Foreign legal entities may set up subsidiaries in India and the legislation in this country provides for two types of subsidiaries, depending on the capital owned by the foreign company. Thus, when starting a company in India which is represented by a foreign legal entity, the investors may choose to incorporate a wholly-owned subsidiary or a subsidiary company.
According to the Companies Act 2013, a subsidiary is defined as a company in which a foreign legal entity owns at least 50% of the total share capital. The definition also states that the foreign company has legal rights on the structure of the board of directors of the subsidiary. There must be at least one Indian resident director in company. There are two main options when registering a company in India as a subsidiary. Investors may establish a wholly-owned subsidiary, which designates the fact that the parent company owns 100% of the subsidiary’s shares. This option is available only for the business sectors which allow 100% foreign direct investments. The other option refers to the subsidiary company, in which the parent company controls at least 50% of the subsidiary’s capital.
Reasons to Establish a Foreign Subsidiary:
- Opening up Access to New Markets for Products and Services :
The scope of expansion is higher because it is easy to raise capital from a venture capitalist, financial institutions, angel investor, and the advantages of limited liability, the Private limited offer more transparency in the company.
- Expanding Brand Recognition :
The brand value of a company will get increased because employees feel secure in joining the private limited company, vendor feels secure in offering credit, investor feels secure in investing, the customer feels trust and confidence in a brand in buying company product or services because of the sound corporate structure. Many startup companies start with zero revenue and rapidly reach to a multibillion-dollar company in just a few years just because of the high brand value of the company.
- Limited Liability :
The liability of Directors and members of the private limited company is limited to their shares. This means the company suffers from any loss and faces financial distress because of primary business activity, the personal assets of shareholders/Members/Directors will not be at risk of being seized by banks, creditors, and government.
- More Cost-Effective Production and Manufacturing
- Access to Technical Skills / Regional Knowledge
- Part of a Global Expansion Plan
- Participating in Local Economic Opportunities