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Understanding Legal Steps for Setting up a Subsidiary in India


India is booming. With its massive consumer base, skilled workforce, and growing economy, it's no surprise that global businesses want a slice of the Indian market. But before you dive in, there’s one big question—how do you legally set up a subsidiary in India? The process might seem like a maze at first, but once you understand the legal roadmap, it becomes manageable. This guide walks you through every essential legal step—no jargon, just clear direction.

Types of Subsidiaries in India
Wholly-Owned Subsidiary

This is where the parent company holds 100% of the shares. It's common for MNCs wanting full control over Indian operations. These can be private limited companies, which are the most favored due to ease of management and compliance.

Joint Venture Subsidiary

In this structure, the foreign company collaborates with a local Indian entity. While ownership is shared, it helps navigate local culture and markets more easily.


Legal Framework for Foreign Companies
Foreign Exchange Management Act (FEMA)

FEMA governs foreign investments in India. It ensures capital flows comply with national interest and RBI policies.

Companies Act, 2013

This is the backbone for company formation, covering everything from incorporation to annual filings. All subsidiaries must follow the provisions of this Act.

Step-by-Step Process to Set Up a Subsidiary in India
Step 1: Choose the Business Structure

Start by deciding whether your subsidiary will be a Private Limited Company (most common) or a Public Limited Company. For startups and SMEs, the former is usually ideal.


Step 2: Obtain Digital Signature Certificate (DSC)

All proposed directors must have a DSC to sign digital documents during incorporation. It’s the electronic equivalent of a physical signature.


Step 3: Acquire Director Identification Number (DIN)

Every director needs a unique DIN. This is obtained by applying through the MCA (Ministry of Corporate Affairs) portal.


Step 4: Name Approval through RUN

Use the Reserve Unique Name (RUN) service on the MCA portal to check name availability and apply for name reservation.


Step 5: Drafting and Filing of Incorporation Documents

These include the Memorandum of Association (MOA) and Articles of Association (AOA). File incorporation forms like SPICe+ (Form INC-32), AGILE-PRO, e-MOA, and e-AOA.


Step 6: PAN, TAN, and Bank Account Setup

After successful incorporation, apply for the company’s PAN (Permanent Account Number) and TAN (Tax Deduction and Collection Account Number). Then, open a corporate bank account.


Minimum Requirements for Incorporation
Directors and Shareholders
  • Minimum 2 directors, one must be a resident Indian.
    • Minimum 2 shareholders, who can be foreign entities or individuals.
Registered Office in India

A physical Indian address is required, and proof (like utility bills or lease agreements) must be submitted.


Capital Requirements

There’s no minimum capital requirement, but it should be realistic based on business needs and operations.


Regulatory Approvals and Compliance
Reserve Bank of India (RBI) Approval

For certain sectors under the approval route, prior RBI permission is mandatory. In other sectors, automatic route applies—just file a report post-investment.


Registrar of Companies (ROC) Compliance

Regular filings, financial disclosures, and board meetings must comply with ROC requirements.


Foreign Direct Investment (FDI) Rules

Check if your business sector allows 100% FDI, and whether it's under the automatic or government route.


Post-Incorporation Requirements
GST Registration

Mandatory if your turnover exceeds the threshold or you're involved in interstate trade.


Import Export Code (IEC)

If you plan to import/export, an IEC from the Directorate General of Foreign Trade (DGFT) is essential.


Shops and Establishment Act Registration

Each state requires local registration under this Act, depending on the office location and employee count.


Taxation Framework for Subsidiaries
Corporate Tax Rates
  • 25% for turnover up to ₹400 crore
  • 30% for larger companies
  • Special rates under Section 115BAB for new manufacturing companies
Registered Office in India
Transfer Pricing Regulations

All international transactions between parent and subsidiary must follow arm’s length pricing. Be ready for audits and documentation.

Withholding Tax Obligations

Payments like royalties, interest, or dividends to the parent company are subject to withholding taxes under Indian tax laws.

Employment and Labor Laws
Hiring Regulations

Follow employment contracts and rules under Shops and Establishments Act, Factories Act, and Industrial Disputes Act.

EPF, ESI, and Other Employee Benefits

Companies with more than a certain number of employees must register under:

  • EPF (Employee Provident Fund)
  • ESI (Employee State Insurance)
  • Gratuity and Bonus Acts
Banking and Financial Regulations Setting Up a Corporate Bank Account

You’ll need documents like incorporation certificate, PAN, board resolution, and KYC of directors to open an account.

Foreign Currency Remittances

Follow RBI and FEMA guidelines for sending/receiving funds to/from your parent company.

Intellectual Property Considerations
Trademarks and Patents

If you're launching a product or brand in India, register your trademark and patents to avoid legal disputes.

Protection Strategies for Foreign Businesses

You can license IP from your parent company to your Indian subsidiary while retaining ownership.

Common Challenges for Foreign Subsidiaries
Bureaucracy and Delays

India’s red tape can be frustrating. Having a local partner or legal advisor smoothens the process.

Cultural and Legal Differences

Understanding local norms and legal nuances is key—what works in the U.S. or Europe may not fly in India.

Legal Assistance and Advisory
Role of Legal Firms and Consultants

Professional firms help with everything—from structuring the company to compliance, documentation, and registrations.

Why Professional Guidance is Crucial

Getting expert help reduces risks, saves time, and ensures you're on the right side of the law from day one.

Timeline and Estimated Costs How Long It Takes
  • 2–6 weeks depending on documentation and regulatory approvals.
Key Cost Components
  • Government fees
  • Professional/legal services
  • Office setup and compliance costs
Conclusion

Setting up a subsidiary in India is a smart move—but not without its legal and procedural hurdles. From getting the right approvals to staying compliant with Indian tax and labor laws, it’s essential to get every step right.

But here’s the good news—with the right guidance, you can be up and running in no time, tapping into one of the world’s fastest-growing economies.

So, are you ready to plant your flag in India?

FAQs
  1. Can a foreign company own 100% of an Indian subsidiary? Yes, in most sectors, 100% FDI is permitted under the automatic route, allowing complete foreign ownership.
  2. What’s the difference between a liaison office and a subsidiary? A liaison office can only promote business—it can't earn revenue. A subsidiary is a full-fledged company that can operate commercially.
  3. Is RBI approval mandatory for all foreign investments? Not always. Sectors under the automatic route don’t require RBI approval. Others under the approval route do.
  4. How long does it take to set up a subsidiary in India? Typically, between 2–6 weeks, depending on document readiness and approval speed.
  5. What taxes are applicable to a foreign-owned subsidiary? Subsidiaries pay corporate tax, GST, and may have transfer pricing and withholding tax obligations.
 

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