tax may be deducted at source.
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All remittances must be made through authorized dealer banks and reported to the RBI.
Proper documentation ensures smooth repatriation without regulatory scrutiny.
Annual and Ongoing Compliance Requirements
Once incorporated, a WOS must follow several statutory compliance obligations, including:
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Annual ROC Filings:
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Form AOC-4 for financial statements.
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Form MGT-7 for annual returns.
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Board and General Meetings:
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Minimum of four board meetings per year.
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One annual general meeting (AGM).
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Tax Filings:
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Annual income tax return by September 30.
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TDS compliance and GST filings (if applicable).
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Audit Requirements:
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Financial statements must be audited by a Chartered Accountant.
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Transfer Pricing Reports:
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For transactions between parent and subsidiary entities.
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Failure to meet these obligations can result in penalties, late fees, and potential suspension of business activities.
Employment and Labor Regulations
A Wholly Owned Subsidiary in India employing local staff must comply with labor laws, including:
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Payment of Wages Act, 1936
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Employees’ Provident Fund (EPF) and ESI Act
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Shops and Establishments Act
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Industrial Disputes Act
Employment contracts should clearly define terms of work, compensation, termination, and confidentiality to avoid disputes.
Additionally, foreign nationals working in India require valid employment visas and must register with the Foreigner Regional Registration Office (FRRO).
Intellectual Property and Brand Protection
Protecting intellectual property (IP) is critical for foreign companies establishing a presence in India. A WOS can register its:
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Trademarks with the Controller General of Patents, Designs and Trademarks.
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Patents under the Patents Act, 1970.
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Copyrights under the Copyright Act, 1957.
Having IP registered under the subsidiary’s name ensures legal protection against misuse and infringement within the Indian jurisdiction.
Exit and Winding Up Process
If the parent company decides to close the subsidiary, the exit process must comply with the Insolvency and Bankruptcy Code (IBC) or Companies Act, 2013.
Steps include:
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Board resolution for voluntary winding up.
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Clearance of liabilities and pending taxes.
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Application to the ROC for removal of name under Section 248.
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RBI approval for repatriation of remaining funds to the parent company.
Following due process ensures a smooth and compliant closure without future liabilities.
Key Benefits of Compliance
Maintaining proper legal and regulatory compliance offers multiple benefits:
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Avoidance of penalties and legal disputes.
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Enhanced corporate reputation.
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Easier access to funding and government tenders.
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Smooth operation and expansion opportunities.
A compliant Wholly Owned Subsidiary in India is viewed favorably by regulators, investors, and business partners.
Conclusion
The legal and regulatory framework for Wholly Owned Subsidiaries in India provides a robust foundation for foreign investors to operate confidently. While India offers liberalized FDI norms and business-friendly reforms, compliance remains the backbone of sustainable success.
By understanding and adhering to Indian corporate, tax, and foreign exchange laws, investors can build strong, compliant, and profitable subsidiaries that align with their global expansion goals. Engaging experienced legal and financial advisors ensures smooth incorporation and ongoing compliance in the dynamic Indian business environment.
FAQs
Q1. Which laws govern Wholly Owned Subsidiaries in India?
They are mainly regulated by the Companies Act, FEMA, RBI guidelines, and Income Tax Act.
Q2. Can foreign investors hold 100% shares in an Indian subsidiary?
Yes, 100% FDI is allowed under the automatic route for most sectors.
Q3. Is it mandatory to have a resident Indian director?
Yes, at least one director must reside in India for 182 days or more during the financial year.
Q4. What are the reporting requirements under FEMA?
Foreign investments must be reported to the RBI via Form FC-GPR within 30 days of issue of shares.
Q5. Can profits be freely repatriated to the parent company?
Yes, after tax compliance and RBI approval, profits can be remitted abroad.
Q6. What happens if compliance is delayed?
Non-compliance can attract penalties, prosecution, and restrictions on remittances.
Q7. Is approval needed for winding up a subsidiary?
Yes, closure must follow ROC and RBI procedures to repatriate funds legally.
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