Capital Requirements for Foreign Subsidiaries in India

Capital Requirements for Foreign Subsidiaries in India

Setting up a foreign subsidiary in India is a strategic move for international businesses aiming to tap into the world’s fastest-growing major economy. India offers vast market potential, a robust legal framework, and liberalized foreign direct investment (FDI) policies. However, one of the most common questions that arises during incorporation is:
“What are the capital requirements for setting up a foreign subsidiary in India?”

Let’s explore this in detail.

 

1. Understanding the Business Structure

A foreign subsidiary in India is typically set up as a Private Limited Company under the Companies Act, 2013. It is considered a separate legal entity, even though it is owned and controlled by a foreign parent company. Foreign ownership can go up to 100% in most sectors under the automatic route (no prior government approval required).


2. Minimum Capital Requirement – Is There Any?

As per current laws, there is no statutory minimum capital requirement for incorporating a private limited company in India, including one with foreign ownership.
  • Earlier, a minimum paid-up capital of ₹1 lakh was required, but this requirement has been removed.
  • However, practical capital sufficiency is essential to demonstrate financial viability and operational readiness.
That said, FDI policies or sector-specific regulations may prescribe capital thresholds in certain industries (e.g., banking, insurance, NBFCs, telecom, defense, etc.).

3. Sector-Specific Capital Norms

Some regulated sectors have prescribed minimum capital requirements for foreign players:

Sector

FDI Route

Capital Requirement

Banking (Private Sector)

Approval Route

₹500 crore minimum capital

NBFCs

Automatic Route

₹2 crore (for most categories)

Insurance

Automatic Route

₹100 crore

Telecom

Automatic/Approval

₹100 crore net worth (up to ₹250 cr)

Defense Manufacturing

Approval Route

Case-specific norms

4. Funding a Foreign Subsidiary – Modes of Capital Contribution

Capital infusion into an Indian subsidiary can happen through:

  • Equity Shares
    – Foreign investors subscribe to shares during incorporation or via rights/bonus issues.
  • Compulsorily Convertible Debentures (CCDs)
    – These are treated as equity for FDI purposes.
  • Preference Shares
    – Subject to RBI rules on pricing and tenure.
  • External Commercial Borrowings (ECBs)
    – Loans from parent company allowed under ECB policy.
  • Shareholder Loans
    – Permitted under FEMA, but must follow pricing, interest, and repayment norms.

All capital contributions must comply with FEMA and FDI norms, including pricing guidelines, reporting (Form FC-GPR), and timeline compliance.

 

5. Documentation & RBI Compliance

Once the foreign capital is received:

  • Report to Authorized Dealer Bank within 30 days of inward remittance.
  • File Form FC-GPR within 30 days of share allotment with RBI via the FIRMS portal.
  • Issue shares within 60 days of receipt of funds.
  • Maintain statutory registers and proper valuation certificates if applicable.

Non-compliance can attract penalties under FEMA.

 

6. Tips for Structuring Capital Smartly

  • Start lean, scale fast
    Inject initial seed capital sufficient to start operations, then scale based on demand.
  • Use layered funding
    Combine equity and CCDs to maintain control and fulfill capital requirements.
  • Account for operational needs
    Budget for at least 6–12 months of operational expenses to show financial preparedness.
  • Use Indian valuation standards
    Follow discounted cash flow (DCF) or NAV method when issuing shares for consideration.

 

7. Tax & Repatriation Planning

  • Capital structure impacts withholding tax, transfer pricing, and profit repatriation.
  • Dividends are tax-free in India (for shareholders), but royalty/interest payments attract TDS.
  • Plan for Double Taxation Avoidance Agreements (DTAAs) when structuring investments.

 

Conclusion

There is no fixed minimum capital requirement to set up a foreign subsidiary in most Indian sectors, but adequate capital is crucial to demonstrate genuine business intent, meet RBI and sectoral norms, and ensure smooth operation.

With India continuing to liberalize FDI norms and promote "Ease of Doing Business", foreign companies have immense opportunities — provided they navigate capital structuring, compliance, and funding smartly.

 

For professional help with foreign subsidiary setup, capital structuring, RBI compliance, and legal documentation, reach out to Team TAXAJ – your trusted advisor for global business expansion in India.

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Created & Posted by Pooja

Income Tax Expert at TAXAJ

 

TAXAJ is a consortium of CA, CS, Advocates & Professionals from specific fields to provide you a One Stop Solution for all your Business, Financial, Taxation & Legal Matters under One Roof. Some of them are: Launch Your Start-Up Company/Business, Trademark & Brand Registration, Digital Marketing, E-Stamp Paper Online, Closure of Business, Legal Services, Payroll Services, etc. For any further queries related to this or anything else visit TAXAJ

 

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