Categories: RBI Consultancy

Setting up Subsidiary Outside India

SETTING UP SUBSIDIARY OUTSIDE INDIA

BRIEF INTRODUCTION

With the arrival of Globalization, more and more Indian companies have an interest in doing business outside India. they require to set up a branch office or a subsidiary abroad. There are multiple benefits of doing so like cost reduction because they save on duty, simple doing business, building a global brand, etc.

Overseas investment in wholly-owned subsidiaries or joint ventures has been recognized as an important avenue for promoting global business by Indian entrepreneurs. Broadly there are two routes under which one can find a WOS abroad, namely automatic route and approval route. Under the automated route, a corporation doesn’t require any prior approval from the administrative unit for putting in place a WOS abroad.

While other proposals/activities not covered by conditions under automatic route would require prior approval of the banking company. Overseas investments in Joint ventures and Wholly Owned Subsidiaries are recognized as a vital avenue for promoting global business by Indian entrepreneurs. There are some significant benefits related to such overseas investments, like transfer of technology and skill, access to a wider global market, promotion of brand name image, employment generation, etc. Such investments are essential drivers of foreign trade. It means investments under the automated route or the approval route through contribution to the capital or subscription to the memorandum of a remote entity or through the acquisition of existing shares of an overseas entity, thus showing an extended term interest within the foreign entity i.e., Joint Ventures or Wholly Owned Subsidiary.

MEANING OF WHOLLY-OWNED SUBSIDIARY

A wholly Owned Subsidiary means a far-off entity formed, registered or incorporated in step with the laws and regulations of the host country whose entire capital is held by the Indian party. it’s a separate legal company where the common stocks are owned and controlled by the holding or the parent company. The parent company has 100% control over the entity, and such company functions in accordance with the guidance of the parent company. it should be noted that the selections for wholly-owned subsidiaries (WOS) are taken by the parent company; however, it does have its own senior management that appears after the business operations.

The common stocks aren’t publicly traded for a WOS; therefore, there aren’t any individual shareholders. The parent company appoints its Board of Directors, but it’s still treated as a separate legal entity. It means the provisions applying on the WOS shall not necessarily be applicable to the parent company.

PURPOSE

The main purpose for establishing a Wholly Owned Subsidiaries is as follows –

  • It diversifies the business operations of a corporation and creates a unique channel to run it.
  • It enables its parent company to control within the foreign companies and markets.

ADVANTAGES

  1. the first advantage of WOS is that the parent company can exert full control over its operations in an exceedingly foreign country.
  2. Since the parent company has all the desired permissions, there are fewer administrative difficulties encountered by the corporate, and thus it can easily acquire the WOS.
  3. Every aspect of the WOS is sorted by the parent company; therefore, it doesn’t have to reveal its technology or competitive advantages to others.

for related are blogs:

  1. The parent company has to make 100% equity investment in its subsidiary. Such investments don’t seem to be reasonable for tiny scale and medium organizations.
  2. The parent organization additionally has to tolerate entire misfortunes accruing thanks to the losses on its own because it owns 100% equity.
  3. Few countries are reluctant to line up entirely owned subsidiaries by outsiders in their land.

DIFFERENCE BETWEEN JOINT VENTURES AND WHOLLY OWNED SUBSIDIARIES

The two business forms, Joint Ventures (JV) and Wholly Owned Subsidiaries (WOS), are quite distinct in terms of their ownership structure, risks benefit and uses. These differences are specified below.

  1. one in all the numerous differences between the JV and WOS is their ownership structure. A JV may be a firm that’s founded managed and owned by two or more companies, whereas WOS is owned by one company that has control over it.\
  2. WOS tends to be riskier than a JV because in JV, the chance is spread to quite one company, and if the business fails, then the losses is divided between the businesses, but in WOS, the parent firm shall absorb all losses by itself. Such an entity therefore reduces the risk by providing access to unused resources, including human and capital resource.
  3. similar to these two differ in risks, they also differ in their potential benefits. the advantages tend to be greater in an exceedingly WOS just because the profit doesn’t must be shared with anyone.
  4. WOS is mostly employed in situations where the business is taken into account low risk, or it might be used if the corporate possesses required skills and knowledge, whereas JV shall be used where the corporate needs access to skills, knowledge, etc.

OVERSEAS DIRECT INVESTMENT WITHOUT REMITTANCE OF FUNDS FROM INDIA

CONDITIONS FOR OPENING BRANCH OFFICE/ REPRESENTATIVE ABROAD

  • The overseas branch/office has been founded or representative is posted overseas for conducting normal business activities of the Indian entity.
  • The overseas branch/office/representative is not allowed to enter into any contract or agreement that are in contravention of the Act, Rules or Regulations made thereunder;
  • The overseas office (trading / non-trading) / branch/representative mustn’t create any financial liabilities, contingent or otherwise, for the top office in India and also not invest surplus funds abroad without prior approval of the bank. Any funds rendered surplus should be repatriated to India.
  • Exchange released by the authorized dealer should be strictly utilized for the purpose(s) that it’s released. The unused exchange could also be repatriated to India under advice to the authorized dealer.
  • the main points of bank accounts opened within the overseas country should be promptly reported to the AD Bank.
  • The account so opened, held or maintained shall be closed,
  • if the overseas branch/ office isn’t founded within six months of opening the account, or
  • within one month of closure of the overseas branch/ office, or
  • in case, no representative is provided for 6 months, the balance held in the account shall be repatriated to India;
  • The renewal of the remittance facility after two years is also granted, provided proper accounts of the utilization of interchange released are furnished to the authorized dealer.
  • the subsequent statements should be submitted by the applicant to the authorized dealer:
  • A statement showing details of initial expenses incurred along with suitable documentary evidence, wherever possible, within three months from the date of release of exchange for that purpose.
  • Annual account of trading/non-trading office abroad duly certified by statutory Auditors/Chartered Accountants.

METHODS OF FUNDING A WHOLLY-OWNED SUBSIDIARY

Investment within the Wholly Owned Subsidiaries outside India is also funded out of 1 or more of the following:

  1. Drawal of interchange from an Authorized Dealer bank in India;
  2. Capitalization of exports;
  3. Swap of shares;
  4. Proceeds of External Commercial Borrowings (ECB) or Foreign Currency Convertible Bonds;
  5. In exchange of ADRs/GDRs issued in step with the Scheme for issue of Foreign Currency Convertible Bonds and common shares Scheme, 1993, and therefore the guidelines issued by the govt. of India thereunder from time to time;
  6. Balances standing in the EEFC account of the said Indian party;
  7. And the proceeds of foreign currency funds raised through issuance of ADRs/GDRs.

PROCEDURE OF CONSTRUCTING FOREIGN INVESTMENTS IN WHOLLY-OWNED SUBSIDIARY

The Indian party looking to create an overseas investment in under the automated route must-

  • Fill ODI form duly supported by documents sort of a certified copy of the Board Resolution, statutory auditors’ certificate, and valuation report.
  • Approach an Authorized dealer for creating the investment/remittance.

PLEDGING OF SHARES OF AN ENTIRELY OWNED SUBSIDIARY

The shares of WOS are also pledged by an Indian party as security for availing either fund based or non-fund-based facility for itself or for the WOS from a certified dealer/public financial organization in India or from a far-off lender providing the overseas lender is regulated and supervised as a bank plus the Indian party’s total financial commitments stay within the prescribed limit by the RBI for overseas investment from time to time.

CONDITIONS FOR AN INDIAN COMPANY TO FORM WOS ABROAD

Only an Indian company engaged within the financial services sector activities may make an investment in a very venture or WOS outside India within the financial service sector provided it satisfies the subsequent conditions:

  • It has earned lucre within the preceding three financial years from the financial service activities;
  • It is registered with the relevant administrative unit of India for conducting financial service activities
  • It has taken the approval for undertaking such activities form the concerned administrative body in India and abroad before such financial activity;
  • And it’s fulfilled the prudential norms with relation to capital adequacy prescribed by the concerned administrative unit in India.

TRANSFER OF SHARE OR SECURITY HELD DURING A WHOLLY-OWNED SUBSIDIARY

An Indian party can transfer by way of sale without the approval of a banking company to a different Indian party or to someone residing abroad any share or security held by it within the WOS or JV outside India provided the subsequent conditions are fulfilled.

  • Such a sale must not end in the write-off of the investment made.
  • The sale must be effected through a stock market where the shares of the foreign WOS/JV are listed.
  • Just in case the shares aren’t listed on the exchange, which the shares are disinvested by a personal arrangement, the share price shouldn’t be but the worth certified by a CA or a licensed Public Accountant because the fair value of the shares based upon the most recent audited financial statements of a JV/WOS.
  • The Indian party shouldn’t have any outstanding dues by way of dividend, royalty, consultancy, or export proceeds from the JV/WOS.
  • The annual performance report with the audited accounts for that year must be submitted to the Federal Reserve Bank.
  • The Indian party must not be under investigation by CBI/DoE/IRDA/SEBI or the other administrative unit in India.

ROUTES TO LINE UP WHOLLY-OWNED SUBSIDIARIES OUTSIDE INDIA

A company registered in India can find WOS outside India through one of the 2 available routes. These routes are-

  1. Approval Route: In some business operations and proposals, a corporation before opening a WOS outside India requires prior approval from the Federal Reserve Bank of India i.e., the regulating authority.
  2. Automatic Route: Under this route one doesn’t require any prior approval from the govt authority and therefore the Federal Reserve Bank of India, before fitting a WOS outside India.

SOURCES OF INVESTMENT AND FUNDING TO SET UP WOS OUTSIDE INDIA

As discussed above under the automated route, any Indian company doesn’t require prior approval to open a WOS outside India from the administrative unit, bank of India. The Overseas Direct Investments (ODI) will be made by the Indian party without approval. However, for creating any remittances towards such investments, the Indian company must approach a bank that is in Authorized Dealer Category-I. Here, Indian Company means the following-

  1. Any company registration in India.
  2. an organization formulated under the businesses Act, 2013.
  3. A liability Partnership firm registered under the financial obligation Partnership (LLP) Act, 2008.
  4. A partnership firm set up under the Indian Partnership Act, of 1932.
  5. Any organization incorporated under the Act of parliament.
  6. Any organization or institution in India as per the notification of the bank of India (RBI).

PERMISSIBLE OPERATIONS FOR INVESTMENT IN WOS OUTSIDE INDIA

Most of the sectors and activities are permissible to be carried on by Indian companies abroad under the automated route. and therefore, they can make overseas investments in these sectors without a hassle and open a WOS outside India to hold them on. However, some sectors where overseas investments aren’t permitted or prohibited are-

  • Banking sector
  • Asset’s sector

It must be noted that any bank operating in India can found WOS outside India or a venture, only after a clearance under the Banking Regulation Act, 1949.

The Indian companies that are engaged within the financial sector can make overseas investments in financial activities abroad. For the aim of constructing such investments, they’re required to follow certain norms are criteria, which are-

  • It must be registered under the administrative body in India that regulates the financial services and operations.
  • It must fulfill all the norms and conditions associated with the adequacy of capital that has been prescribed by the regulatory agency in India.
  • It must have accrued a net within the past three fiscal years from operating within the financial sector.
  • It must have obtained prior approval from the concerned regulatory authorities in both India and abroad for creating the venture within the financial services.

PROCEDURE FOR INVESTMENT IN WOS OUTSIDE INDIA UNDER AUTOMATIC ROUTE

The following process must be fulfilled by the Indian company that wishes to open a WOS outside India through the automated route of investment-

  1. Form ODI is to be filed through online mode with the Authorized Dealer Category-I bank.
  2. The prescribed documents must be duly attached with the shape. These documents are-
    • Certified copy of Board Resolution
    • Valuation report as per norms of valuation
    • Certificate from Statutory Auditors.
  1. The corporate then, within the final step must approach the authorized bank for creating the remittances against the investment in WOS outside India.

RBI APPROVAL ROUTE FOR INVESTMENT IN WOS OUTSIDE INDIA

The other route for creating investments abroad is that the approval of the Federal Reserve Bank of India. this is often called the approval route and is employed by those Indian companies that don’t seem to be allowed to take a position through the automated route. For the aim of approval from RBI to open WOS outside India or other branches, one must follow the subsequent process-

  1. Filing the ODI form online with specific applications for approval.
  2. The prescribed documents must be attached with the shape through the authorized dealer category-I bank to the RBI.
  3. An application must be made to the interchange Department within the Overseas Investment Division.

While approving such proposals the RBI considers the subsequent points and factors-

  1. Contribution of such investments to the external trade sector of India and other related benefits.
  2. Viability of clear of the WOS outside India.
  3. Experience and sector of experience of the Indian company for operating the wholly-owned subsidiary.
  4. Track records of business and its financial stability of both the Indian company and foreign organization.

It is to be noted that any trusts and societies that operate within the manufacturing, health or educational sector and are registered in India are allowed to open WOS outside India and make investments with RBIs prior approval.

COMPLIANCES REQUIRED BY INDIAN COMPANY FOR OPENING WOS OUTSIDE INDIA

The following compliance checklist must be fulfilled by the Indian company making a far-off investment or opening a WOS outside India:

  1. For creating investments – Filing Form Overseas Direct Investment (ODI)
  2. Obtaining Unique number (UIN) from the Authorized Dealer Category-I bank.
  3. Reporting any changes in details: Any decisions taken regarding the WOS outside India must be reported to the concerned authorities within 30 days of approval of investment with respect to-
    • Activities diversification
    • Alterations made within the shareholding patterns
    • Opening any sub- subsidiaries under the WOS

All such changes as per the local laws must even be reported to the host country where the WOS outside India has been founded.

  1. Post making the investments, the Indian company must ensure submitting the share certificates to the authorized dealer bank within sixty days.
  2. Annual filing: the subsequent forms and documents must be filed by the WOS outside India on annual basis-
  • Annual Performance Report in Form ODI, Part II on or before 31st December of every year.
  • Annual Returns on Foreign Assets and Liabilities (FLA) on or before 15th July every year.

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