How to Set Up an Indian Subsidiary has become a key consideration for global investors and companies as India emerges as a preferred destination for establishing a long-term presence in Asia. With its steadily growing economy, business-friendly reforms, expanding consumer base, and a highly skilled workforce, India presents a unique mix of opportunity and stability. For many foreign businesses, setting up a fully functional subsidiary offers greater strategic control, operational autonomy, and legal advantages compared to distributorships, franchises, or liaison offices.
A subsidiary in India refers to a company incorporated under the Companies Act, 2013, with foreign ownership—either as a Wholly Owned Subsidiary (WOS), where 100% shares are held by the foreign parent company, or a Joint Venture (JV), where ownership is shared with Indian individuals or entities. Regardless of shareholding pattern, once incorporated, the subsidiary is treated as an Indian company. It acquires an independent legal identity, pays taxes as a resident Indian entity, can hold assets, enter into contracts, hire employees, sue or be sued in its own name.
Understanding India’s FDI Framework
Foreign investment into India is primarily governed by the Foreign Exchange Management Act, 1999 (FEMA) and the Consolidated FDI Policy released by the Department for Promotion of Industry and Internal Trade (DPIIT). Investment entry routes are broadly categorized into two:
- Automatic Route: Where no prior government approval is required.
- Government Route: Where specific approval from the concerned ministry is mandatory.
Many sectors—like IT services, software development, consulting, manufacturing, and single-brand retail (subject to conditions)—allow 100% FDI under the automatic route. However, critical and regulated sectors like defence, print media, telecom, and multi-brand retail require government approval or have sectoral caps. It’s important to identify which route applies to your business before moving ahead.
Every FDI inflow must comply with valuation norms, FEMA pricing guidelines, and must be reported to the Reserve Bank of India (RBI) via its FIRMS portal within the prescribed timelines. Delayed or inaccurate filings may lead to penalties or regulatory scrutiny.
Legal and Structural Prerequisites for Incorporation
The most commonly preferred structure for foreign subsidiaries is the Private Limited Company, offering limited liability protection, strong credibility with stakeholders, and flexibility in management. The incorporation process is entirely digital, managed by the Ministry of Corporate Affairs (MCA) through the SPICe+ (Simplified Proforma for Incorporating Company Electronically Plus) system.
Key incorporation requirements include:
- Directors: Minimum two, with at least one director being an Indian resident (must have stayed in India for at least 182 days in the previous year).
- Shareholders: Minimum of two. Foreign individuals or foreign companies are permitted.
- Registered Office: A local Indian address supported by ownership or lease documents.
- Digital Signatures (DSC): For all directors and authorized representatives.
- Director Identification Number (DIN): Can be applied for alongside the SPICe+ application.
The name of the proposed company must follow the naming guidelines and should not resemble existing company names or trademarks. The name is first reserved through Part A of the SPICe+ form.
Upon name approval, Part B of the SPICe+ form is used to upload the following key documents:
- Memorandum and Articles of Association (MoA and AoA)
- Proof of identity and address of directors and shareholders
- Registered office address proof (utility bill, lease deed, NOC)
- Declarations, consents, and statutory forms such as INC-9 and AGILE-PRO
Post verification, the MCA issues the Certificate of Incorporation along with a Corporate Identification Number (CIN). Simultaneously, the entity is allotted a PAN, TAN, and can optionally register for GST, ESIC, and EPFO.
Capital Infusion and RBI Compliances
There is no minimum capital requirement for private limited companies in India. However, once the bank account is set up, the foreign investor must remit the share capital via a recognised banking channel. Upon receiving the funds, the company must issue share certificates to the shareholders and file Form FC-GPR within 30 days of share allotment through the RBI FIRMS portal.
Compliance with FEMA’s pricing guidelines is crucial. Share valuation must be based on internationally accepted pricing methodologies (typically DCF or NAV-based methods), and documentation must be accurate and timely. Errors, omissions, or delays can result in penalties and affect future remittances or repatriations.
Post-Incorporation Legal Obligations
Setting up the company is just the first step. Maintaining compliance is an ongoing responsibility. Immediately after incorporation and capital infusion, the company must:
- Appoint a statutory auditor within 30 days.
- Maintain statutory registers and books under the Companies Act.
- Conduct Board Meetings and Annual General Meetings (AGMs) at prescribed intervals.
- File annual returns (MGT-7) and financial statements (AOC-4) with the Registrar of Companies (RoC).
- File income tax returns, TDS filings, and GST returns (if applicable).
- Comply with labour law registrations when employee count crosses specific thresholds (e.g., EPFO, ESIC).
Neglecting post-incorporation compliance can lead to heavy penalties, disqualification of directors, and loss of credibility.
Taxation and Transfer Pricing Guidelines
An Indian subsidiary is taxed as a domestic entity. The base corporate tax rate is 22%, subject to applicable surcharge and cess, provided no special deductions or incentives are claimed. New manufacturing companies or startups registered under government schemes may be eligible for lower tax rates, sometimes as low as 15%.
All transactions between the Indian subsidiary and its foreign parent or group entities fall under transfer pricing regulations. These must be conducted at arm’s length pricing and backed by detailed documentation. Tax authorities in India are especially vigilant about pricing of inter-company services, royalties, and intra-group transactions.
Dividends declared by the subsidiary are taxed in the hands of the foreign shareholder, and withholding tax applies depending on the nature of payment and the Double Taxation Avoidance Agreement (DTAA) between India and the foreign country.
Repatriation of Funds and Exit Strategies
Profits, dividends, royalties, and other legitimate payments can be freely repatriated, subject to compliance with FEMA and applicable taxation. Dividend payouts must be after the deduction of applicable withholding taxes and must follow RBI’s guidelines.
When it comes to exiting the investment, foreign shareholders may:
- Sell shares to local investors or other non-residents (reported via Form FC-TRS).
- Merge or acquire with another company.
- Voluntarily wind up the subsidiary.
In each of these options, fair valuation, tax implications, regulatory approvals, and timelines must be closely examined.
Key Mistakes to Avoid
Setting up a subsidiary involves navigating multiple layers of regulation. Common pitfalls include:
- Entering restricted sectors without proper FDI approvals.
- Failing to appoint an Indian resident director.
- Delayed or incorrect filings with the RBI (especially FC-GPR).
- Incomplete or non-arm’s length transfer pricing documentation.
- Overlooking post-incorporation compliances such as AGM, statutory audit, or GST.
These mistakes can cause significant delays, invite scrutiny, or even result in penalties. Partnering with seasoned legal, tax, and compliance professionals from the beginning helps avoid costly errors.
Conclusion
Setting up a subsidiary in India is a rewarding long-term strategy for foreign companies aiming to participate meaningfully in one of the world’s fastest-growing economies. While the process involves multiple legal steps and regulatory filings, the country’s digital governance reforms have made it far more transparent and streamlined than before.
With careful planning, sectoral due diligence, and expert guidance, a foreign company can not only enter the Indian market smoothly but also build a scalable, compliant, and profitable business that taps into India’s vast economic potential. A properly structured Indian subsidiary is more than just a local branch—it’s a gateway to sustained growth, innovation, and impact in the Indian business landscape.
