Foreign Direct Investment: An Indian Analysis

Foreign Direct Investment in India has slowly increased over the years due to the friendlier laws passed in India. In fact the government in even inviting FDI in the defence system now this is a huge leap. But lot of other changes are required if FDI and its subsidiaries have to be allowed to have trade in India. This blog talks about the idea of Parent and Subsidiaries as well.

An Introduction to Parent and its Subsidiaries

With India afoot to add major investments to its already expanding kitty, it is substantiated through many global surveys that it remains a favored place for the giant conglomerates to invest. With the present government’s attempts to enlarge FDI (Foreign Direct Investment) scope into defense and other sectors, the avenues for the companies to do business in India has only grown.  A foreign company interested to do business in India has various options such as a joint venture, a liaison, or representative office, or through subsidiaries [1]. Among these types, the outline of market reality shows the way of subsidiaries to be the most desired way to invest by a foreign entity. In certain countries licensing remains major trouble for companies and hence subsidiaries that have already acquired such licenses provide further ease to the foreign entities.[2] However, such incorporations only take place once the liaison office or the representative office initially finds it suitable to invest further in India. A subsidiary in general parlance stands for something which is related or supplementary to something. However, in the context of companies, it is the Companies Act of 2013 where the subsidiary is defined. Under the Companies Act, a subsidiary in relation to any other holding company under Section 2 subsection 87 means a company in which the holding company—

(i) Controls the composition of the Board of Directors; or

(ii) Exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies.[3]

In addition to these and as per the act a subsidiary is also a company that is owned wholly or in parts by an already existing subsidiary of some parent company.[4] There are various forms of companies that find their place under the company’s act. However, the two broad categories of companies where investments are thought to be made are public and private companies. Both of these are discussed at great lengths under Companies Act, 2013. However, for our attention, it is important to note that while in a public company it is permitted to invite debt capital and equity contributions from the public, a private company is expressly barred from inviting such subscription. In a country where the government still holds stakes in giant companies, much of the debate is often on the question that why such public companies draw little investments. The reason why foreign companies often wish to invest in private companies as foreign direct investment is simple; it gives you same benefit with little to do for it. In other words, to have a public company as a subsidiary one has to comply with a plethora of regulations because of the reason that it has taken money from the public and the regulatory authority owes a responsibility for its accountability. While in the case of a private company, it is closely held and the investment in a private company is limited to promoters nearest family. In addition to these factors such as; appointment of the board of directors, managerial remuneration, and on certain issues of capitals, private companies provide for greater autonomy as compared to public companies. Therefore unless a company wishes to draw major investments which the promoters of private companies are unable to provide, foreign companies often seek to invest in private companies.

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The Types of Subsidiary

We must remember that a subsidiary can be both partially or wholly owned. In a wholly owned subsidiary the common stock is completely owned by the parent company and the goods hence cannot be traded publicly. A company often fully owns a subsidiary when they believe that it is going to be beneficial for your business.  There is often a doubt that looms in such discussions over liability. Though a company may be completely owned by a foreign company, it is the director of the subsidiary and not the parent company who is responsible for maintaining day to day function. However, the parent company may have the power to remove or elect a new director or board of directors. Directors of such subsidiaries are often expected to act in the best interest of the subsidiaries even if they come in conflict with the parent company. Therefore both are distinct and have a separate legal entity and cannot be treated as a single unit. A subsidiary though has its recognition of being a separate legal entity but it still is connected to the parent company. None of them i.e. the parent company and the subsidiary can wash off their hands from each other. Keeping in mind their relationship, the parent company along with presenting their own financial statements is supposed to present consolidated financial statements which contain combined balance sheets of the parent and the subsidiary companies. These balanced sheets also include the foreign subsidiaries owned by a foreign parent company.[5]

Conclusion

In addition to these, the companies Act of 2013 has from widening the definition for “place of business” for foreign companies doing business in India had included many provisions such as removal of limitations under section 4(7) informing private or public limited companies, permitting foreign legal entities to establish project offices in India, etc., has tried to ease the process and please the investors. However, still, the compliance of rules laid down in Foreign direct investment policy that is updated from time to time needs to be complied with. India is growing with its aims and investments. The present government especially keen at striking chord with the international community is trying hard to woo foreign investors to do foreign direct investment business in India and with India. In such a situation it has not only opened the doors for newer Foreign Direct Investments to flow in but is working hard to ease the process, limit the laws, and create an investor-friendly environment. With expecting more investments, the market should be ready to embrace the change further.

Also read State Bank of Bikaner & Jaipur v. National Iron & Steel Corp.

[1]http://www.supremecourtcases.com/index2.php?option=com_content&itemid=1&do_pdf=1&id=22264, June 26, 2017

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[2] J. D. Maverick, What is the difference between a subsidiary and a wholly owned subsidiary?, http://www.investopedia.com/ask/answers/032615/what-difference-between-subsidiary-and-wholly-owned-subsidiary.asp

[3] http://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf

[4] Id

[5] Nicola Sargeant, Are domestic and foreign subsidiaries included on a company’s financial statements?,http://www.investopedia.com/ask/answers/06/subsidiarycbsheet.asp