Setting up a foreign subsidiary in India can be a
strategic move to expand business operations in one of the world's
fastest-growing economies. However, due to market shifts, regulatory changes,
global consolidation, or financial considerations, foreign parent companies may
eventually decide to exit the Indian market. A smooth and compliant exit
strategy is essential to protect reputation, manage liabilities, and optimize
costs.
In this article, we’ll explore the key
exit
strategies available to foreign subsidiaries in India, their legal
frameworks, and compliance requirements.
1. Voluntary Winding Up of the
Subsidiary
Voluntary liquidation
is one of the most common exit
methods, especially if the business is solvent and the decision is strategic
(not due to financial distress).
Key Steps:
Pass
a Board Resolution and a Special Resolution for winding up.
Appoint
a liquidator.
File
with the Registrar of Companies (RoC) under Section 59 of the Insolvency
and Bankruptcy Code (IBC), 2016.
Clear
all outstanding liabilities and distribute remaining assets.
Best suited for:
Clean exits where the
company has no major
disputes or liabilities.
2. Striking Off the Company
Under Section 248 of the Companies Act, 2013, a
foreign subsidiary that is not operational or has been inactive for
two or more years can opt for striking off.
Key Conditions:
The
company must not have any outstanding liabilities.
It
should not have undertaken any business activity recently.
File
Form STK-2 with necessary declarations and affidavits.
Best suited for:
Dormant subsidiaries or inactive entities looking
for a cost-effective exit.
3. Sale of Business or Share
Transfer
Foreign companies may choose to exit through a
sale of shares or business assets to another Indian or foreign investor.
Options Include:
Share
Sale (Transfer of ownership)
Asset
Sale (Transfer of fixed and current assets)
Slump
Sale (Transfer of the business as a going concern)
Key Considerations:
Comply
with FDI regulations under
FEMA.
Obtain
necessary approvals from RBI (if required).
Capital
gains tax implications for the foreign shareholder.
Best suited for:
Strategic divestments or M&A-led exits.
4. Merger or Amalgamation
The subsidiary can merge with another Indian
company (within the group or externally), subject to approval from the National
Company Law Tribunal (NCLT).
Benefits:
Transfer
of assets and liabilities to the acquirer.
Continuation
of operations under a new entity.
Challenges:
Requires
detailed documentation, valuation, and regulatory scrutiny.
Time-consuming
process with strict timelines.
Best suited for:
Strategic restructuring, intra-group
consolidation, or simplifying operations.
5. Transfer of Business to LLP or
JV
In certain cases, the foreign entity may exit by
transferring
business operations to a Joint Venture (JV) partner or
converting the
subsidiary into an LLP, thereby reducing operational involvement.
Regulatory Requirements:
Compliance
with RBI’s FDI circulars.
Execution
of business transfer agreement (BTA) or conversion documents.
Best suited for:
Partial exit or transitioning to a new business
model.
6. Involuntary Liquidation
through NCLT
If the company is insolvent or unable to repay
creditors, it may be forced to undergo involuntary liquidation under
IBC.
Process Includes:
Filing
application by creditors or company itself.
Appointment
of Insolvency Professional (IP).
Liquidation
of assets and settlement of claims.
Best suited for:
Distressed subsidiaries with unmanageable
liabilities.
Compliance and Reporting
Obligations
Regardless of the exit route, foreign subsidiaries
must ensure:
Settlement
of tax dues (including TDS,
GST, corporate tax).
Closure
of bank accounts, cancellation of GST,
IEC, and other registrations.
Reporting
to RBI under FEMA for repatriation of capital and profits.
Professional Support is Essential
Exiting India through any of the above methods
involves regulatory compliance, tax planning, and legal due diligence.
It’s advisable for foreign companies to work closely with:
Chartered
Accountants
Company
Secretaries
Legal
Advisors
FEMA
Consultants
This ensures that the exit is legally sound,
tax-efficient, and reputation-safe.
A well-planned exit strategy is just as important
as the market entry for any foreign subsidiary operating in India. Choosing the
right method—be it winding up, striking off, share sale, or merger—depends on
the company’s financial health, future goals, and operational history.
At TAXAJ, we help foreign companies navigate
all legal, financial, and regulatory requirements for a smooth and
compliant exit from India.
Created &
Posted by
Pooja
Income Tax Expert
at TAXAJ
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