Foreign Subsidiary in India: Complete FEMA + Companies Act Setup Guide | Virtual Auditor

1. Why a Subsidiary? Comparing Entity Options for Foreign Companies in India

Before establishing an Indian presence, a foreign company must choose among several entity structures: a wholly owned subsidiary (WOS), a joint venture subsidiary, a branch office (BO), a liaison office (LO), or a project office (PO). Each has distinct legal, tax, and operational implications. Understanding these distinctions is the first critical decision in the India entry strategy.

1.1 Subsidiary vs. Branch Office vs. Liaison Office

1.2 Why the Subsidiary Is the Preferred Choice

For most foreign companies planning substantive operations in India — whether in IT services, manufacturing, SaaS, consulting, or e-commerce — the subsidiary structure is overwhelmingly preferred for several reasons:

• Full operational flexibility: A subsidiary can carry on any lawful business activity, hire employees, acquire property, enter into contracts, and operate without the activity restrictions that apply to branch and liaison offices.
• Lower tax rate: At 22% (plus surcharge and cess, effective rate approximately 25.17%) under Section 115BAA of the Income Tax Act, the subsidiary’s tax rate is significantly lower than the 40% applicable to foreign companies (BO).
• Limited liability: The foreign parent’s liability is limited to its equity investment. In contrast, a BO or LO exposes the foreign company to unlimited liability for the Indian operations.
• No RBI approval (automatic route): In sectors where 100% FDI is permitted under the automatic route, no prior approval from RBI or any government ministry is needed. This removes a significant administrative hurdle.
• Perpetual existence: Unlike a BO or LO that must be renewed periodically, a subsidiary has perpetual succession.
• Easier fund-raising: An Indian subsidiary can raise capital from Indian investors, take ECBs, and issue debentures — options not available to a BO or LO.

2. Pre-Incorporation Planning — FEMA and FDI Policy Analysis

Before initiating the incorporation process with MCA, the foreign entity must conduct a thorough FEMA and FDI policy analysis. This is a step that many entities skip, leading to complications later. At Virtual Auditor, we always begin with this regulatory mapping exercise.

2.1 FDI Policy — Sectoral Caps and Entry Routes

The FDI Policy, issued by the Department for Promotion of Industry and Internal Trade (DPIIT), prescribes the sectoral caps and entry routes for FDI. The Consolidated FDI Policy (updated periodically) classifies sectors into three categories:

• Prohibited sectors: FDI is not permitted — lottery business, gambling and betting, chit funds, Nidhi company, trading in transferable development rights, real estate business (excluding construction development), manufacturing of cigars, cheroots, cigarillos, and cigarettes of tobacco.
• Sectors with caps and/or government route: FDI is permitted subject to sectoral caps and/or prior government approval. Key examples include:
  • Defence — 74% under automatic route, beyond 74% under government route
  • Telecom — 100% (up to 49% automatic, beyond 49% government route)
  • Insurance — 74% under automatic route
  • Print media (news and current affairs) — 26% under government route
  • Multi-brand retail — 51% under government route
  • Digital media/news — 26% under government route
  • Broadcasting — various sub-limits depending on segment
  • Mining — 100% automatic for most minerals; coal mining at 100% automatic
  • Private security agencies — 74% under automatic route
• Sectors with 100% automatic route: Most sectors fall here — IT/ITES, manufacturing, consulting, e-commerce (marketplace model), food processing, healthcare, education (limited), construction development (with conditions), pharmaceuticals (greenfield — 100% automatic; brownfield — 74% automatic, beyond 74% government route).

2.2 FEMA NDI Rules, 2019 — The Investment Framework

The Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules), notified under FEMA Section 6(2), replaced the earlier FEMA Notification 20(R) and govern all non-debt capital inflows into India. Key provisions relevant to subsidiary setup include:

• Rule 21 — Eligible instruments: FDI can be received only in equity shares, compulsorily and mandatorily convertible debentures, or compulsorily and mandatorily convertible preference shares. Optionally convertible instruments are treated as debt and not as FDI.
• Rule 21(2) — Pricing: Shares issued to non-residents must be at a price not less than the fair market value determined as per internationally accepted pricing methodology on an arm’s length basis by a SEBI-registered merchant banker or a Chartered Accountant holding a valid Certificate of Practice. For a newly incorporated company with no operations, the FMV is typically the face value.
• Rule 23 — Mode of payment: The consideration must be received through normal banking channels — i.e., inward remittance from abroad or debit to NRE/FCNR(B) account of the non-resident investor. Payment by any other mode (including cash, accommodation, or transfer from NRO account for fresh FDI) is not permitted for subscription to shares.
• Rule 28 — Reporting: The investee company must report the FDI to RBI through the AD bank using Form FC-GPR (Foreign Currency — Gross Provisional Return) within 30 days of allotment of shares.

2.3 Sectoral Conditions and Press Notes

Even in 100% automatic route sectors, there may be sector-specific conditions. For example:

• E-commerce: FDI is permitted only in the marketplace model, not the inventory-based model. The e-commerce entity cannot exercise ownership over the inventory, influence the price of goods/services, and more than 25% of sales through the platform cannot be from entities in which the e-commerce company has equity participation.
• Construction development: Minimum area of 20,000 sq.m. for serviced plots and built-up area of 20,000 sq.m. for construction-development projects. Minimum capitalisation of USD 5 million for WOS and USD 5 million for JV. Repatriation of capital locked in for 3 years from date of receipt of each instalment.
• Single-brand retail: 100% automatic route, but if FDI exceeds 51%, the entity must mandatorily source 30% of the value of goods purchased from India.

These conditions are typically embodied in DPIIT Press Notes and subsequently incorporated into the Consolidated FDI Policy. Non-compliance with these conditions constitutes a FEMA contravention. We always verify the latest Press Notes and circulars before advising on sector-specific FDI structures.

2.4 Beneficial Ownership and Indirect FDI

A critical FEMA concept is the computation of indirect foreign equity. If a foreign entity holds shares in Indian Company A, and Indian Company A invests in Indian Company B, the FDI percentage in Company B is computed on a look-through basis. This means:

• If the foreign parent holds 100% of Company A, and Company A invests in Company B, Company B is treated as having 100% indirect FDI.
• If the foreign parent holds 60% of Company A, and Company A invests in Company B, Company B has 60% indirect FDI (assuming Company A invests 100% of Company B’s equity).

This computation is governed by Rule 23 of the NDI Rules and the methodology prescribed in the Consolidated FDI Policy. Downstream investment by an Indian company that is owned or controlled by a non-resident entity must comply with the sectoral cap and entry route conditions applicable to the sector of Company B. This is a frequently misunderstood provision that can lead to inadvertent contraventions, particularly in group restructurings.

3. Incorporation Process Under the Companies Act, 2013

Once the FEMA and FDI analysis confirms that the proposed subsidiary structure is permissible, the incorporation process begins. The Companies Act, 2013 and the Companies (Incorporation) Rules, 2014 govern this process, which is now entirely online through the MCA21 portal.

3.1 Pre-Incorporation Requirements

3.1.1 Directors — Minimum Requirements

A private limited company requires a minimum of two directors (Section 149(1)). At least one director must be resident in India — meaning they have stayed in India for a total period of at least 182 days during the financial year (Section 149(3)). The foreign parent’s nominee(s) can serve as directors, but the resident director requirement must be independently satisfied.

Each proposed director must obtain a Director Identification Number (DIN) from MCA. Foreign nationals apply for DIN through SPICe+ form itself, submitting a passport copy (apostilled or notarised and consularised by the Indian embassy in their country) and proof of address.

3.1.2 Digital Signature Certificate (DSC)

All directors must obtain a Class 3 Digital Signature Certificate from a certifying authority recognised by the Controller of Certifying Authorities (CCA) under the Information Technology Act, 2000. For foreign directors, the DSC application requires a passport copy and address proof, authenticated by the Indian embassy or apostilled (for Hague Convention countries).

3.1.3 Name Reservation

The proposed company name must be reserved through Part A of SPICe+ (RUN — Reserve Unique Name). MCA allows up to two name choices. The name must not be identical or deceptively similar to any existing company, LLP, or registered trademark. Names must comply with the Companies (Incorporation) Rules, 2014 regarding prohibited and restricted words. Name reservation is valid for 20 days from approval.

3.2 SPICe+ Incorporation Form

The SPICe+ (Simplified Proforma for Incorporating Company Electronically Plus) is an integrated web form that bundles the following services into a single application:

• Part A: Name reservation (RUN)
• Part B: Incorporation application — includes:
  • Company incorporation (Certificate of Incorporation with CIN)
  • DIN allotment for up to 3 directors
  • PAN (Permanent Account Number) allotment
  • TAN (Tax Deduction Account Number) allotment
  • EPFO registration (Employee Provident Fund)
  • ESIC registration (Employee State Insurance)
  • Professional Tax registration (for applicable states)
  • Bank account opening with designated banks
  • GST registration (through AGILE-PRO-S form linked to SPICe+)
  • Shops & Establishments registration (for applicable states)

3.3 Documents Required for Incorporation

The following documents must be submitted with SPICe+ for a foreign subsidiary:

3.4 Authentication of Foreign Documents — Apostille vs. Consularisation

Documents originating from outside India must be properly authenticated before submission to MCA. Two methods apply:

• Apostille: For countries that are signatories to the Hague Apostille Convention (1961). Documents are notarised locally and then apostilled by the designated competent authority in the home country. The apostille is a standardised certificate attached to the document.
• Consularisation: For countries that are NOT signatories to the Hague Convention. Documents are notarised locally, attested by the Ministry of Foreign Affairs (or equivalent) of the home country, and then authenticated by the Indian Embassy or Consulate in that country.

This authentication requirement is one of the most time-consuming aspects of incorporating a foreign subsidiary. We advise clients to initiate document authentication 2-3 weeks before filing SPICe+.

3.5 Certificate of Incorporation and Post-Incorporation Steps

Upon successful processing, MCA issues the Certificate of Incorporation bearing the Corporate Identity Number (CIN). The certificate also contains the PAN and TAN of the company. Post-incorporation, the following steps must be completed promptly:

1. Open a bank account: A current account must be opened with an Authorised Dealer (AD) bank. The bank account is designated to receive FDI inflows. Many banks now offer account opening linked to SPICe+, but in practice, foreign-owned subsidiaries often face additional KYC scrutiny.
2. Commence business: Section 10A of the Companies Act requires that every company incorporated after the Companies (Amendment) Ordinance, 2018 must file a declaration (Form INC-20A) within 180 days of incorporation confirming that every subscriber has paid the value of shares agreed to be taken. Failure to file INC-20A within 180 days triggers penal consequences including strike-off.
3. Appoint auditor: Within 30 days of incorporation, the Board must appoint the first statutory auditor, who holds office until the conclusion of the first AGM (Section 139(6)).
4. Register for GST: If the company’s activities attract GST (most do), GST registration through the linked AGILE-PRO-S form or separately through the GST portal is required.

4. Receiving FDI — FEMA Compliance After Incorporation

After incorporation, the subsidiary is ready to receive FDI from the foreign parent. This phase involves strict FEMA compliance that must be adhered to within prescribed timelines.

4.1 Inward Remittance and KYC

The foreign parent remits the investment amount to the subsidiary’s bank account through normal banking channels. The AD bank conducts KYC on the remitter (the foreign parent) including verification of the source of funds, identity of the beneficial owner, and compliance with FEMA regulations. The remittance must be accompanied by a Foreign Inward Remittance Certificate (FIRC) or an e-FIRC generated by the AD bank.

Pending allotment of shares, the foreign investment amount is kept in a share application money pending allotment account. The company must allot shares within 60 days of receipt of the remittance. If shares are not allotted within 60 days, the amount must be refunded to the foreign investor. Any amount remaining beyond 60 days without allotment or refund constitutes a FEMA contravention.

4.2 Share Allotment and Pricing Compliance

The Board of Directors passes a resolution allotting shares to the foreign subscriber. The shares must be allotted at a price not less than the fair market value determined in accordance with the NDI Rules:

• For a new company with no operations: The FMV is the face value of shares (typically Rs 10 per share). No valuation report is required as there is no premium.
• For an existing company (subsequent FDI round): The FMV must be determined by a SEBI-registered merchant banker or a Chartered Accountant using an internationally accepted pricing methodology — commonly the Discounted Cash Flow (DCF) method. For listed companies, the pricing is as per SEBI guidelines (LODR Regulations).

4.3 Reporting to RBI — Form FC-GPR

Within 30 days of allotment of shares, the subsidiary must report the FDI to RBI through the AD bank using Form FC-GPR on the FIRMS (Foreign Investment Reporting and Management System) portal. The FC-GPR filing includes:

• Details of the investee company (CIN, name, registered office, sector, NIC code)
• Details of the foreign investor (name, country, relationship, beneficial owner)
• Details of the investment (number of shares, face value, premium, total consideration, date of allotment, date of receipt of remittance)
• Valuation certificate from a SEBI-registered merchant banker or CA (for investments at a premium)
• KYC documents of the foreign investor
• FIRC/e-FIRC evidencing the inward remittance
• CS certificate confirming compliance with Companies Act and FEMA

Delayed filing of FC-GPR is a FEMA contravention that requires compounding. In our experience at Virtual Auditor, delayed FC-GPR filings account for the largest category of FEMA compounding applications. We strongly advise clients to set up internal reminders and engage their AD bank and CA immediately upon share allotment.

4.4 Annual Reporting — FLA Return

Every Indian company that has received FDI must file an Annual Return on Foreign Liabilities and Assets (FLA Return) with RBI by 15 July each year. The FLA Return captures the company’s foreign liabilities (FDI, portfolio investment, loans, trade credits) and foreign assets. Non-filing of FLA is treated as a contravention and can lead to difficulties in processing future FDI-related applications.

5. Government Route — When Prior Approval Is Required

For sectors requiring government approval (defence, telecom beyond 49%, print media, broadcasting, multi-brand retail, mining of certain categories), the foreign parent must obtain approval from the concerned administrative ministry before making the investment.

5.1 Foreign Investment Facilitation Portal (FIFP)

Applications under the government route are filed through the FIFP portal, managed by DPIIT. The application includes details of the proposed investment, the sector, the business plan, the identity of the foreign investor, and the proposed shareholding structure. The concerned ministry (e.g., Ministry of Defence for defence sector investments) examines the application and may seek clarifications. The typical processing time is 8-10 weeks, though complex cases can take longer.

5.2 Security Clearance

For FDI from countries sharing a land border with India — specifically Bangladesh, China, Pakistan, Nepal, Myanmar, Bhutan, and Afghanistan — Press Note 3 of 2020 mandates that all FDI requires government approval regardless of the sector or the extent of foreign holding. This applies even to transfers of existing FDI where the beneficial owner is from these countries. Additionally, FDI proposals from Pakistan are restricted to the government route in specific sectors, and no FDI from Pakistan is permitted in defence, space, and atomic energy.

This Press Note 3 requirement has significant implications for Chinese investors, who were previously able to invest under the automatic route in most sectors. All new Chinese investments now require government approval, and the processing times have been considerably longer than for other nationalities.

6. Post-Incorporation Compliance Framework

Establishing the subsidiary is only the beginning. The ongoing compliance framework spans the Companies Act, FEMA, Income Tax, GST, labour laws, and potentially sector-specific regulations. A structured compliance calendar is essential.

6.1 Companies Act Annual Compliances

6.2 FEMA Ongoing Compliances

• FLA Return: Annual filing with RBI by 15 July — capturing all foreign liabilities and assets.
• FC-GPR for subsequent rounds: Each time new shares are allotted to non-residents, a fresh FC-GPR must be filed within 30 days.
• FC-TRS: When shares are transferred from a resident to a non-resident or vice versa, Form FC-TRS must be filed within 60 days of receipt of remittance.
• Annual Return on Foreign Liabilities and Assets: Even if no fresh FDI is received during the year, the FLA return must be filed if there is outstanding FDI.
• Downstream investment reporting: If the subsidiary makes any downstream investment in another Indian company, the reporting requirements under the NDI Rules must be complied with.

6.3 Transfer Pricing Compliance

A foreign subsidiary inevitably has transactions with its parent company — management fees, royalties, IT services, cost recharges, shared service costs, or intercompany loans. Under Sections 92A to 92F of the Income Tax Act, 1961, these are “specified domestic transactions” or “international transactions” with associated enterprises, subject to transfer pricing regulations.

• Transfer pricing documentation: If aggregate value of international transactions exceeds Rs 1 crore in a financial year, the company must maintain prescribed documentation (Form 3CEB certified by a CA, due by the date of filing the tax return).
• Arm’s length pricing: All transactions with the parent must be at arm’s length price, determined using one of the five prescribed methods (CUP, RPM, CPM, PSM, or TNMM). The most commonly used method for IT services subsidiaries is the Transactional Net Margin Method (TNMM) with an operating margin benchmark.
• Country-by-Country Reporting (CbCR): If the parent group’s consolidated revenue exceeds EUR 750 million (approximately Rs 6,200 crore), the Indian subsidiary may need to file CbCR disclosures with the Indian tax authorities.
• Advance Pricing Agreement (APA): For certainty on transfer pricing, the subsidiary can apply for an APA with the Central Board of Direct Taxes (CBDT). Unilateral APAs typically take 18-24 months; bilateral APAs take longer but provide greater certainty.

6.4 Tax Compliance

7. Dividend Repatriation — Getting Profits Back to the Parent

One of the primary reasons foreign companies establish Indian subsidiaries is to generate revenue in the Indian market and repatriate profits. The dividend repatriation framework has become significantly simpler since April 2020 when the Dividend Distribution Tax (DDT) was abolished.

7.1 Current Framework

• Declaration of dividend: The Board recommends the dividend, and shareholders approve it at the AGM (final dividend) or the Board declares it (interim dividend). The company must have adequate distributable profits (out of current year profits or accumulated profits after providing for depreciation).
• Tax on dividend: No DDT. Dividend is taxable in the hands of the recipient. For a non-resident parent company, the Indian subsidiary must deduct TDS at 20% (under Section 195 read with Section 115A). This rate may be reduced under the applicable Double Taxation Avoidance Agreement (DTAA). For example, under the India-Singapore DTAA, the rate is 10% if the parent owns at least 25% of shares.
• Remittance: After deducting TDS, the subsidiary remits the net dividend through the AD bank. Form 15CA (online) and Form 15CB (CA certificate) must be filed/issued before the remittance.
• No RBI approval: Dividend remittance is a current account transaction and does not require prior RBI approval. The AD bank processes the remittance based on the board resolution, tax deduction challan, and 15CA/15CB.

7.2 DTAA Benefits — Practical Application

India has comprehensive DTAAs with over 90 countries. The applicable DTAA rate for dividends varies:

To claim the beneficial DTAA rate, the subsidiary must obtain a Tax Residency Certificate (TRC) from the parent company, issued by the tax authority of the parent’s country of residence, along with a Form 10F declaration.

8. Common Structuring Decisions and Pitfalls

8.1 Authorised vs. Paid-Up Capital

The authorised capital is the maximum number of shares the company can issue without amending its MoA. The paid-up capital is the amount actually invested by shareholders. For a foreign subsidiary, we recommend setting the authorised capital at 2-3 times the initial investment to accommodate future capital infusions without the cost and delay of increasing authorised capital (which requires shareholder approval and payment of additional ROC fees and stamp duty).

8.2 Nominee Shareholders — The Two-Shareholder Requirement

A private limited company requires a minimum of two shareholders (Section 3(1)(b) of the Companies Act, 2013). For a WOS, both shareholders are typically the same foreign parent (holding shares in different capacities — e.g., the parent company directly and through a nominee). Alternatively, the foreign parent holds the majority, and a nominee or group entity holds one share. This is a common structuring question, and we advise that the nominee arrangement should be properly documented with a nominee agreement to avoid future ownership disputes.

8.3 Convertible Instruments as FDI

Under the NDI Rules, FDI can be received through equity shares, compulsorily convertible debentures (CCDs), or compulsorily convertible preference shares (CCPS). CCDs are particularly popular in startup funding as they allow investment without immediately determining the valuation — the conversion happens at a future date based on a pre-agreed formula. However, the conversion must be mandatory and not optional. Optionally convertible instruments are treated as debt (ECB) and not as FDI, attracting a different regulatory framework entirely.

8.4 Common Pitfalls We Encounter

• Delayed INC-20A filing: Foreign parents often take time to remit the subscription money after incorporation, leading to a breach of the 180-day deadline for filing the declaration of commencement of business.
• Incorrect NIC code: The National Industrial Classification code selected at incorporation determines the applicable FDI sectoral cap. An incorrect NIC code can create a mismatch between the actual activity and the FDI compliance framework.
• Resident director resignation: If the sole resident director resigns and a replacement is not appointed, the company operates in violation of Section 149(3). This is a common issue when Indian employees leave.
• Share premium without valuation: When subsequent FDI rounds are received at a premium, a valuation report is mandatory. Allotting shares at a premium without a valuation report is a FEMA contravention.
• Non-filing of annual compliances: Many foreign subsidiaries, particularly those with minimal operations initially, neglect annual ROC filings. Non-filing for two consecutive years triggers strike-off proceedings under Section 248 of the Companies Act.

9. Exit Strategy — Winding Down or Selling the Subsidiary

Foreign parents may need to exit their Indian subsidiary due to changes in business strategy, underperformance, or group restructuring. The exit options include:

9.1 Sale of Shares (FC-TRS Compliance)

The foreign parent can sell its shares in the Indian subsidiary to an Indian buyer or another non-resident buyer. Under FEMA, the pricing is regulated:

• Non-resident to resident transfer: The price must not exceed the FMV determined by a SEBI-registered merchant banker or CA. This protects against capital flight — the resident is not allowed to pay more than FMV to the non-resident.
• Non-resident to non-resident transfer: The price must not be less than the FMV. This ensures that India does not lose the value of the investment.

The transfer must be reported on Form FC-TRS within 60 days of receipt of the sale consideration. Capital gains tax implications (either short-term or long-term depending on the holding period) must be addressed, and Form 15CA/15CB is required for remittance of sale proceeds.

9.2 Voluntary Winding Up

Under the Insolvency and Bankruptcy Code, 2016 (IBC) read with Section 59 of the Companies Act, 2013, a company with no debts or with debts fully paid can be wound up voluntarily. The process involves a declaration of solvency by directors, special resolution by shareholders, appointment of a liquidator (registered with IBBI), realisation of assets, payment of liabilities, and distribution of surplus to shareholders. The entire process typically takes 12-18 months.

9.3 Strike-Off Under Section 248

For dormant companies that have not carried on any business for two consecutive financial years, strike-off under Section 248 of the Companies Act is a faster and more cost-effective exit. The application is filed in Form STK-2 with the ROC, and the company’s name is removed from the register. However, the directors remain liable for any pending obligations, and repatriation of residual funds requires FEMA compliance including appropriate tax clearances.

10. Our End-to-End Setup Process at Virtual Auditor

At Virtual Auditor, we offer a comprehensive Indian subsidiary setup service that covers the entire lifecycle from pre-incorporation planning through ongoing compliance. Our process, led by CA V. Viswanathan (IBBI/RV/03/2019/12333), follows these stages:

1. FDI feasibility analysis: We examine the proposed business activity, identify the applicable NIC code, confirm the FDI sectoral cap and entry route, and advise on any sector-specific conditions.
2. Structure advisory: We recommend the optimal capital structure, advise on authorised vs. paid-up capital, and draft the MoA objects clause to cover current and anticipated future activities.
3. Document preparation and authentication: We coordinate the preparation, notarisation, and apostillisation/consularisation of all foreign documents.
4. Incorporation filing: We file SPICe+ with MCA, obtain the CIN, PAN, TAN, and facilitate bank account opening.
5. FDI receipt and reporting: We coordinate with the AD bank for KYC, process the share allotment, and file FC-GPR within 30 days.
6. Post-incorporation setup: We complete GST registration, appoint auditors, set up the statutory register, and establish the compliance calendar.
7. Ongoing compliance: We handle annual ROC filings, tax returns, FLA returns, transfer pricing documentation, and FEMA compliance management on a retainer basis.

For transparent pricing on our subsidiary setup services, visit our pricing page.

Frequently Asked Questions

Can an LLP be used instead of a private limited company for foreign investment?

Yes, but with significant restrictions. FDI in LLPs is permitted only in sectors where 100% FDI is allowed under the automatic route AND where there are no FDI-linked performance conditions. The LLP must operate in eligible sectors, and the investment is governed by FEMA (Non-Debt Instruments) Rules. However, LLPs cannot issue different classes of securities (preference shares, debentures), which limits structuring flexibility. For most foreign investors, the private limited company remains the preferred vehicle. See our comparison guide on FDI in Indian startups for a detailed analysis.

What if the foreign parent is from a country sharing a land border with India (e.g., China)?

Under Press Note 3 of 2020, FDI from countries sharing a land border with India (Bangladesh, China, Pakistan, Nepal, Myanmar, Bhutan, Afghanistan) requires prior government approval regardless of the sector. This applies to both direct and indirect beneficial ownership. If the ultimate beneficial owner is a citizen of or incorporated in these countries, the government route applies. The approval process through FIFP typically takes 8-16 weeks, and national security considerations are evaluated. FDI from Pakistan has additional restrictions — it is permitted only in specific sectors under the government route.

Is there a minimum investment amount for setting up a foreign subsidiary?

There is no statutory minimum FDI amount prescribed by RBI or FEMA for establishing a subsidiary in India (except for sector-specific minimums such as USD 5 million for construction development). The Companies Act, 2013 has also removed the minimum paid-up capital requirement for private limited companies. Practically, we advise an initial investment sufficient to cover 6-12 months of operating costs, including office rent, employee salaries, and compliance costs. Many IT/ITES subsidiaries start with an initial capital of Rs 10 lakh to Rs 50 lakh.

Can a foreign subsidiary in India repatriate capital (not just dividends)?

Yes, but capital repatriation is more regulated than dividend repatriation. Options include: (a) share buyback — under Section 68 of the Companies Act, subject to FEMA pricing norms (shares bought at not more than FMV), (b) capital reduction under Section 66 with NCLT approval, (c) liquidation and distribution of surplus assets. Each of these routes requires specific FEMA compliance, tax withholding, and Form 15CA/15CB. Capital repatriation is a capital account transaction and is subject to RBI regulations, unlike dividend remittance which is a current account transaction.

What is the Permanent Establishment (PE) risk for the foreign parent?

Establishing an Indian subsidiary does not automatically create a PE for the foreign parent in India. Under most DTAAs, a subsidiary is a separate legal entity and is not a PE of its parent. However, a PE may be created if: (a) the subsidiary acts as a dependent agent of the parent — i.e., it has authority to conclude contracts on behalf of the parent and habitually exercises that authority, (b) the subsidiary’s premises constitute a fixed place of business of the parent. Careful structuring of the subsidiary’s mandate, reporting lines, and authority is essential to avoid inadvertent PE creation. This is particularly relevant for IT service companies where employees of the subsidiary may interact with the parent’s clients.

How does the Indian subsidiary handle expatriate employees from the parent?

Foreign nationals deputed by the parent to work in the Indian subsidiary require: (a) an Employment Visa (not a Business Visa), (b) registration with the Foreigners Regional Registration Office (FRRO) within 14 days of arrival if the stay exceeds 180 days, (c) PAN (mandatory for any person earning income in India), (d) Indian tax return filing if they qualify as resident or have Indian-source income. The subsidiary must deduct TDS on salary and comply with Indian labour laws (PF, ESI, Shops & Establishments Act). The remuneration structure may be split between the Indian subsidiary and the parent for tax efficiency, but this must be documented in a secondment agreement and priced at arm’s length for transfer pricing compliance.

What role does the IBBI Registered Valuer play in setting up a subsidiary?

While the initial subscription to shares at face value does not require a formal valuation, subsequent FDI rounds at a premium require a valuation by a SEBI-registered merchant banker or a CA. Additionally, if the subsidiary’s shares are transferred between a resident and a non-resident, a formal valuation is mandatory under FEMA pricing guidelines. CA V. Viswanathan, as an IBBI Registered Valuer (IBBI/RV/03/2019/12333), provides valuation services for FDI pricing, share transfers, and related-party transactions, ensuring compliance with both FEMA requirements and transfer pricing regulations.

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