Setting Up of Business, Industrial and Labour Laws · Setting up of Branch Office, Liaison Office and Wholly Owned Subsidiary by Foreign Company

Wholly Owned Subsidiary in India: Setup and FDI Compliance

Updated 11 October 2026 · Fact-checked

A wholly owned subsidiary (WOS) in India is a company whose entire share capital is held by a foreign parent. You incorporate it under the Companies Act, 2013, bring in FDI through the automatic or approval route within the sectoral cap, follow FEMA pricing rules, and report the inflow and share issue to RBI.

Understand Wholly Owned Subsidiary: Setup and FDI Compliance

A wholly owned subsidiary is an Indian company in which a foreign company holds 100% of the equity, directly or through nominees. Because it is a company incorporated in India, it is a separate legal person. Its liability is limited, and the foreign parent is not liable for its debts beyond its investment.

This is the key difference from a branch office or liaison office. A branch is only an extension of the foreign company. It has limited permitted activities and the parent is directly liable. A WOS can carry on any activity permitted for the sector, can earn and retain profits, and can raise funds locally.

Foreign investment is called FDI. It is regulated by FEMA and the FDI policy. There are two routes. Under the automatic route, no prior government approval is needed. You only report to RBI after the investment. Under the government route, you need prior approval before bringing in money. Which route applies depends on the sector. Many sectors allow 100% under the automatic route. Some have a sectoral cap, a ceiling on foreign holding. Some are prohibited. A 100% WOS is possible only where the sector allows 100% foreign holding. Always check the current FDI policy for the sector in the question.

The set-up has two parts. First, company law steps: name approval, incorporation with the Registrar, PAN, TAN and other registrations. A private company needs at least two directors, and at least one director must be a resident in India. Second, FEMA steps: receive the funds through banking channels, issue shares within the time limit, comply with pricing norms, and file reports with RBI through an authorised dealer bank.

After set-up, the WOS must follow ongoing company compliances. These include board meetings, annual general meeting, financial statements and annual return. It must also file the Annual Return on Foreign Liabilities and Assets (FLA) with RBI each year. Key managerial personnel provisions under the Companies Act may also apply, depending on the class of company.

Key rules to remember

WOS shareholding: Foreign parent holds 100% of equity (directly or through nominees); Possible only where the sector allows 100% foreign investment. Nominee holders are needed for a private company's minimum two members.
FDI route test: Sector check → Automatic route (no prior approval) OR Government route (prior approval) OR Prohibited; Check the sectoral cap first. Foreign holding above the cap is not allowed.
Pricing rule for fresh issue: Issue price ≥ fair value (unlisted company) determined by a valuer under any internationally accepted pricing methodology; For an issue to a non-resident, the price cannot be below fair value. Listed companies follow SEBI pricing rules.
Reporting after receipt of funds: Advance remittance → report to RBI (Form FC-GPR for share issue) → file after allotment; Shares must be allotted within the period prescribed under FEMA rules (generally 60 days from receipt of the advance). Otherwise the amount must be refunded unless RBI permits otherwise.
Annual reporting: FLA return filed with RBI every year; Applies to Indian companies that have received FDI.
Companies Act, 2013, section 203(1): Prescribed companies must have whole-time KMP: MD or CEO or manager (or a whole-time director in their absence), company secretary and CFO; Section 203(4): a vacancy in a whole-time KMP office must be filled by the Board within six months. Section 203(5): penalty of ₹5,00,000 on the company and ₹50,000 on each director and KMP in default.

How to solve Wholly Owned Subsidiary: Setup and FDI Compliance questions

Use this order for any question on setting up a WOS or its FDI compliance.

1Identify the sector and check whether FDI is allowed. Note if it is prohibited, capped or open to 100%.
2Decide the route: automatic or government approval. State the effect: approval needed before investment, or only post-investment reporting.
3Confirm that 100% holding is permitted. If the cap is lower, a WOS cannot be set up and a joint venture may be the answer.
4List the company law steps: name approval, incorporation, directors (including a resident director), PAN, TAN and other registrations.
5Apply FEMA conditions: receipt of funds through banking channels, pricing at or above fair value, allotment within the time limit.
6State the reporting: Form FC-GPR for the share issue and the annual FLA return, filed through the authorised dealer bank.
7Add ongoing compliances and any section-based rule asked, such as section 203 for KMP.
8Close with a clear conclusion that answers the exact question asked.

Quickest way: Four-line WOS answer frame

When to use it: Use this when you have little time, for short notes or questions that ask for steps or advantages.

Line 1: Define a WOS as an Indian company with 100% foreign equity and a separate legal identity.
Line 2: Say the route (automatic or government) and the sectoral cap.
Line 3: Give set-up steps: incorporate, receive funds, price at fair value or above, allot shares in time.
Line 4: Give reporting (FC-GPR, FLA return) and one comparison with a branch office: limited liability and wider activities.

Common mistakes in Wholly Owned Subsidiary: Setup and FDI Compliance

Saying a WOS can be set up in every sector with 100% foreign holding.
Students remember that many sectors allow 100% automatic route and generalise.
Fix: Always say it depends on the sectoral cap in the FDI policy. Some sectors have lower caps and some are prohibited.
Treating the automatic route as 'no compliance'.
The word 'automatic' suggests nothing is required.
Fix: Write that prior approval is not needed, but pricing norms must be met and reports must be filed with RBI after the investment.
Confusing a WOS with a branch office and saying the parent is not liable in both.
Both are ways for a foreign company to operate in India.
Fix: A WOS is a separate company with limited liability. A branch is part of the foreign company, so the parent is directly liable.
Forgetting the resident director requirement and the minimum members.
Students focus on FEMA and skip company law basics.
Fix: Mention at least two directors, with one resident in India, and that nominees hold shares to meet the minimum members, with the parent as beneficial owner.
Quoting wrong KMP penalties or timelines under section 203.
Several sections have similar penalty and time provisions.
Fix: Remember: vacancy filled within six months (section 203(4)); penalty ₹5,00,000 on the company and ₹50,000 on each director and KMP in default (section 203(5)).
Ignoring the pricing rule and the time limit for allotment.
Students treat these as technical details.
Fix: State both: price not below fair value, and allotment within the prescribed period after receipt of funds, failing which refund is required.

Worked examples

Example 1

Zentra GmbH, a German company, wants to set up a wholly owned subsidiary in India in a sector where 100% FDI is allowed under the automatic route. Explain the steps and compliance required.

Show the solution

Provision: A WOS is an Indian company with all equity held by the foreign parent. FDI in the sector is allowed up to 100% under the automatic route, so no prior government approval is needed.
Company law steps: Zentra gets the name approved, incorporates the company with the Registrar under the Companies Act, 2013, and appoints at least two directors, one of whom is resident in India. A nominee holds one share as the second member, with Zentra as beneficial owner.
FEMA steps: Zentra remits the subscription money through banking channels. The shares are issued at a price not below fair value determined by a valuer, and allotted within the prescribed time from receipt of funds.
Reporting: the company reports the inflow and the allotment to RBI through its authorised dealer bank in Form FC-GPR, and files the FLA return every year.
Other registrations: PAN, TAN and other registrations needed for the business are obtained.

Answer: Zentra can incorporate the WOS without prior approval, because the sector is under the automatic route. It must incorporate under the Companies Act, 2013, comply with FEMA pricing and allotment-time rules, and report to RBI through FC-GPR and the annual FLA return.

Example 2

A foreign company asks why it should prefer a wholly owned subsidiary to a branch office in India. Also state the consequence if the subsidiary, a company required to have KMP, leaves its Chief Financial Officer's post vacant for eight months.

Show the solution

Advantages of a WOS: it is a separate legal person, so the parent's liability is limited to its investment. A branch is part of the foreign company, so the parent is liable for its obligations.
Activity scope: a WOS can carry on any activity permitted in the sector within FDI policy. A branch office is restricted to permitted activities and conditions.
Funding and profit: a WOS can raise funds locally and retain profits as a company. These are limited for a branch.
KMP rule: under section 203(1), prescribed companies must have a managing director or CEO or manager (or a whole-time director in their absence), a company secretary and a CFO as whole-time KMP.
Vacancy: section 203(4) requires the Board to fill a vacancy at a Board meeting within six months. Eight months exceeds six months, so there is a default.
Penalty: under section 203(5), the company is liable to a penalty of ₹5,00,000. Every director and KMP in default is liable to ₹50,000. For a continuing default, a further ₹1,000 per day after the first applies, not exceeding ₹5,00,000.

Answer: A WOS gives limited liability and wider activities compared with a branch. The vacancy of eight months breaches section 203(4). The company faces a penalty of ₹5,00,000 and each director and KMP in default ₹50,000, plus ₹1,000 per day for continuing default after the first day, subject to the ₹5,00,000 cap.

Exam tips

Always begin with the sector check. Examiners hide the answer in a line such as 'sector allows 100% under automatic route'.
Learn the contrast between WOS, branch office and liaison office as a short table in your head: legal status, liability, activities, approval.
Write the full sequence in order: incorporate, receive funds, price, allot, report. Marks go for each step.
Give section numbers only for the Companies Act provisions you are sure of, such as section 203, and describe FEMA rules in plain words.
End every answer with a one-line conclusion that answers the question asked.

Practice questions from Setting up of Branch Office, Liaison Office and Wholly Owned Subsidiary by Foreign Company

Wholly Owned Subsidiary: Setup and FDI Compliance: frequently asked questions

How does a foreign company set up a wholly owned subsidiary in India?

It incorporates a company under the Companies Act, 2013 and brings in funds as FDI as per the sector's route. It issues shares to itself within the pricing and time rules, and reports to RBI. A nominee usually holds one share to meet the minimum members for a private company.

Is the automatic route available for every wholly owned subsidiary?

No. It applies only to sectors where the FDI policy allows investment without prior approval, up to the sectoral cap. Other sectors need government approval, and some are prohibited.

What is FC-GPR and when is it filed?

It is the form used to report to RBI the issue of shares to a non-resident against FDI. It is filed through the authorised dealer bank after the shares are allotted. Check the current FEMA rules for the exact filing period.

Why is a wholly owned subsidiary better than a branch office?

A WOS is a separate legal entity with limited liability for the parent. It can carry on a wider range of activities and raise funds locally. A branch is part of the foreign company and has restricted permitted activities.