How to Set Up a Subsidiary in India: A Complete Guide

India, with its fast-growing economy, skilled workforce, and robust legal framework, has become an attractive destination for global companies looking to expand. Establishing a subsidiary in India is an ideal way for foreign businesses to tap into this vibrant market. Whether you want to enter India for manufacturing, services, or IT operations, a subsidiary can provide the flexibility and local presence you need.

This blog provides a comprehensive guide to setting up a subsidiary in India, covering everything from regulatory requirements to the key benefits of having a subsidiary.

What is a Subsidiary?

A subsidiary is a company controlled by another (the parent company), where the parent owns more than 50% of the subsidiary’s shares. In India, subsidiaries of foreign companies can operate as private limited companies, and their operations are regulated by The Companies Act, 2013. A subsidiary can operate independently while adhering to Indian laws, offering foreign businesses a strong foothold in the Indian market.

Why Set Up a Subsidiary in India?

There are several compelling reasons why establishing a subsidiary in India can benefit your business:

1. Access to a Growing Market

India is one of the largest consumer markets in the world, with a burgeoning middle class. A subsidiary allows you to sell your products or services directly in the Indian market, catering to local needs and preferences.

2. Favorable Tax and Investment Policies

India has signed various tax treaties with other countries to avoid double taxation. Furthermore, the Indian government has introduced multiple policies that encourage foreign direct investment (FDI) in different sectors, making it easier for businesses to establish a subsidiary.

3. Skilled Workforce

India’s large talent pool, especially in areas like IT, engineering, and manufacturing, makes it easier for subsidiaries to hire skilled professionals at competitive costs. This workforce can help enhance productivity and foster innovation.

4. Strategic Location

India’s strategic geographical location makes it an ideal hub for businesses looking to serve global markets. With easy access to neighboring regions like Southeast Asia and the Middle East, your subsidiary in India can become a key player in your global operations.

Steps to Set Up a Subsidiary in India

1. Choose the Type of Subsidiary

Foreign companies can establish their presence in India through various types of entities. The most common form is a Private Limited Company, but foreign businesses can also opt for:

• Wholly-Owned Subsidiary: In this case, the parent company holds 100% ownership of the subsidiary.
• Joint Venture (JV): A partnership between the foreign company and an Indian entity where both parties share ownership and responsibilities.

2. Incorporation Process

The incorporation process is regulated by The Companies Act, 2013 and involves the following steps:

• Digital Signature Certificate (DSC): Obtain a DSC for at least one director of the proposed subsidiary.
• Director Identification Number (DIN): Apply for a DIN for all directors.
• Company Name Registration: Register the subsidiary’s name with the Registrar of Companies (ROC) to ensure it complies with legal naming conventions.
• Memorandum of Association (MOA) and Articles of Association (AOA): Draft these legal documents that outline the company’s objectives, structure, and internal governance.

3. Comply with FDI Regulations

India allows foreign direct investment (FDI) in various sectors under two main routes:

• Automatic Route: No prior government approval is required, and the FDI is permitted in specific sectors (e.g., IT, services, manufacturing).
• Approval Route: Government approval is mandatory for certain industries, such as defense or telecommunications.

Before incorporating your subsidiary, ensure that your business aligns with India’s FDI policies. Consulting with legal or regulatory experts can help you navigate this process smoothly.

4. Set Up Bank Accounts

A key step in setting up your subsidiary is opening a corporate bank account in India. The bank account will be used for the financial transactions of the subsidiary and must adhere to Indian financial regulations.

5. Hiring Employees

When hiring employees for your subsidiary, compliance with Indian labor laws is essential. India has stringent regulations regarding minimum wages, employee benefits, provident funds, and social security. Make sure to adhere to these guidelines when recruiting staff for your subsidiary.

6. Obtain Necessary Licenses and Permits

Depending on the industry and business activities, you may need specific licenses or permits from Indian authorities. For instance, if you’re entering the manufacturing sector, you might need clearances from the Ministry of Environment or the Pollution Control Board.

7. Tax Compliance and Filing Requirements

Your subsidiary must comply with Indian tax regulations, including Goods and Services Tax (GST), Corporate Income Tax, and Withholding Tax. Additionally, the company must file annual tax returns, maintain accurate financial records, and undergo statutory audits.

Benefits of Setting Up a Subsidiary in India

1. Full Control Over Operations

Setting up a subsidiary provides you with complete control over your business operations in India. This allows for greater flexibility in decision-making, strategic planning, and the implementation of global standards and practices.

2. Enhanced Brand Presence

A subsidiary helps establish a direct connection with the Indian market, improving brand recognition and fostering trust with local customers. With the ability to adapt to local preferences, your business can better serve Indian customers while retaining the parent company’s brand values.

3. Limited Liability Protection

In a subsidiary, the parent company enjoys limited liability, meaning it is only responsible for the company’s obligations up to its shareholding. This limits the financial risks while expanding into a new market.

4. Long-Term Market Expansion

Setting up a subsidiary in India positions your business for long-term growth. By establishing a local presence, your company can better navigate the Indian market's unique challenges and opportunities, ensuring sustainable business expansion.

Challenges of Establishing a Subsidiary in India

While setting up a subsidiary offers numerous benefits, there are some challenges that businesses must consider:

• Regulatory Complexity: India’s regulatory environment can be complex, especially for foreign businesses unfamiliar with the local laws and procedures. Partnering with a local consultant can help you navigate these challenges.
• Cultural Differences: Understanding the local culture, business etiquette, and consumer preferences can take time, but it is essential for successful market entry.
• Infrastructure Gaps: Although India is rapidly developing, some regions may still face infrastructure issues, such as transportation and power shortages, that could impact business operations.

Conclusion

Establishing a subsidiary in India is a strategic move for businesses looking to expand into one of the world’s most dynamic markets. With the right planning, legal assistance, and understanding of local regulations, foreign companies can successfully set up a subsidiary and take advantage of the opportunities India has to offer.

Whether you're exploring the Indian market for the first time or expanding your existing operations, consulting experts like Zcoordinate Solutions can simplify the process and ensure a smooth transition into India’s business landscape.