Foreign Subsidiary in India: FDI Rules, Incorporation, Compliance

Forms of foreign business in India

A foreign company can have presence in India through:

1. Wholly-Owned Subsidiary (WOS) — Indian Pvt Ltd with 100% shareholding by foreign parent. Most common.
2. Joint Venture (JV) — Pvt Ltd with foreign parent and Indian partner
3. Branch Office — Direct presence (limited to specific activities; needs RBI approval)
4. Liaison Office — Non-commercial activities only; cannot earn income
5. Project Office — Time-bound, project-specific (e.g., infrastructure projects)

WOS / JV through Pvt Ltd is the most popular for genuine business operations as it offers full operational flexibility.

FDI policy framework

FDI is governed by the consolidated FDI Policy and FEMA. Routes:

Automatic Route — No prior government approval needed. Just post-investment reporting to RBI through AD Bank. Applies to most sectors:

• Manufacturing (most sub-sectors)
• IT/ITeS
• E-commerce (B2B; marketplace model)
• Most services
• Single brand retail (above 51%, with conditions)

Government Approval Route — Prior approval from Department for Promotion of Industry and Internal Trade (DPIIT) or relevant ministry:

• Defence (above 49%)
• Print media (above 26%)
• Multi-brand retail (above 51%)
• Civil aviation (above thresholds)
• Pharmaceuticals (brownfield, above 74%)
• Strategic sectors (telecom, banking — partial)

Incorporation process

1. Decide entity type (WOS Pvt Ltd is most common)
2. Foreign parent + at least one Indian resident director required (or use 'nominee director')
3. Obtain DSC for directors (foreign + Indian)
4. Obtain DIN for foreign director (if not already)
5. Name reservation via SPICe+ Part A
6. File SPICe+ Part B for incorporation
7. Documents needed:
   • Foreign parent's incorporation certificate (apostilled)
   • Foreign parent's Board resolution authorising the investment
   • Foreign director's passport (apostilled)
   • Indian director's documents
   • Registered office documents
8. RoC examines and issues CoI (10-15 working days)
9. Open bank account, get IEC if importing/exporting

Post-incorporation: FC-GPR filing

After the Indian Pvt Ltd allots shares to foreign parent (subscription money), file Form FC-GPR on FIRMS portal of RBI within 30 days of allotment:

• Details of investment received
• Equity instrument issued
• Pricing guidelines compliance (issue price must be at least fair value as per valuation report)
• Sector-specific compliance
• UIN (Unique Identification Number) issued by RBI after submission

Penalty: Late filing attracts penalty (typically 5% of investment amount, prorated for delay). Significant for large investments.

Ongoing compliance

Compliance is heavier than regular Pvt Ltd:

• FLA (Foreign Liabilities and Assets) Return — Annual, due 15 July for previous FY
• FC-GPR for any new share allotments to foreign entity
• FC-TRS for transfer of shares from resident to non-resident or vice versa
• APR (Annual Performance Report) — For ODI from India by Indian companies
• Standard MCA filings — AOC-4, MGT-7, ADT-1, DIR-3 KYC, DPT-3
• Statutory audit + tax audit + Income tax compliance
• Transfer pricing — Mandatory if transactions with related party (foreign parent) exceed ₹1 cr
• GST compliance like normal Pvt Ltd

Practical considerations

• Indian resident director: Use a nominee director from CA firm (₹50,000-1 lakh per year) if no genuine Indian partner
• Registered office: Coworking space or virtual office acceptable; physical office not needed initially
• Compliance budget: ₹2-5 lakh per year for full compliance (incorporation + ongoing)
• Repatriation: Dividends, royalties, technical service fees can be repatriated after tax (DDT abolished; dividend taxed in shareholder's hands)
• Exit: Sale of shares from foreign parent to Indian buyer requires FC-TRS filing