Setting up a Wholly Owned Subsidiary (WOS) in India offers foreign companies full control over their Indian business operations. In this structure, the foreign parent entity holds 100% of the subsidiary’s share capital, enabling direct oversight of local strategic and financial decisions.
While this model offers significant operational and strategic benefits, it comes with critical compliance responsibilities. From incorporation to ongoing operations, a WOS must comply with multiple legal frameworks, primarily the Companies Act, 2013, and the Foreign Exchange Management Act (FEMA), among others. The following sections explain these compliance obligations step-by-step, beginning from the incorporation stage.
Companies Act, 2013: Key Compliance Requirements for Wholly Owned Subsidiaries
Wholly Owned Subsidiaries (WOS) established by foreign companies in India are governed by the Companies Act, 2013, and are subject to several ongoing regulatory requirements. These include governance structure, statutory audits, filing obligations, dematerialization norms, and maintenance of ownership transparency.
Below is a detailed overview of the compliance mandates that must be followed post-incorporation.
Composition of the Board of Directors
A WOS must have a minimum of two directors, with at least one director who is a resident in India. The Board is entrusted with key strategic decision-making and is responsible for ensuring the company adheres to governance norms laid out in the Companies Act.
Appointment of Statutory Auditor
Within 30 days from the date of incorporation, the WOS is required to appoint a statutory auditor. The auditor shall be a practicing Chartered Accountant registered with ICAI (Institute of Chartered Accountants of India). This ensures that financial disclosures are reviewed independently in accordance with Indian auditing standards.
Mandatory Maintenance of Statutory Records
WOS entities must maintain:
- Proper books of accounts
- Statutory registers
- Minutes of board and shareholder meetings
These records must be kept at the registered office of the company and preserved for the statutory period as prescribed under law.
Annual ROC Filings
Every WOS must file:
- Form MGT-7/7A: Annual Return
- Form AOC-4: Financial Statements
These filings must be submitted within the timelines prescribed under the Act and are essential for maintaining corporate transparency and regulatory compliance.
Disclosure & Ownership Compliance Forms
Filing of Form MGT-6 (Beneficial Ownership Disclosure)
As per Section 89 of the Companies Act, a WOS must file Form MGT-6 within 30 days of receiving a declaration under Section 89. This declaration is:
- Submitted by the registered owner using Form MGT-4, and
- By the beneficial owner using Form MGT-5.
Failure to comply within the prescribed 30-day timeline can lead to penalties. Therefore, it is critical for WOS to establish internal controls to monitor shareholding declarations and ensure prompt submission of MGT-6 to the RoC.
Filing of Form BEN-2 (Declaration of Significant Beneficial Owners)
Wholly Owned Subsidiaries in India that have Significant Beneficial Owners (SBOs) are required to report such beneficial ownership by filing Form BEN-2 with the Registrar of Companies. This step is crucial for enhancing transparency and tracking ultimate control over the Indian entity.
Corporate Governance and Share Capital Changes
While not every WOS is mandated to implement advanced corporate governance structures, certain entities must establish committees such as:
- Audit Committee
- Nomination and Remuneration Committee
- Stakeholders’ Relationship Committee
These are required where applicable as per thresholds and business nature.
Moreover, any change in share capital—be it issuance of new shares or a transfer—must be duly reported to the RoC. Maintaining updated ownership records is critical for legal validity and shareholder trust.
Dematerialization Requirements Under the Companies (Prospectus and Allotment of Securities) Rules, 2014 (Amended)
Following the MCA notification dated 27th October 2023, new compliance norms have been introduced relating to issuance and holding of securities:
1. Mandatory Dematerialization for Private Companies
All private companies other than small companies are now mandated to issue their securities in dematerialized form only. This ensures enhanced transparency, reduced risk of fraud, and improved ease in share transfer.
2. Facilitation of Dematerialization
WOS must facilitate the dematerialization process in accordance with the Depositories Act, 1996 and its associated regulations. The objective is to ensure all securities are converted into electronic format and managed through depositories.
Definition of a Small Company (for Exclusion from Demat Requirement)
For exemption from the above dematerialization requirement, a company must qualify as a small company, which means:
- Paid-up share capital ≤ ₹4 crore, and
- Turnover ≤ ₹40 crore (as per previous year’s financials)
However, the following companies are not eligible to be treated as small companies, irrespective of capital or turnover:
- Holding or subsidiary companies
- Section 8 companies (non-profit)
- Companies governed by special statutes or Acts
FEMA Compliance for Wholly Owned Subsidiaries in India
Foreign investments in India are governed by the Foreign Exchange Management Act (FEMA), which regulates the inflow and outflow of foreign exchange and capital. A Wholly Owned Subsidiary (WOS) incorporated in India by a foreign parent company must follow specific FEMA compliance obligations to ensure lawful operation.
Compliance with Foreign Direct Investment (FDI) Policy
Wholly Owned Subsidiaries must comply with India’s FDI policy, governed by the RBI and sectoral regulators. In most sectors, 100% FDI is permitted through the automatic route. However, certain industries require prior government approval before foreign investment can be made. Understanding the sectoral cap and entry route is essential before making the investment.
Reporting of Foreign Investments: Form FC-GPR
Upon issuance of shares against foreign investment, the WOS must submit Form FC-GPR (Foreign Currency-Gross Provisional Return) to the Reserve Bank of India (RBI) within 30 days of the allotment. This form is a mandatory declaration of the receipt of foreign funds and share issuance.
Filing of FLA Return (Foreign Liabilities and Assets)
Every WOS that has received FDI in any previous year is required to file the Foreign Liabilities and Assets (FLA) Return annually. The deadline for submission is 15th July of each year. This return captures the details of foreign assets and liabilities held by the Indian subsidiary and must be submitted even if there is no new investment in the current financial year.
External Commercial Borrowings (ECB)
If a WOS intends to raise external funding through External Commercial Borrowings (ECB), it must strictly follow the RBI’s ECB framework. This includes obtaining necessary permissions, adhering to borrowing limits, interest ceilings, and end-use restrictions. Prior registration and compliance with ECB reporting guidelines are mandatory.
Compliance in Foreign Exchange Transactions
All foreign exchange transactions undertaken by a WOS—including remittances to the parent company, royalty payments, or import/export settlements—must comply with FEMA provisions. Proper documentation must be maintained for each foreign exchange transaction, and payments must be routed through authorized dealers as per the FEMA guidelines.
Other Regulatory Compliances Applicable to WOS
Apart from the Companies Act and FEMA, Wholly Owned Subsidiaries in India are also required to adhere to several other statutory regulations depending on their business nature and scale of operations.
Goods and Services Tax (GST) Compliance
A WOS must obtain GST registration if its aggregate turnover crosses the threshold limit specified under the GST law. Once registered, the subsidiary is required to file monthly, quarterly, or annual GST returns, maintain accurate records of invoices, and ensure timely payment of tax liabilities.
Labour Law Compliances
A WOS functioning in India is bound to comply with various labour and employment laws to ensure employee welfare and workplace fairness. These include:
- Employees’ Provident Funds and Miscellaneous Provisions Act
- Payment of Wages Act
- Industrial Disputes Act
These laws cover employee benefits, wages, working conditions, and grievance redressal mechanisms.
Sector-Specific Regulatory Requirements
In addition to general laws, Wholly Owned Subsidiaries operating in regulated sectors such as banking, insurance, telecommunications, pharmaceuticals, etc., must comply with sector-specific guidelines. These may involve obtaining licenses, adhering to operating restrictions, or filing regular reports with regulatory bodies like SEBI, IRDAI, TRAI, or RBI, as applicable.
Conclusion
Setting up a Wholly Owned Subsidiary (WOS) in India provides foreign companies with substantial strategic control and access to one of the world’s fastest-growing markets. However, this opportunity comes with a comprehensive set of compliance responsibilities that begin at incorporation and extend throughout the lifecycle of the entity.
A WOS must strictly adhere to the regulatory frameworks laid out under the Companies Act, 2013, the Foreign Exchange Management Act (FEMA), the Income Tax Act, and other applicable Indian laws. Timely submission of statutory filings, tax returns, and disclosures is critical not only for legal conformity but also for operational stability.
Failure to comply with these obligations can attract penalties, interest, and legal action, underscoring the importance of a well-structured compliance management system. To reduce exposure to risk and ensure seamless operations, companies are strongly advised to engage experienced professionals for compliance support.
Maintaining full regulatory compliance enables a WOS to operate confidently, build investor trust, and establish a strong, sustainable presence in the Indian business environment.
Frequently Asked Questions (FAQs)
Q1. What is a Wholly Owned Subsidiary (WOS) in India?
A Wholly Owned Subsidiary is a company incorporated in India in which 100% of the share capital is held by a foreign parent company, giving it full control over Indian operations.
Q2. What are the key compliance requirements for a WOS under the Companies Act, 2013?
WOS must appoint directors, file annual returns (Form MGT-7), financial statements (Form AOC-4), maintain statutory registers, and undergo statutory audits.
Q3. Is it mandatory for WOS to file Form FC-GPR?
Yes. A WOS must file Form FC-GPR with the Reserve Bank of India within 30 days of issuing shares against foreign investment.
Q4. What is the FLA Return and who needs to file it?
The FLA (Foreign Liabilities and Assets) Return must be filed annually by WOS that have received FDI in previous years. The deadline is typically 15th July every year.
Q5. Is GST registration mandatory for WOS?
Yes, if the WOS crosses the prescribed turnover threshold, GST registration is mandatory along with filing periodic GST returns.
Q6. Are there sector-specific compliances for WOS in regulated industries?
Absolutely. Sectors like banking, telecom, and insurance require additional licenses and adherence to specific regulatory frameworks alongside general company law compliance.
