Shridhi Jain (Company Secretary) (1678 Points)
27 November 2012An Indian company is forming a company abroad in collaboration with two more foreign ppl.
Is it required for the promoting company to be the holding company of the company to be formed.?
Actually, the foreign company wants to act as the representative of the indian company.
Shareholding pattern as decided is 1/3 shares each amongst three.
CA. Subhash Dangi
(Chartered Accountant)
(1784 Points)
Replied 27 November 2012
As the controlling stake i.e, 2/3 (66.67%0 is held by two foreign nationals, they can control over the management and affairs of the company.
How can promoting Indian company become holding company which is holding less than 50% of voting rights?
If they just want to representative of the Indian company, the aggregate share holding should not be more than 50% of voting rights.
Shridhi Jain
(Company Secretary)
(1678 Points)
Replied 27 November 2012
Indian company cant be a holding company. It will hold 1/3rd of shares.
Can it be a promoting company of foreign company?
I mean to ask, is it required for a promoting company to be a holding company?
CA. Subhash Dangi
(Chartered Accountant)
(1784 Points)
Replied 27 November 2012
Not necessary for Promoter compnay to become holding compnay.
Refer beow for better understanding:
At a later stage, foreign companies start their Indian business operations by incorporating a private limited company under the Companies Act 1956 ("CA1956") either as a joint venture company or a wholly owned subsidiary. The choice of having a private limited company in India is for various reasons including less compliances and more freedom given to private limited companies to carrying on its operations under the CA1956.
Section 4(1) of the CA1956 defines the holding and subsidiary companies. This section is applicable to Indian subsidiaries of the foreign companies as well. As per this section, a company ("First Company") is said to be a subsidiary of another ("Second Company"), if Second Company:
The Second Company is known as the holding company.
In most cases, an Indian company becomes the holding company of the other company by holding more than half of paid-up equity share capital. It is pertinent to note that section 4(6) of the CA1956 has made special additional provisions to determine holding-subsidiary companies relationship in case of foreign companies. According to section 4(6) of the CA1956, if a foreign company is the holding company of the Indian company by applying the law of the country of the foreign company, the foreign company shall be deemed to be the holding company of the Indian company under the CA1956 as well, irrespective of whether the requirements of this section 4 of the CA1956 are fulfilled or not. Illustration: If under the test laid down in the laws of United Kingdom a company, say, A Limited (Indian company) is subsidiary of, say, B Limited (UK company) by applying the laws of United Kingdom, then, A Limited shall be subsidiary of B Limited under the CA1956 as well notwithstanding the test laid down under section 4 of the CA1956 is satisfied or not.
The CA1956 has put restrictions on payment of the remuneration by a public company (and subsidiaries of public companies) to its directors and other managerial personnel as defined therein. As per section 3(1)(iv) of the CA1956 as amended by the Companies (Amendment) Act, 2000 (w.e.f. 13 December 2000), 'public company' means a company which: (a) is not a private company; or (b) is a private company which is a subsidiary of a company which is not a private company. However, no such restriction on payment of the remuneration to directors is applicable to private companies. Consequently, if any director of a public company draws or receives the remuneration in excess of the prescribed limits (without the prior sanction of the Central Government), he shall refund such sums to the company and until such sum is refunded; such director shall hold such money in trust for the company. More importantly, the said public company cannot waive the recovery of any sum so refundable unless permitted by the Central Government.
Due to this restriction on payment of remuneration to directors by the public companies and their subsidiaries, Indian private limited subsidiaries ("Indian Subsidiaries") of foreign publicly traded companies ("Foreign Public Companies") also faced problems in paying remuneration to their directors. To overcome this problem, section 4(7) was introduced in the CA1956 through the Companies (Amendment) Act, 1960 (w.e.f. 28 December 1960) on the recommendation of the Companies Act Amendment Committee 1957 ("Committee"). The Committee felt that the prime purpose of the CA1956 is to protect the interest of Indian shareholders. Therefore, a distinction was drawn between: (a) private companies which are wholly owned subsidiaries of foreign companies; and (b) private companies which are subsidiaries of foreign companies but a portion of their capital is held by Indian nationals or companies. Evidently, it is the interest and protection of Indian shareholders that the Committee then had in mind. The Committee had recommended that:
"Where, Indians having no beneficial shareholding interest, whatsoever in the company, it was felt that there is no necessity for the Indian Legislature to concern itself with the matter. But if any as the Indian capital is involved, there is no reason for any different treatment for the purpose of the Act [CA1956] between such a company and a company which is a subsidiary of an Indian public company."
Accordingly, section 4(7) was inserted in the CA1956 as under:
"(7) A private company, being a subsidiary of a body corporate incorporated outside India, which, if incorporated in India, would be a public company within the meaning of this Act, shall be deemed for the purposes of this Act to be a subsidiary of a public company if the entire share capital in that private company is not held by that body corporate whether alone or together with one or more other bodies corporate incorporated outside India."
Thus, an exemption was provided to Indian Subsidiaries of Foreign Public Companies by inserting section 4(7) in the CA1956, wherein it is provided that an Indian Subsidiary of Foreign Public Company is not treated as 'public company' under the CA1956, if entire share capital of such an Indian Subsidiary is held by foreign companies incorporated outside India. The reason for such an exemption was that there was no Indian shareholder in such Indian Subsidiaries. This exemption is continuing even after the Companies (Amendment) Act, 2000 came into effect.
As per prevailing practice, it is however noticed that the provision to determine the holding-subsidiary companies relationship as stated in section 4(1) and section 4(6) are usually ignored by Indian Subsidiaries of Foreign Public Companies and the provisions of section 4(7) which is an exemption provision were used to determine the holding-subsidiary companies relationship. As per this practice, it is argued that the phrase "A private company, being a subsidiary of a body corporate incorporated outside India, which, if incorporated in India, would be a public company within the meaning of this Act" as used in section 4(7) of the CA1956 should consider only the intermediate parent company to determine the holding-subsidiary companies relationship under the CA1956. In most of such cases, the intermediate holding company (which is a private company formed in tax beneficial jurisdiction) is considered for determining the holding-subsidiary companies relationship and the ultimate parent company which is often a Foreign Public Company is ignored. Further, the cases in which the provisions of sections 4(6) of the CA1956 are applied to determine the holding-subsidiary companies relationship are negligible.
It is inferred that the practice of using section 4(7) of the CA1956 to determine the holding-subsidiary companies relationship will make the provisions of section 4(1)(c) and section 4(6) of the CA1956 (as stated above) redundant and cannot be accepted at all. Even in the Vodafone case, it was ultimate parent company, i.e., Vodafone International Holdings B.V. against which proceedings were initiated and not against the intermediate parent companies. Further, as and when the violations of remuneration to directors in excess of limits under the CA1956 are known, the proceedings could be initiated against the directors of such Indian Subsidiaries of Foreign Public Companies. In such cases, a director who received remuneration in excess of such limits from the Indian Subsidiary of Foreign Public Companies (under the impression that remuneration so paid to him is in compliance with provision of the CA1956) continues to hold such remuneration in trust for the employer company though such director is paying taxes on this remuneration as his income under Indian tax laws.
In view of above, a Foreign Public Company going to set up private limited company in India
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Entry Strategies for Foreign Investors |
STARTING OPERATIONS IN INDIA |
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| A foreign company planning to set up business operations in India has the following options | |||||
| AS AN INDIAN COMPANY | |||||
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A foreign company can commence operations in India by incorporating a company under the Companies Act,1956 through
Foreign equity in such Indian companies can be up to 100% depending on the requirements of the investor, subject to equity caps in respect of the area of activities under the Foreign Direct Investment (FDI) policy. Details of the FDI policy, sectoral equity caps & procedures can be obtained from Department of Industrial Policy & Promotion, Government of India (https://www.dipp.nic.in ). |
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| Joint Venture With An Indian Partner |
Foreign Companies can set up their operations in India by forging strategic alliances with Indian partners.
Joint Venture may entail the following advantages for a foreign investor:
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| Wholly Owned Subsidiary Company | Foreign companies can also to set up wholly-owned subsidiary in sectors where 100% foreign direct investment is permitted under the FDI policy. | ||||
| Incorporation of Company |
For registration and incorporation, an application has to be filed with Registrar of Companies (ROC). Once a company has been duly registered and incorporated as an Indian company, it is subject to Indian laws and regulations as applicable to other domestic Indian companies. For details please visit the website of Department of Company Affairs under Ministry of Finance at https://dca.nic.in |
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| AS A FOREIGN COMPANY | |||||
Foreign Companies can set up their operations in India through
Such offices can undertake any permitted activities. Companies have to register themselves with Registrar of Companies (ROC) within 30 days of setting up a place of business in India. |
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| Liaison Office/Representative Office |
Liaison office acts as a channel of communication between the principal place of business or head office and entities in India. Liaison office can not undertake any commercial activity directly or indirectly and can not, therefore, earn any income in India. Its role is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers. It can promote export/import from/to India and also facilitate technical/financial collaboration between parent company and companies in India.
Approval for establishing a liaison office in India is granted by Reserve Bank of India (RBI). |
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| Project Office | Foreign Companies planning to execute specific projects in India can set up temporary project/site offices in India. RBI has now granted general permission to foreign entities to establish Project Offices subject to specified conditions. Such offices can not undertake or carry on any activity other than the activity relating and incidental to execution of the project. Project Offices may remit outside India the surplus of the project on its completion, general permission for which has been granted by the RBI. | ||||
| Branch Office |
Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India for the following purposes: (i) Export/Import of goods (ii) Rendering professional or consultancy services (iii) Carrying out research work, in which the parent company is engaged. (iv) Promoting technical or financial collaborations between Indian companies and parent or overseas group company. (v) Representing the parent company in India and acting as buying/selling agents in India.
(vi) Rendering services in Information Technology and development of software in India. (vii) Rendering technical support to the products supplied by the parent/ group companies. (viii) Foreign airline/shipping company.
A branch office is not allowed to carry out manufacturing activities on its own but is permitted to subcontract these to an Indian manufacturer. Branch Offices established with the approval of RBI, may remit outside India profit of the branch, net of applicable Indian taxes and subject to RBI guidelines Permission for setting up branch offices is granted by the Reserve Bank of India (RBI). |
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| Branch Office on “Stand Alone Basis” |
Such Branch Offices would be isolated and restricted to the Special Economic zone (SEZ) alone and no business activity/transaction will be allowed outside the SEZs in India, which include branches/subsidiaries of its parent office in India.
No approval shall be necessary from RBI for a company to establish a branch/unit in SEZs to undertake manufacturing and service activities subject to specified conditions. Application for setting up Liaison Office/ Project Office/ Branch Office may be submitted in form FNC 1 (available at RBI website at www.rbi.org.in ) |
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| FOREIGN DIRECT INVESTMENT (FDI) POLICY | |||||
| FDI under automatic route is now allowed in all sectors, including the services sector, except a few sectors where the existing and notified sectoral policy does not permit FDI beyond a ceiling. | |||||
| Automatic Route |
No prior approval is required for FDI under the Automatic Route. Only information to the RBI within 30days of inward remittances or issue of shares to Non Residents is required. RBI has prescribed a new form, Form FC-GPR (instead of earlier FC-RBI) for reporting shares issued to the Foreign Investors by an Indian company.
For details please contact:
Chief General Manager, |
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| Government Approval | Foreign Investment proposed not covered under the ‘Automatic Route’ are considered for Governmental Approval on the recommendations of the Foreign Investment Promotion Board (FIPB) | ||||
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| TAXATION IN INDIA | |||||
| India is moving towards reforming its tax policies and systems so as to facilitate globalization of economic activities. The corporate tax rate for foreign companies is 40%. The net tax rate is far lower than this on account of various deductions and exemptions available under the tax laws. Tax holidays are available in Special Economic Zones set up to make industry globally competitive. Infrastructure Sector Projects enjoy special tax treatment/holidays. A user friendly tax administration is being introduced with round the clock electronic filing of customs documents from 31.3.04 | |||||
should ensure that entire paid-up share capital of its Indian Subsidiary is owned by two or more bodies corporate outside India. Further, if an individual (in or outside India) or an Indian company (in both cases either as a nominee or otherwise of Foreign Public Company) holds even a single share of Indian Subsidiary of Foreign Public Company, the provisions to avail the exemption under section 4(7) of the CA1956 are not complied with because as per said section the entire paid-up share capital of Indian Subsidiary must be held by "bodies corporate incorporated outside India".
Going forward, the new Companies Bill has no exemption provision similar to section 4(7) of the CA1956. Though the reason for this omission is unknown, but it is assumed that keeping in view the globalisation it would be unfair on the part of Indian Government not to protect interest of the global investors by granting such an exemption to Indian Subsidiaries of Foreign Public Companies and allowing the directors of such private companies to draw remuneration without any restriction.
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