Incorporating a subsidiary company is a strategic step that allows a parent or holding company to expand its operations, manage risks, and enter new markets. Under the Companies Act, 2013, a subsidiary is a separate legal entity, yet controlled by the parent company through ownership or decision-making authority.
1. Definition under the Companies Act, 2013
As per Section 2(87) of the Act, a company is considered a subsidiary of another company (the holding company) if:
- The holding company controls the composition of its Board of Directors, or
- The holding company holds more than 50% of the total share capital (equity or preference shares).
This definition applies equally to domestic and foreign subsidiaries operating in India.
2. Types of Subsidiary Companies
- Wholly Owned Subsidiary (WOS): The parent company owns 100% of the share capital.
- Partly Owned Subsidiary: The parent owns more than 50% but less than 100%.
- Foreign Subsidiary: When more than 50% of the share capital of an Indian company is held by a foreign company.
3. Step-by-Step Incorporation Process
Step 1: Obtain Digital Signature Certificates (DSC)
All proposed directors must obtain a DSC to digitally sign incorporation forms on the MCA portal.
Step 2: Apply for Director Identification Number (DIN)
DIN can be applied through the SPICe+ (INC-32) form.
Step 3: Name Reservation
Apply through RUN (Reserve Unique Name) or Part A of SPICe+. The name must include “Private Limited” or “Limited” and follow MCA naming guidelines.
Step 4: Drafting of MOA and AOA
- Memorandum of Association (MOA): Defines the main objectives of the company.
- Articles of Association (AOA): Lays out internal rules and management structure.
Step 5: Filing of SPICe+ (INC-32)
Submit incorporation forms with the following documents:
- MOA (INC-33) and AOA (INC-34)
- Proof of registered office (electricity bill, NOC, rent agreement, etc.)
- Identity and address proofs of directors/shareholders
- Declaration (INC-9), consent (DIR-2), and authorization documents
Step 6: Verification & Certificate of Incorporation
After ROC verification, a Certificate of Incorporation (COI) is issued along with PAN, TAN, and CIN numbers.
4. Post-Incorporation Compliances
After registration, the subsidiary must:
- Conduct its first Board Meeting within 30 days
- Appoint the first statutory auditor
- Issue share certificates within 60 days
- Maintain statutory registers (Register of Members, Directors, etc.)
- File annual financial statements and returns to ROC
- Comply with FEMA, RBI, and FDI guidelines (for foreign subsidiaries)
5. Key Provisions for Foreign Subsidiaries
Under Rule 2(h) of the Companies (Incorporation) Rules, 2014, a foreign company can hold up to 100% of shares in an Indian subsidiary, subject to FDI sectoral caps.
The subsidiary is treated as an Indian company and must comply with:
- Indian taxation laws
- FEMA guidelines for foreign investments
- Transfer pricing and audit norms
6. Advantages of Incorporating a Subsidiary
- Separate legal identity from the holding company
- Limited liability for shareholders
- Easier to attract investors and business partners
- Enables tax planning and risk segregation
- Provides a gateway for foreign entities to operate in India
7. Risks and Challenges
- Complex compliance and regulatory filings
- Exposure to cross-border taxation and transfer pricing audits
- Risk of loss consolidation for holding companies
- Regulatory scrutiny under SEBI and FEMA
8. Conclusion
Setting up a subsidiary company in India provides a strong foundation for corporate growth, international expansion, and strategic diversification. However, it’s crucial to follow all MCA, FEMA, and Income Tax provisions carefully. Engaging professional experts like Company Secretaries (CS) and Chartered Accountants (CA) ensures smooth incorporation, ongoing compliance, and risk-free operations.
