Setting up of Subsidiary in India This PPT is prepared by P. GAMBHIR & ASSOCIATES (PGA) to provide foreign companies a general information for setting up a Subsidiary in India and brief introduction of its regulatory and tax aspects. It contains relevant rules prevailing in India in March, The information contained in this article is not our comprehensive or exhaustive study but for the general information of the readers. It is not meant to address any particular set of circumstances. We strongly recommend readers to seek professional advice before taking any decision. For any further information, please visit PGA at or or

© P. GAMBHIR & ASSOCIATES 2009 Foreign entity may set up a Subsidiary Company in India that can be private or public limited company, with or without limited liability. In India, the companies are incorporated and regulated under the provisions of the Companies Act, Individual directors are required to obtain DIN (Directors Unique Identification Number) from the Ministry of Company Affairs. The liability of the members can be limited by shares or guarantee. In case of a company with limited liability, the liability of its members is limited to the extent of amount unpaid on the shares held by them or a pre-committed/guaranteed amount. For a company with unlimited liability, the liability of its members is unlimited. Subsidiary can either be a wholly owned or in joint venture with some Indian partner. Except in the sectors where Foreign Direct Investment (FDI) cap is applicable, foreign entity can have 100% subsidiary. No RBI approval is needed where 100% direct investment is permissible. Subsidiary is treated as a domestic company. Funding is possible in the form of Share Capital and business operations. Thin Capital Rule applies in India. 2

© P. GAMBHIR & ASSOCIATES 2009 PARTICULARSPRIVATE LIMITEDPUBLIC LIMITED MINIMUM / MAXIMUM NUMBER OF SHAREHOLDERS Two/FiftySeven or up to the number of shares MINIMUM DIRECTORS TwoThree LIABILITY OF SHAREHOLDERS In both the cases, limited to the extent they have subscribed to the share capital unless agreed otherwise. MINIMUM PAID-UP CAPITAL INR 100,000INR 500,000 BASIC FEATURES  No offer can be made to public to subscription to its shares  Right to transfer shares is restricted  Cannot invite or accept deposits from public other than its members, directors or their relatives. No such restrictions but subject to other compliances. WHEN IT CAN START BUSINESS On incorporationOn obtaining certificate of commencement of business from ROC after incorporation. SUITABILITY Closely held entity with minimum procedural, reporting, compliances, etc. - For widely held entity. - If planning to go for Public Issue. and - Listing of shares. 3

Activities Permitted  It can undertake all types of business activities, as permitted by its Charter that may include marketing, manufacturing, providing of technical or consultancy services, etc. Activities not permitted  It cannot undertake any activity that is outside the preview of its Charter or an activity barred by law. © P. GAMBHIR & ASSOCIATES

Tax Implications It is treated as a domestic Indian company under Indian tax laws and is eligible for all tax deductions and benefits as available to any other Indian company. Liable to pay Fringe Benefit Tax on the value of fringe benefits provided and deemed to be provided to its employees. Dividend is tax free in the hands of shareholders but subsidiary is liable to pay Dividend Distribution Tax (DDT) on the amounts paid or declared as dividend. Transfer Pricing Rules: Transactions between subsidiary and parent/associated entities are subject to Transfer Pricing (TP) Regulations. 5

Advantages  Easy operations;  Less formalities; and  Simple exit route. Formation time  2-3 weeks after receipt of the relevant information. © P. GAMBHIR & ASSOCIATES 2009 Where a foreign entity has business presence in India and wishes to undertake vide range of activities and intend to operate in a flexible manner for longer duration. 6

© P. GAMBHIR & ASSOCIATES 2009 For further information, please visit PGA at or or or contact us at: 87-B, Masjid Moth – II, DDA Flats, Greater Kailash - III New Delhi (INDIA) Tel/Fax: , CA. Parveen Gambhir 7