Process Involved

The incorporation of a subsidiary of a foreign entity in India is a comprehensive, multi-stage process that generally comprises three broad phases: (i) Incorporation of the Indian Company (“Indian Co.“); (ii) Post-Incorporation Advisory and Compliance; and (iii) Dematerialisation of Shares.

It is important to note that the process of incorporation in India extends well beyond the mere filing of incorporation documents. Several regulatory and procedural requirements are triggered immediately upon incorporation, including those under the Companies Act, 2013, the Foreign Exchange Management Act, 1999, and various allied labour and tax legislations. Each stage requires close coordination, extensive documentation, and timely filings before different regulatory authorities such as the Ministry of Corporate Affairs (“MCA”), the Reserve Bank of India, and other state and central departments.

Accordingly, the following phases must be undertaken to ensure that all statutory and procedural requirements are duly met and that the Indian subsidiary is fully compliant and operational under applicable Indian laws.

Phase One: Incorporation of the Indian Co.:

The first phase involves establishing the Indian subsidiary under the Companies Act, 2013 and ensuring compliance with the FEMA framework governing foreign investment. This phase includes both preparatory and filing-related activities, such as:

1. Procurement of necessary information (such as particulars of proposed directors, share capital structure, and contact details) and finalization of documents, including notarization and apostille procedures for the name reservation of the Indian Co.

2. Procurement of Digital Signature Certificates (DSCs) for the proposed first directors and authorised representatives of the foreign shareholders of the Indian Co.

3. Filing the name reservation application for the Indian Co. before the MCA.

4. Drafting of the constitutional documents of the Indian Co., i.e., the Memorandum of Association (MoA) and the Articles of Association (AoA).

5. Reviewing documentation relating to the resident director, a mandatory requirement for incorporation.

6. Collating and preparing all necessary forms, declarations, undertakings, and supporting documents to be filed with the Registrar of Companies (ROC).

7. Drafting and submitting the incorporation application for obtaining the Corporate Identification Number (CIN), Permanent Account Number (PAN), Tax Deduction and Collection Account Number (TAN), and Director Identification Numbers (DINs).

Key Requirements:

1. At least one director must be an Indian resident(staying in India for more than 182 days in a year).

2. The India Co. must have a registered office address in India(either on lease/rent or in its own name)

3. The India Co. must have a separate email address for registration procedures in India. This is not mandatory, but it is advisable to have a separate email address for ease of compliance.

Phase Two: Post-Incorporation advisory to the Indian Co.:

Post-incorporation compliance is a critical step that renders a newly formed company legally operational. Activities such as the appointment of directors, issuance of share certificates, opening of a bank account, and filing of initial statutory returns ensure that the company transitions from mere registration to formal recognition by regulatory authorities as an active and functioning legal entity. Activities under this phase include:

1. Applying for registration under the applicable Shops and Establishment Act in the state where the registered office is located.

2. Applying for registration under the Employees’ Provident Fund and Employees’ State Insurance schemes, as applicable.

3. Drafting the resolutions and minutes of the first Board Meeting, covering matters such as opening of a bank account, taking note of the Certificate of Incorporation, appointment of directors and auditors, etc.

4. Collating, preparing, and/or drafting of necessary documents/ information (such as SMF forms, declarations, undertakings, etc.), as may be required to be filed with the Reserve Bank of India under the extant foreign exchange laws and filing of Form FC-GPR (Foreign Currency – Gross Provisional Return) and along with the FIRC (Foreign Inward Remittance Certificate).

5. Coordinating with the Authorised Dealer Bank in relation to the opening of a bank account of the Indian Co.

6. Filing of mandatory forms such as Form INC-20A (Declaration of Commencement of Business) and Form ADT-1 (Appointment of Auditors) of the Indian Co.

7. Applying for registration under Professional Tax in the state where the Indian Co.’s registered office is located, if necessary.

8. Applying for registration under Goods and Services Tax in the state where the Indian Co.’s registered office is located, if necessary.

9. Applying for the Importer Exporter Code of the Indian Co., if necessary.

Phase Three: Dematerialisation of Shares:

The final phase concerns compliance with the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, notified on 27 October 2023, which introduced Rule 9B mandating private companies (including foreign subsidiaries) to issue, hold, and transfer securities only in dematerialised form by 30 June 2025 (extended from the earlier deadline of 30 September 2024). The said Rule 9B requires three important compliances from a private limited company, namely:

1. Mandatory for all private limited companies to issue securities in dematerialised form after 30 September 2024 (which was subsequently extended via a notification to 30 June 2025);

2. Facilitate the conversion of existing physical securities to dematerialised form before 30 September 2024; and

3. Transfer securities only in dematerialised form after 30 September 2024.

The aforesaid mandate requires that every private limited company that is not classified as a small company as of 31 March 2023 must comply with the requirement to dematerialise its shares on or after 30 June 2025. The notification further clarifies that any company that ceases to qualify as a small company shall have a period of 18 months from the end of the financial year in which such status changes to comply with the dematerialisation requirement. It may be noted that no foreign subsidiary qualifies as a small company. Further, since a newly incorporated subsidiary did not exist as of 31 March 2025, the strict compliance deadline of 30 June 2025 does not technically apply to it.

In view of this ambiguity, two prevailing approaches have emerged in practice:

1. First Approach: The 30 June 2025 deadline is interpreted as applicable to newly incorporated companies as well, and accordingly, the Indian Co. should issue its shares only in dematerialised form.

2. Second Approach: The newly incorporated Indian subsidiary may determine its status as a small company only after the closure of its first financial year, and therefore has 18 months from the end of that year to dematerialise its shares. Under this view, the Indian Co. may initially issue physical share certificates and subsequently convert them into dematerialised form within the prescribed 18-month period.

Considering the evolving regulatory landscape, we recommend that the Indian Co. follow the First Approach and dematerialise its shares soon after incorporation to ensure compliance and avoid potential interpretational risks.

Kindly note that the process of dematerialisation is extensive and time-consuming. It requires collaboration and coordination with three agents/ intermediaries/ government-authorised entities: (i) the Depository, (ii) the Depository Participant (“DP”), and (iii) the Registrar and Transfer Agents (“RTA”). The process involved in the dematerialisation of shares of the Indian Co. is as follows:

1. Appointment of Depository (National Securities Depository Limited or Central Depository Services Limited).

2. Appointment of RTA.

3. Drafting of all necessary documents for the dematerialisation process.

4. Review, collation and submission of all relevant documents to the Depository.

5. Admission of securities at the Depository and obtaining International Securities Identification Number (ISIN).

6. Preparation, finalisation, and submission of documents with DP and coordination with DP for the opening of the Demat Account of shareholders of the Indian Co.

7. Procurement of PAN cards for the shareholders of Indian Co.

8. Opening of Demat Account for the shareholders of Indian Co.

9. Passing board resolutions and executing documents to issue shares in dematerialised form.

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