A foreign company seeking to establish its business in India can do so by incorporating a wholly-owned subsidiary under the Companies Act, 2013. This is one of the most preferred modes of foreign direct investment in India as it allows full control over the Indian operations. The subsidiary functions as a separate legal entity and can carry on commercial activities, subject to sectoral restrictions and regulatory guidelines under the Foreign Exchange Management Act and other laws.
Regulatory Framework Governing Subsidiary Incorporation
The formation of a wholly-owned subsidiary by a foreign entity in India is primarily governed by the Companies Act, 2013, along with applicable regulations of the Reserve Bank of India under FEMA. These laws establish the framework for company formation, foreign investment, compliance obligations, and post-incorporation operations. The Ministry of Corporate Affairs administers corporate regulations, while the Reserve Bank of India regulates foreign investment and capital flows into India.
Modes of Business Entry for Foreign Entities
Foreign companies can enter the Indian market through various modes. These include establishing a wholly-owned subsidiary, entering into a joint venture with an Indian partner, setting up a liaison office, project office, or branch office. Among these, a wholly-owned subsidiary offers the maximum flexibility, legal independence, and control over operations, making it a preferred route for long-term business plans in India.
Eligibility to Incorporate a Wholly-Owned Subsidiary
Any foreign company can incorporate a wholly-owned subsidiary in India, provided that foreign direct investment is permitted in the sector in which the business intends to operate. The foreign investor must adhere to the prescribed limits under the FDI policy and comply with sector-specific guidelines under FEMA. There is no restriction on nationality or legal form of the foreign investor, allowing both corporate entities and individuals to invest, subject to conditions.
Residency Requirements for Directors
The Companies Act, 2013, does not prohibit the appointment of foreign nationals or non-resident individuals as directors of an Indian company. However, it mandates that every company must appoint at least one director who is a resident of India. A resident director is defined as a person who has stayed in India for at least 182 days during the preceding calendar year. This requirement ensures local accountability and the presence of a representative in India for statutory compliance.
Composition of Shareholders and Directors
To form a wholly-owned subsidiary, the foreign parent company acts as the primary shareholder. Since a private limited company in India requires at least two shareholders, the second shareholder is typically a nominee holding one share on behalf of the parent company. This structure meets the requirement under Section 3(1)(b) of the Companies Act, 2013. In terms of directorship, at least two directors are required, and one of them must fulfill the resident director condition.
Appointment of Nominee Shareholder
In cases where the foreign holding company intends to hold 100 percent ownership of the Indian subsidiary, it must still ensure compliance with the statutory requirement of having at least two shareholders. This is achieved by appointing a nominee shareholder who holds a minimal number of shares, generally one, in trust for the foreign company. The nominee shareholder has no beneficial interest in the shares and operates under an agreement with the holding company.
Capital Requirements for Incorporation
There is no minimum capital requirement for incorporating a wholly-owned subsidiary in India. This flexibility was introduced through the Companies (Amendment) Act, 2015, which removed the earlier minimum paid-up capital stipulations for private companies. The capital structure can be decided by the foreign parent company and may be prescribed in the company’s articles of association based on business needs and investor preferences.
Permissible Business Activities for Wholly-Owned Subsidiaries
Wholly-owned subsidiaries in India can engage in a broad spectrum of business activities, depending on the FDI policy and sectoral caps applicable under FEMA regulations. Sectors such as manufacturing, pharmaceuticals, e-commerce, IT services, infrastructure, civil aviation, financial services, insurance, and renewable energy generally permit foreign investment under automatic or government approval routes. However, some sectors like defense, print media, and broadcasting have restrictions or require special approvals, and the foreign company must ensure compliance with sectoral conditions before proceeding.
Understanding Sectoral Restrictions and Caps
Foreign direct investment in India is subject to sectoral caps, which refer to the maximum permissible limit of foreign ownership in a specific industry. These limits are set out in the consolidated FDI policy and RBI regulations. While some sectors allow up to 100 percent FDI under the automatic route, others require prior government approval or restrict foreign ownership to a lower percentage. The responsibility for ensuring compliance with sectoral caps lies with the investee company, and any breach can lead to penalties or disqualification.
Entry Routes for Foreign Investment
There are two primary entry routes for foreign investment in India, depending on the nature of the sector and the level of foreign ownership involved. These are the automatic route and the government route.
Automatic Route for Foreign Investment
Under the automatic route, foreign investment does not require prior approval from either the Reserve Bank of India or the central government. Sectors such as IT services, renewable energy, and manufacturing typically fall under this route. Once the investment is made and the shares are issued, the company must report the transaction to the RBI and complete other post-investment compliances.
Government Route for Foreign Investment
In sectors falling under the government route, prior approval from the relevant ministry or department is mandatory before the foreign investment is made. Examples include defense, telecom, and print media. The process involves filing an application through the designated online portal, furnishing detailed information about the proposed investment, and complying with any conditions imposed in the approval letter. Once approval is granted, the company can proceed with incorporation and issuance of shares.
Due Diligence Before Incorporation
Before proceeding with incorporation, the foreign investor should conduct due diligence on the regulatory framework, permissible business activities, tax implications, compliance obligations, and any sector-specific restrictions. This includes verifying the FDI policy, checking applicable RBI guidelines, and consulting with legal and financial advisors to ensure that the incorporation process is smooth and compliant with Indian laws. Due diligence also involves assessing potential locations for the registered office and understanding local legal requirements.
Choosing the Right Legal Structure
Although this document focuses on the incorporation of wholly-owned subsidiaries, foreign companies must evaluate whether this structure is the most suitable for their objectives. Alternatives such as joint ventures, branch offices, and project offices offer different degrees of control, liability, and compliance obligations. A wholly-owned subsidiary provides maximum control and independence but comes with higher compliance responsibilities under Indian corporate law.
Documentation for Wholly-Owned Subsidiary Incorporation
To incorporate a wholly-owned subsidiary, certain documents are required to be submitted along with the incorporation application. These documents vary depending on whether the foreign investor is an individual or a company. Standard documentation includes the digital signature certificate of the directors, identity and address proofs, proof of registered office address, board resolutions from the parent company, and notarized and apostilled copies of relevant documents from the home country.
Mandatory Compliance With Notarization and Apostille Requirements
Documents submitted by foreign entities or foreign nationals must be notarized and apostilled in their home country. This ensures their authenticity and validity for legal use in India. The documents should be prepared in English or accompanied by a certified English translation. The foreign parent company must coordinate with the appropriate notary and apostille authorities in their jurisdiction to ensure that the documents meet Indian regulatory standards.
Name Reservation Through SPICe+ Part A
The first step in forming a wholly-owned subsidiary is reserving a unique name for the proposed company. This is done through SPICe+ Part A, a web-based form available on the Ministry of Corporate Affairs portal. Applicants can propose one or two names along with the business objectives. The Registrar of Companies examines the proposed names to ensure they are not identical or similar to existing company names or trademarks. Upon approval, the name is reserved for twenty days, within which the incorporation process must be completed.
Filing SPICe+ Part B and Linked Forms
Once the name is approved, applicants must complete SPICe+ Part B, which includes detailed information about the company’s structure, directors, shareholders, and capital. Alongside SPICe+ Part B, linked forms like Agile Pro, INC-9, and e-MOA/e-AOA must be submitted. These forms capture essential compliance details such as Goods and Services Tax registration, Employee Provident Fund registration, and Shops and Establishments registration. The Agile Pro form also enables the allotment of PAN, TAN, and Import Export Code in one submission.
Documentation Requirements for Incorporation
A number of supporting documents must be submitted along with the SPICe+ form set to validate the identity, address, and authority of the persons and entities involved. These include the digital signature certificates of directors, consent letters, identity and address proofs, proof of the registered office address, and documents establishing the existence of the foreign parent company. For foreign entities, all documents must be duly notarized and apostilled in the country of origin.
Preparation of Charter Documents
The Memorandum of Association and Articles of Association are the key charter documents of the company. These outline the business objectives, rules of internal management, shareholding structure, and rights and duties of the members. For wholly-owned subsidiaries, these documents must clearly state the role of the foreign parent company and the nominee shareholder arrangement. The documents must be submitted in electronic format and signed using digital signatures. A physical copy, duly notarized and apostilled, is also required for record-keeping.
Appointment of Directors and Subscribers
The incorporation application must include details of the directors and subscribers to the Memorandum. Directors must provide their consent in the prescribed format and submit KYC documents such as a passport, proof of address, and photographs. If the subscriber is a company, it must pass a board resolution authorizing the investment and appointing a representative to sign the incorporation documents. Nominee shareholders must also provide their consent and identity documentation.
Registered Office Verification
The registered office of the company must be located in India and must be verified through documentary evidence. If the premises are leased, a lease deed along with a no-objection certificate from the owner and a utility bill not older than two months must be submitted. In the case of owned premises, property ownership documents and utility bills must be attached. The registered office must be capable of receiving official communications and shall be disclosed to the Registrar of Companies at the time of incorporation.
Final Submission and Processing by Registrar
After completing SPICe+ Part A and Part B and attaching the required documents, the application is submitted to the Registrar of Companies along with the applicable fees. The Registrar reviews the application and, if satisfied, issues the Certificate of Incorporation. This certificate includes the Corporate Identification Number, PAN, and TAN. The company becomes a legal entity on the date of incorporation and may begin its business operations upon receiving regulatory approvals, if required.
Post-Incorporation Compliance with FEMA
Once the wholly-owned subsidiary is incorporated, the company must comply with foreign exchange regulations governing the receipt of capital from its foreign parent. The Foreign Exchange Management Act prescribes the process for receiving foreign investment and the filing of necessary forms with the Reserve Bank of India. The company must open a capital account with an Indian bank and obtain an AD Code to receive inward remittances. The capital received must be recorded properly and reported to the RBI within the stipulated timeline.
Inward Remittance Process
The foreign parent company must remit the share capital to the Indian company’s bank account through a SWIFT transfer. Upon receiving the funds, the Indian bank informs the company and provides the Foreign Inward Remittance Certificate. The bank also issues a KYC certificate for the foreign investor. These documents are essential for filing the FC-GPR form with the Reserve Bank of India. Proper documentation and reconciliation of funds are critical for avoiding penalties and ensuring regulatory compliance.
Filing of FC-GPR with RBI
The company must file Form FC-GPR within thirty days from the date of receiving share capital. This form provides details of the foreign investment, such as the amount received, mode of remittance, and the number of shares allotted. Supporting documents such as the Foreign Inward Remittance Certificate, KYC, board resolution for share allotment, valuation certificate, and the charter documents must be attached. The form must be filed through the RBI’s online portal and digitally signed by an authorized representative.
Allotment of Shares and Issuance of Share Certificates
After receiving the capital and filing FC-GPR, the company must proceed with the allotment of shares to the foreign holding company and the nominee shareholder. A board resolution must be passed for allotment, and the share certificates must be issued within sixty days from the date of incorporation. The share certificates must be properly stamped and delivered to the shareholders. A register of members must be maintained, reflecting the shareholding structure of the company.
Importance of Valuation Certificate and CS Certification
A valuation report from a chartered accountant or a merchant banker is required to justify the pricing of shares issued to the foreign investor. This is important to ensure that the investment is made at fair market value, in compliance with FEMA regulations. Additionally, a practicing company secretary must certify the accuracy of the information submitted in FC-GPR and confirm compliance with applicable laws. These certifications lend credibility and legal validity to the reporting process.
Timelines and Penalties for Non-Compliance
Timely compliance with RBI and MCA requirements is crucial for the lawful functioning of the wholly-owned subsidiary. Delays in filing FC-GPR or in receiving inward remittances can attract penalties and lead to difficulties in further capital raising. Similarly, non-compliance with share allotment deadlines or incorrect filings can trigger investigations and legal consequences. Companies must establish an internal compliance mechanism to track deadlines and coordinate with professionals for timely filings.
Registration for Statutory Taxes and Licenses
As part of the SPICe+ incorporation process, the wholly-owned subsidiary is automatically registered for PAN, TAN, and GST if applicable. These registrations are essential for tax compliance and conducting business operations in India. Additionally, depending on the location and nature of business, the company may require registration under the Shops and Establishments Act or local municipal laws. Companies engaged in import or export must also obtain an Import Export Code through the SPICe+ system.
Bank Account Opening and Capital Management
The newly incorporated subsidiary must open a bank account in India for conducting business and managing capital. Banks require incorporation documents, KYC, board resolutions, and address proof for account opening. The account should be used exclusively for business purposes and must be monitored for compliance with RBI guidelines on foreign currency transactions. Companies must maintain proper accounting records and ensure that all receipts and payments are documented and reconciled.
Importance of Professional Guidance
Given the complexity of regulatory and compliance requirements, foreign companies are advised to engage professional consultants, such as chartered accountants, company secretaries, and legal advisors. These professionals assist in drafting documents, ensuring proper filings, and managing communication with regulatory authorities. Their expertise helps avoid legal risks and ensures that the incorporation process is executed efficiently and lawfully. Professional support is also valuable for post-incorporation compliance, audits, and annual reporting.
Issuance of Share Certificates and Statutory Registers
Upon the allotment of shares to the foreign holding company and nominee shareholder, the company must issue physical share certificates. These certificates serve as proof of ownership and must be delivered to the shareholders within sixty days from the date of incorporation or allotment. The company must also maintain a register of members, which is a statutory requirement under the Companies Act. The share certificate must include details such as the name of the shareholder, number of shares held, share certificate number, and date of issue.
Filing of Statutory Returns With the Registrar
The company must file the details of the share allotment with the Registrar of Companies in Form PAS-3. This filing must be completed within fifteen days of the allotment. Other statutory returns include the filing of financial statements and the annual return. These are filed in Form AOC-4 and MGT-7,, respectively. Filing these forms on time ensures that the company remains compliant and does not attract penalties or disqualification of directors.
Opening Statutory Registers
A newly formed company must maintain various statutory registers under the Companies Act. These include the register of members, register of directors and key managerial personnel, register of charges, and register of share transfers. These registers are to be maintained at the registered office of the company and must be updated regularly to reflect any changes. Non-maintenance of these registers can attract fines and inspections from regulatory authorities.
Appointment of Auditor
Every company incorporated in India must appoint its first statutory auditor within thirty days from the date of incorporation. If the board of directors fails to do so, the shareholders must appoint the auditoatin the first general meeting. The appointment must be filed with the Registrar in Form ADT-1. The statutory auditor is responsible for auditing the company’s financial statements and ensuring that the accounts are prepared by applicable laws.
Holding the First Board Meeting
The first meeting of the board of directors must be held within thirty days of incorporation. The agenda of this meeting typically includes the appointment of the first auditor, adoption of the common seal, approval of the preliminary expenses, opening of a bank account, and authorization for filing statutory forms. Minutes of this meeting must be recorded and signed by all directors present. This meeting sets the foundation for the governance and operational activities of the company.
Compliance With RBI Reporting Obligations
Apart from filing Form FC-GPR after receipt of share capital, companies having foreign investment must comply with additional RBI reporting obligations. These include annual return on foreign liabilities and assets, which must be filed online with the Reserve Bank through the Foreign Liabilities and Assets portal. This return provides a snapshot of the foreign investment in the company and is critical for balance of payments statistics and monitoring of foreign investment inflows.
Tax Registrations and Compliance
Once incorporated, the subsidiary must ensure it is registered under applicable tax laws. The PAN and TAN are allotted at the time of incorporation, but the company must also obtain GST registration if it supplies goods or services above the threshold limit. Filing of income tax returns is mandatory for all companies, regardless of whether they have earned income. Companies must also deduct tax at source where applicable and file TDS returns periodically.
Maintenance of Books of Accounts
Indian company law mandates the maintenance of accurate and up-to-date books of accounts at the registered office or another place as decided by the board of directors. These books must reflect a true and fair view of the financial state of the company. Books can be maintained in electronic format and must be kept for at least eight financial years. Regular audits and reviews must be conducted to ensure transparency and accuracy in reporting.
Compliance With Labor Laws
If the subsidiary hires employees in India, it must comply with labor laws such as the Payment of Wages Act, Minimum Wages Act, Employees’ Provident Funds and Miscellaneous Provisions Act, Employees’ State Insurance Act, and Shops and Establishments Act. Registrations under these laws must be obtained, and contributions must be made for employees wherever applicable. Employee contracts, payroll systems, and leave policies must also comply with Indian labor regulations.
Licensing and Sector-Specific Approvals
Depending on the nature of the business, certain licenses or approvals may be required before commencing operations. These may include factory licenses, environmental clearances, drug licenses, or licenses from sectoral regulators such as the Securities and Exchange Board, Reserve Bank, Insurance Regulatory Authority, or Telecom Regulatory Authority. Companies must ensure that these approvals are in place to avoid legal risks and operational hurdles.
Trademark and Intellectual Property Registration
Foreign companies setting up a subsidiary in India may wish to protect their brand and intellectual property by registering trademarks, patents, copyrights, or industrial designs. The Indian Trademark Office allows both Indian and foreign applicants to apply for trademark protection. The process involves filing an application, responding to examination reports, and defending opposition, if any. Intellectual property protection helps the company maintain brand value and prevent unauthorized use.
Transfer Pricing and Tax Structuring
Since a wholly-owned subsidiary often engages in transactions with its foreign parent, it is subject to transfer pricing regulations under the Income Tax Act. The company must ensure that international transactions such as the import of goods, the provision of services, royalty payments, or technical support fees are conducted at arm’s length. Proper documentation and benchmarking studies must be prepared and maintained. A well-structured tax plan also helps in minimizing tax liabilities and avoiding disputes.
Audit and Statutory Filings
The financial statements of the company must be audited annually by a chartered accountant. The audit report and financial statements must be filed with the Registrar of Companies. Companies must also hold an annual general meeting within six months of the end of the financial year. The audit ensures that the company’s financial affairs are in order and that statutory dues have been discharged. Filing delays can lead to penalties and reputational damage.
Related Party Transactions and Corporate Governance
Any transaction between the subsidiary and the foreign parent company is treated as a related party transaction and must comply with Section 188 of the Companies Act. The board must approve such transactions, and in some cases, shareholder approval may be required. Maintaining transparency in related party transactions is essential for upholding good corporate governance and avoiding regulatory scrutiny.
Conversion Into a Public Company or a Branch Office
While a wholly-owned subsidiary is typically incorporated as a private limited company, it may choose to convert into a public limited company as it expands. This requires a change in its memorandum and articles of association, an increase in the number of directors and shareholders, and enhanced compliance obligations. Alternatively, foreign companies may decide to convert their presence into a branch office or liaison office, depending on their business strategy.
Dormancy or Closure of Subsidiary
Suppose the subsidiary is not carrying on any business for two consecutive financial years and has not filed financial statements or annual returns. In that case. In that case, it may be classified as a dormant company. The company may also apply for strike off under the Fast Track Exit scheme if it meets the criteria. Closure of the company involves settling outstanding liabilities, surrendering registrations, and filing closure documents with the Registrar.
Annual Corporate Filings and Compliances
Every year, the company must file its audited financial statements and annual return. These filings disclose the financial position, shareholding pattern, and corporate governance framework of the company. Failure to file these forms attracts penalties and can lead to the disqualification of directors. Other annual compliances include holding board meetings, updating statutory registers, renewing licenses, and maintaining audit trails.
Ensuring Internal Controls and Risk Management
As the subsidiary grows, it must establish strong internal controls, policies, and procedures to manage risks. These include financial controls, operational policies, fraud detection mechanisms, and internal audit systems. A robust risk management framework ensures that the company can withstand regulatory challenges, economic fluctuations, and business disruptions. It also builds investor confidence and enhances corporate credibility.
Role of Technology in AGM Notices
With the increasing emphasis on digitization and efficiency in corporate communication, the Companies Act, 2013, has acknowledged the role of technology in serving notices for general meetings. Rule 18 of the Companies (Management and Administration) Rules, 2014, allows companies to send AGM notices through electronic means to members who have provided their email addresses. This development supports a sustainable and faster approach to compliance while ensuring accessibility for shareholders regardless of location.
However, the use of electronic mode does not exempt the company from maintaining adequate records. Proof of sending and delivery through electronic means must be preserved for at least three years. Additionally, notices must still be dispatched via physical means if any member has not registered an email address or specifically requested a hard copy.
Default in Sending AGM Notices
Failure to serve proper notice of an annual general meeting as required under the Companies Act, 201,3 can result in various consequences. If a company does not issue the notice within the prescribed time frame or fails to comply with the content and delivery provisions, the resolutions passed in the meeting may be rendered invalid.
Further, Section 102 of the Companies Act, 2013 specifies that any omission or misstatement in the explanatory statement accompanying the notice may lead to penalties and legal repercussions. The persons responsible for issuing the notice, such as the company secretary or authorized officers, may face fines under the Act.
In some cases, shareholders may challenge the validity of the meeting and its decisions in a court or tribunal if due process has not been followed. To avoid such situations, companies must maintain strict compliance with both statutory and procedural requirements.
AGM Notices in Special Cases
In certain exceptional cases, additional considerations apply to AGM notices. For example, if the company is listed, it must also comply with the regulations laid down by the Securities and Exchange Board of India (SEBI) regarding shareholder communications. These may include additional disclosures or timelines not mentioned in the Companies Act.
Similarly, if a company has foreign shareholders, the notice may need to be dispatched by international courier or other reliable delivery modes. In case of companies under insolvency resolution or restructuring, the insolvency professional or administrator may have a role in convening and issuing notices for meetings, depending on the legal situation.
For companies in default of holding AGMs within time or those seeking an extension from the Registrar of Companies, a specific resolution must be passed and adequate disclosures made in the notice for the delayed meeting. Proper documentation and approval must be secured before convening the meeting beyond the original due date.
Judicial Interpretation on AGM Notices
Indian courts and tribunals have interpreted the provisions relating to AGM notices in various judgments, reinforcing the principle of transparency and shareholder empowerment. It has been held that notices must be clear, free from ambiguity, and must not mislead members about the nature or consequences of the proposed resolutions.
In some cases, the courts have allowed procedural lapses to be overlooked if the overall purpose of the meeting was achieved and the lapse was minor or technical. However, substantial deviations, such as failing to provide 21 clear days’ notice or omitting material facts from the explanatory statement, have led to the nullification of meeting outcomes.
Judicial precedents emphasize the importance of adhering strictly to notice provisions as they form the foundation of shareholder democracy. The law views the issuance of notice not as a formality, but as a vital part of governance and statutory obligation.
Conclusion
The issuance of an AGM notice under the Companies Act, 2013, is more than a clerical task. It is a procedural and legal cornerstone of corporate governance that ensures transparency, accountability, and participation in company affairs. A notice must be timely, complete, accurate, and served through appropriate modes, offering members a fair opportunity to attend and make informed decisions.
From understanding the statutory provisions to incorporating practical best practices, every company must approach AGM notice issuance with diligence. Non-compliance can result in legal risks, reputational damage, and invalidation of critical business decisions. As corporate laws evolve, especially with the digital shift in communications, companies must stay updated on regulatory changes to ensure proper notice and meeting conduct. The AGM remains a key platform for engaging stakeholders, and its effectiveness begins with a properly served and legally compliant notice.