Small Company Registration in India for a Foreign Company
India is a rapidly growing economy, and the backbone of any economy consists of its MSMEs (Micro, Small, and Medium Enterprises). In the Indian economy, the MSME sector accounts for 40–45% of manufacturing output and 45% of exports, making small company registration in India for foreign company a practical entry option.
When a foreign company invests in India, it often chooses to operate in the form of an MSME or a small company. In keeping view of the same Indian Company has made laws, policies, and a framework to promote the small and MSMEs sector in India and make ease of doing and convenient for foreign investors to start a business in India as a small company with less compliance and fast processes.
As per Section 2(85) of the Indian Companies Act, a “small company” means a company, other than a public company—
(1) paid-up share capital of which does not exceed INR 10,00,00,000 (Ten crore rupees) and
(2) turnover of which shall not exceed INR 100,00,00,000 (One Hundred Crore) [as per profit and loss account for the immediately preceding financial year
Provided that nothing in this clause shall apply to—
(1) a holding company or a subsidiary company;
(2) a company registered under section 8 (for charitable and non-profit purpose etc); or
(3) a company or body corporate governed by any special Act;
All those Companies who does not satisfy the above criteria are treated as non-small Companies and are outside the ambit of the small Company definition. Irrespective of the above thresholds, the following companies are also excluded from the definition of a Small Company in India:
- Public Company
- Holding or Subsidiary Company
- Wholly owned subsidiary (WoS)
- Section 8 (non-profit) Company
- Companies governed by special Acts
All these exclusions impact eligibility for small company registration in India for foreign company.
Exemptions and benefits available to Small Companies in India for foreign Companies
A small Company enjoys several compliance relaxations aimed at reducing regulatory burden under various laws, making small company registration in India for foreign company beneficial.
Under the Companies Act, 2013:
1. Board Meetings (Section 173)
A small company needs to hold only 2 Board Meetings in a year (instead of 4, which is applicable to non-small companies), with a minimum gap of 90 days. This reduces the burden of a small company in India.
2. Cash Flow Statement (Section 2(40))
Small Companies are not required to prepare a Cash Flow Statement, making annual financial statements simpler.
3. Reduced Penalties (Section 446B of the Indian Companies Act)
The Small companies incorporated by foreign companies in India get reduced penalties for most non-compliances, including:
- Delay in filings
- Delay in annual return
- Delay in financial statements
4. Simplified Annual Return (Section 92)
The small companies use Form MGT-7A (Annual Return), which is an abridged form of MGT-7, a key advantage in small company registration in India for foreign company. It can be signed by a director only and is not required to be certified by a practising Company Secretary.
5. Internal Audit (Rule 13 of Companies (Accounts) Rules, 2014)
The Internal audit is not mandatory for small companies.
6. Non-applicability of Companies Auditor’s Report Order (CARO)
The Companies Auditor’s Report Order (CARO) does not apply to small companies, making statutory audits lighter.
7. Simplified Board Report (Section 134)
Small companies can use a simplified Board Report. They get exemptions from certain disclosures, such as:
- Formal evaluation of the board
- Remuneration details in specific formats
- CSR- related disclosures
8. Dematerialization of Shares (Rule 9B)
The small Companies are not mandatorily required to dematerialize their shares and may keep their shares in physical form.
Under Other Laws
A Small company incorporated by a foreign company in India can register itself under the MSME Act.
1. MSME Benefits (If registered as MSME)
A small Company can also register as an MSME to get:
- Priority in government tenders
- Protection under payment (45-day payment rule), if any small company incorporated by foeign company in India having MSME registration, as per rules debtor has to clear its payments within 45 days, otherwise it will be reported under the Income Tax Act.
- Cheaper bank loans (priority sector lending)
- Credit guarantee schemes
2. Income Tax Act, 1961
A small Company may have lower litigation exposure due to a smaller scale, which means:
- Less scrutiny
- Lower chances of complex tax disputes
- If MSME payments are delayed beyond 45 days (or the agreed period, max 45 days) under the MSMED Act, 2006, the buyer must pay compound interest at three times the RBI bank rate. Additionally, under Section 43B(h) of the Income Tax Act, the buyer cannot deduct this expense in the current financial year, deferring the tax benefit until the year the payment is actually made.
Private Limited Company – Most Preferred Mode
The most commonly adopted and famous structure for establishing a presence in India is incorporating a Private Limited Company, commonly used for small company registration in India for foreign company.
The Private Limited Company is broadly categorized into:
- Small Company
- Non-Small Company
Composition of shareholding for foreign companies to register themselves as a small company in India and get the benefits of a small company and the MSME Act.
| S.NO | Composition as two Shareholders(minimum requirement) | Share in an Indian Company | Small Company Qualified |
| 1. | Holding a Foreign Company(XYZ Ltd) as a shareholder in an Indian Company | 99.99% | No |
| Individual Nominee for XYZ Ltd | 0.1% | ||
| 2 | Foreign Company XYZ Ltd as Shareholder | 50% | Yes |
| Individual Shareholder | 50% | ||
| 3. | Foreign Company XYZ Ltd as Shareholder | 50% | Yes |
| Foreign Company ABC Ltd as the second shareholder | 50% |
Wholly Owned Subsidiary (WoS) – Mostly Used by Foreign Entity
A wholly owned subsidiary (WoS) is a Company where 100% equity share stake is held by its parent foreign company in an Indian Company as a shareholder. Such companies give full control to their parent entity over their day-to-day operations, decision-making, policy formulation, etc. The WoS constitutes a separate legal entity with independent legal identity, a separate bank account, and necessary statutory registration in its own name.
However, a WoS does not qualify as a Small Company and is therefore not eligible for various regulatory benefits, relaxations available to Small Companies in India for foreign companies.
Advisory on Selecting the Establishment Model
From the compliance perspective, it may be advisable to consider incorporating a Joint Venture (JV) Company in the form of a Private Limited Company instead of a Wholly Owned Subsidiary.
Suggested Structure of JV:
- Parent entity holds up to 50% equity stake.
- Remaining 50% held by another group entity or individual.
Rationale:
The JV will qualify as a Small Company, subject to meeting prescribed thresholds. This enables the entity to avail regulatory relaxations and compliance benefits and reduces overall compliance burden without materially impacting business operations, making it suitable for small company registration in India for foreign company.
Five Simple Steps to register a Small Company in India by a foreign company
1. Company Setup
The process of small company registration in India for foreign company is very easy. It is 100% online process with no physical requirement of directors or shareholders to setup company and Bank account activation. A foreign company or an individual can set up their company in India within 5-7 working days. The entire incorporation process is to be done via the online portal of the Registrar of Companies under the Ministry of Corporate Affairs(MCA) in India.
- Name Reservation: To reserve a name for small company registration by foreign company in India, the first step is to file online Form Spice Part A to be filed for name reservation, first they need to apply unique name as per Name guidelines by MCA, it should be unique not resemble to existing name of company or LLP and not resemble or near resemble with existing trademarks in Indian
- Incorporation Application: For small company registration in India for foreign company, the second step is to file online form Spice Part B. After name reservation, need to file incorporation documents, i.e., MOA & AOA(Memorandum & Articles of Association), with other requisite documents, i.e., Director consent letter, undertaking, INC 9 (declaration of promoters and shareholders)
- Certificate of incorporation: After filling the online incorporation application, the RoC department will scrutinise the documents and information provided in it, and if all documents are in order, they will approve the same and issue a Certificate of incorporation.
2. Registered Address
As per the Indian Companies Act, every company must have a registered address within 30 days of its incorporation. Generally, new companies or startups prefer business centres, co-working spaces for the initial stage, once their business grow they shift to independent offices.
For the registered address following documents are mandatory:
- Lease Deed
- No objection certificate
- The latest utility bill is not older than two months
- Photographs of the office, inside and outside, with one of the Directors.
3. Bank Account
Once the company is incorporated and registered in India, the next step is to open a Bank Account in the name of the Company. We have both options, Indian Banks and global Banks, which can open the account easily. If all documents are in order, the banker generally takes 5-7 working days to open the bank account.
4. Capital Compliance
After incorporation, registering the address, and opening a bank account, the next crucial step in an Indian company is to do initial capital compliance. As per the Indian Companies Act, there is no minimum capital required for company registration, however bank generally ask to open a current account for a minimum of INR 1,00,000 /USD 11,00 as this amount is justified as capital from a foreign investor in India. The Capital compliance has to be reported with RBI (Reserve Bank of India) as FDI(Foreign Direct Investment) via online form filling FC-GPR within 30 days of shares allotment.
A company, after incorporation, cannot commence its business without receiving capital in its account and reporting the same with the RoC via filing online form 20A. After filling Form 20A, the company can commence its business in India.
5. Post Compliances
Once capital compliance and reporting are done, the company has to do some post-compliance as per business requirements:
i) GST/VAT Registration
ii) Professional Tax Registration
iii) Shop & Establishment Registration, etc.
iv) MSME registration under the MSME Act provides various benefits.
Conclusion
For foreign companies entering India, structuring the business as a small company can significantly reduce compliance burden while maintaining operational flexibility. However, choosing the right structure requires careful planning around eligibility, shareholding, and regulatory requirements for small company registration in India for foreign company. CorporateLegit supports businesses at every stage, right from structuring and incorporation to FEMA compliance and ongoing filings, making sure that our clients get a smooth, compliant, and efficient setup in India.
FAQ
- Can a foreign company or individual register a small company in India?
Yes, a foreign company or individual can register a small Company in India by non subsidiary company.
- What kind of shareholding pattern is required for a foreign company to register a small company in India?
It should be a non-subsidiary Private Limited Company, which means the foreign parent entity should not hold more than 50% shares in the Indian small company.
- Whether a wholly owned subsidiary qualifies or is eligible for small company status in India?
No, as a wholly owned subsidiary holding 100% shares and having more than 50% share in the Indian company, hence it does not qualify.
- What are the basic requirements to register a Private Limited (small company) in India?
Two shareholders may be body corporate, or individual, one address and one resident director.
- What kind of benefits are available for small companies in India?
Various benefits under the Companies Act, Income Tax Act, and MSME Act.
- Dematerialisation of shares mandatory compliance for small companies in India?
No, small companies are excepted for mandatory dematerialisation of shares in India.