Friday, May 31, 2024
Friday, May 31, 2024

Closure of a Foreign Subsidiary of an Indian Company

by Aishwarya Agrawal
Closure of a Foreign Subsidiary

In recent years, India has become one of the most favourable places for foreign companies who are looking for good investment opportunities. Despite this, for various reasons, a foreign company might find it necessary to terminate its business operations in India. Consequently, both the overseas company established in India and its subsidiary must know well about the procedures involved in closing their operations. In this blog, we shall discuss the steps involved in closure of a foreign subsidiary of an Indian company.

Foreign Subsidiary Company in India

As per Section 2(42) of the Companies Act, 2013, foreign corporations are defined, and they are obligated to follow a comprehensive regulatory framework. It is of utmost importance for foreign subsidiaries to comprehend and comply with these regulations to ensure legal and operational compliance within India.

Process of Closure of a Foreign Subsidiary of an Indian Company

In light of the economic challenges brought about by the COVID-19 pandemic, many Indian companies with global subsidiaries are contemplating the closure of their overseas operations. When deciding closure of a foreign subsidiary of an Indian company, they must adhere to certain regulatory procedures and submit relevant documentation.

Steps for Closure of a Foreign Subsidiary of an Indian Company

The steps involved in the closure of a Foreign Subsidiary of an Indian Company are:

1. Board Resolution and ODI Part III Form Submission:

The Indian company, as the parent entity, is required to convene a board meeting and pass a resolution to initiate the closure of a Foreign Subsidiary of an Indian Company. Simultaneously, they must complete and submit the Overseas Direct Investment (ODI) Part III form, which includes details related to the closure. This form should be accompanied by all supporting documents relevant to the termination of the Joint Venture (JV) or Wholly Owned Subsidiary (WOS).

2. Approval from Authorised Dealer:

To proceed with the closure of a Foreign Subsidiary of an Indian Company, the Indian party must seek approval from an authorised dealer, as this approval is necessary to ensure compliance with foreign exchange regulations and to facilitate the repatriation of funds as well, if it is applicable to it.

3. Online OID Petition:

The authorised dealer, acting as the legal intermediary, is responsible for filing an online Original Issue Discount (OID) petition. This petition is submitted through their nodal headquarters and serves as a formal request for the Closure of a Foreign Subsidiary of an Indian Company.

By following these steps and fulfilling the associated requirements, Indian companies can address the issue of closure of a Foreign Subsidiary of an Indian Company in accordance with regulatory guidelines.

Disinvestment by Way of Sale of Shares of JV/WOS outside India Without Write-off

When an Indian Party intends to sell or transfer shares of a Joint Venture or Wholly Owned Subsidiary located outside India without writing off any investments, certain conditions must be met. These conditions apply when shares or insurance held by the Indian Party in an overseas JV/WOS are involved in the transaction.

Conditions for Share Transfer

These conditions include:

1. Documented Investments: If the investments in the overseas JV/WOS are properly documented, the share transfer must be conducted through a stock purchase transaction. This ensures a transparent and regulated transfer process.

2. Undocumented Investments: If the investments in the overseas JV/WOS are not documented, and the disinvestment percentages are transferred through a private agreement, the share rate should not be lower than the value certified by a chartered accountant. This measure is in place to maintain fairness and transparency in such transactions.

3. No Pending Payments: The Indian Party should not have any pending payments or financial obligations from the overseas JV/WOS at the time of disinvestment.

4. Minimum Duration and Audited Reports: The overseas JV/WOS must have been operational for a minimum of one full year, and the Annual Percentage Rate (APR) for that year, along with audited financial reports, should have been approved by the Reserve Bank of India.

5. No Regulatory Investigations: The Indian Party should not be under investigation or inquiry by any regulatory authority in India. This condition ensures that the disinvestment process is not hindered by ongoing investigations or legal issues.

Disinvestment by Way of Sale of Shares of JV/WOS Outside India with Write-off

In certain scenarios, an Indian Party may disinvest in an overseas Joint Venture or Wholly Owned Subsidiary and write off the investments without the prior authorisation of the Reserve Bank of India. Such disinvestment is permissible when the amount received after disinvestment is less than the original investment amount.

Conditions for Disinvestment with Write-off

Some of the conditions that apply in this case:

1. Recorded Overseas Commodity Trade: Disinvestment without prior authorisation is allowed when the JV/WOS is registered in the overseas commodity trade.

2. Listed Indian Party with Net Worth Below Rs. 00 Crores and Investment Below $10 Million: 2 listed Indian Party with a net worth of less than Rs. 100 crores can disinvest in an overseas JV/WOS without prior authorisation if the investment in the overseas entity is below $10 million.

Reasons for Closure of a Foreign Subsidiary of an Indian Company

Closure of the Foreign Subsidiary of an Indian Company is a significant decision for a company, and there are various reasons that may lead to this choice. Some of the common reasons for closing a foreign subsidiary include:

1. Low Income and High Expenditures: When a foreign subsidiary consistently generates low income while incurring high operational expenses, it can become financially unsustainable. Companies may decide to close the subsidiary to avoid ongoing financial losses.

2. Challenges with Establishment, Taxation, and Compliances: Complexities related to establishing and maintaining a foreign subsidiary, including taxation and compliance with immigration and employment regulations, can be burdensome. These challenges, especially for non-productive ventures, may lead to the decision to close the subsidiary.

3. Market and Demand Changes: Shifting market dynamics, changing customer demands, or a lack of market demand for the subsidiary’s products or services can necessitate closure. Companies may decide to exit a market where demand has diminished or evolved.

4. Economic Slowdowns: Economic downturns in the foreign market or globally can have a significant impact on a subsidiary’s financial performance. In such cases, closing the subsidiary may be a strategic move to mitigate losses.

5. Dependence on Home Government Systems: In certain situations, foreign subsidiaries may face challenges due to changing regulations or unfavourable policies in the host country. Companies may opt to close the subsidiary to reduce reliance on or exposure to such governmental systems.

Each of these reasons highlights the multifaceted considerations that companies must weigh when contemplating the closure of a foreign subsidiary. The decision often involves a combination of financial, operational, and strategic factors aimed at optimising the company’s overall performance and sustainability.

Final Thoughts

The closure of a foreign subsidiary of an Indian company represents a strategic response to various factors that impact business operations. This decision is often driven by financial considerations, such as low profitability or high expenses, as well as challenges related to taxation and compliance. Market dynamics, demand shifts, and economic downturns can also influence this choice. Moreover, changes in government policies and regulations in the host country can prompt the closure of a subsidiary. Ultimately, this decision reflects a company’s adaptability and its commitment to optimising its global business portfolio, ensuring financial viability, and focusing on core operations.

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