Subsidiary Formation in India Explained

If your business expansion strategy does not include operations in India, you are missing out on a treasure loot that keeps on giving. India has proved itself to be chock full of opportunities for foreign businesses. The ease of doing business in India has improved greatly, and the prime time to form a subsidiary in India is NOW.

Subsidiary formation in India is a relatively straightforward process. However, there are some considerations and regulations you must understand before making the leap.

  • First, the basics

In simple words, a subsidiary is a company which is owned by another company. The owning company / parent company / holding enjoys controlling interest in the child company / subsidiary company. That is, a holding company has at least 51% stock ownership. However, the subsidiary can also be wholly owned by the holding company.

The parent company can be located anywhere; it is not necessary that they also be in India. However, to incorporate a company in India, the subsidiary company needs to be registered in India. Naturally then, the subsidiary will (and must) have a corporate address in India.

  • Considerations for subsidiary formation in India 
    • Directors

For forming a subsidiary in India, the child company needs at least two directors. Additionally, at least one of the directors should be a resident of India. All directors should have their DIN (Director Identification Number).

  • Shareholders

The Indian subsidiary should have a minimum of 2 shareholders. Shareholders can be individuals or businesses themselves, or even a combination of the two. What this means that your company must be publicly limited, and cannot be privately owned. This further implies that the holding company itself needs to be a public limited company, and cannot be a partnership or LLC.

  • Taxation

The subsidiary in India will be a separate tax entity. The cost of operations, the profits earned, and the expenses of incoming goods and services are all liable for taxation and input tax credit. However, to connect between the taxation of the holding company and the Indian subsidiary is a tricky subject, because matters of direct investments, indirect investments, and taxation laws of the country-of-origin kick in. But for all intents and purposes, you should be aware that there is a tax consideration for the subsidiary you will incorporate in India, just that the actual liability will depend on a lot of conditions bespoke to your situation.

  • Location

You wouldn’t want your subsidiary to become a sink project. No business has unlimited resources to keep an unviable project alive. Naturally, your objective with the Indian subsidiary will be to become as profitable as possible, as soon as possible. For that the location of your subsidiary formation in India matters. A lot. Be prepared to put in considerable time and effort into market research and gauging the expectations of the Indian market place to whatever your business offers.

  • Employee productivity

You really don’t have any say in the day-to-day operations of the Indian subsidiary. But to have a controlling hand from afar, you need to run a tight ship. To ensure your team in India is as productive as possible, you need to understand the mentality of your employees. What do they respond to? Are they most productive under high pressure or do they value work flexibility?

Moreover, you also need to keep in mind cultural considerations. Indians value their traditions and would always prefer to have their holidays aligned to cultural festivals and auspicious occasions. Figure out what makes your employees tick, and help your Indian directors create an atmosphere of business growth.

  • Costing

Subsidiary formation in India costs between 50,000 INR to 2,00,000 INR. There are additional costs involved in making your business 100% compliant. Not to mention the cost of your time as you supervise the smooth functioning of the Indian subsidiary.

  • Becoming operational

Unfortunately, among the 5 methods of international business expansion, subsidiary formation suffers a lag in getting the child company fully operational. Setting up the Indian subsidiary takes 2-4 months. This is owing to the fact that a holding company actually owns your subsidiary. Every decision needs to go through their pre-existing hierarchies. Once all decisions are verified, then you can start business operations. Until then, you are stuck in limbo.

  • Need help with subsidiary formation?

We provide support to facilitate foreign enterprises in seamlessly establishing their presence in India. We understand India better. We understand the pulse, the culture and the laws. And that is why, though you are entering unknown territories, we take it on ourselves to safeguard & protect your interests. Our deep experience in subsidiary formation will make the incorporation process swift and cost-effective.