While India has drastically improved on Ease of Doing Business Index, there is still a long way to go. Compliances are an important part of doing business in India and at times, a little complex.

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Companies in India are governed according to the provisions of Companies Act, 2013. Among the type of companies, the most popular structure for subsidiaries is that of a private company which demand comparatively lower compliances but don’t offer opportunity to raise money through public issue unless converted to a public company. This is the most suitable structure for starting off with a subsidiary or a Joint venture.

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Ownership and Management

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Under this structure, a company can be set up with atleast two directors (managing the company’s business operations) and atleast two shareholders (having ownership of the company). Directors of the company need not be the shareholders. In case of wholly owned subsidiary, a nominal shareholding is given to fulfil the requirement of two shareholders for incorporation of a company.

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From a practical perspective, to efficiently complete the process of company incorporation, we advise to have atleast one Indian Director on board. The holding company may, at any time in future may choose to alter the composition of the board of directors. In case the holding company wishes to appoint a local director only for the purpose of ease of setting up of a subsidiary company, we recommend entering into an explicit contract with the prospective director to this effect.

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Considerations at incorporation

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• Authorised Capital - This is the maximum amount of investment that can be made in the company. This can be raised when need be, however will incur additional compliance cost. Higher initial authorised capital means higher government fees.

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• Memorandum and Articles of Association - These documents primarily define the objects of the business and lay down the bye laws for the company. A carefully drafted Articles of Association is very crucial for the holding company to exercise and retain control over the operations of the subsidiary company.

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Considerations post incorporation

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• Separate Legal Entity - Indian subsidiary is a separate legal entity from the holding company. The operational relationship must be carefully documented and monitored in order to maintain the separate legal status of each company.

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• Transfer Pricing - The relationship between the Indian subsidiary and the holding company must be “arms-length” and the Income Tax authorities of both countries may scrutinize transfer pricing among the companies. The agreements are usually cost plus arrangements. To be arms length, such agreements must contain provisions normally found in such agreements such as how the scope of services will be specified, not just tax provisions.

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• Intellectual property - IP developed by the India subsidiary is usually assigned to the holding company since the subsidiary is only a captive service supplier. This should be backed by proper agreements including transfer pricing considerations.

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• Employee Benefits - Employee payments are usually broken in Basic Pay, Variable Pay and Allowances. This is done to reduce liability on account of a mandatory payment of 12% to provident fund (pension trust) calculated on basic pay, by both employer and employees. Companies tend to balance basic pay with allowances.