Over the last few decades, India has advanced to be the most preferred and favourable alternative for foreign companies’ investments. Nonetheless, sometimes, due to commercial or other reasons, a foreign company is required to close its business activities in India. A foreign firm in India and its subsidiary company must be familiar with the closing process. This article discusses the procedure of closing a subsidiary company in India and explains it elaborately.
Overview of Indian Subsidiary Company
An Indian subsidiary company denotes a business entity that is owned or controlled by another company, which is generally termed the parent company. With regard to corporate and business structure, a subsidiary company is usually a distinct legal entity from its parent company. However, the parent company has a majority stake in the company’s equity.
These are some of the distinctive characteristics of an Indian subsidiary company:
- Separate Entity of Law: A subsidiary is a distinct legal entity completely separate from the parent company, and it has its own financial statements, own assets, liabilities, management structure, and so on.
- Ownership: The large majority of shares in a subsidiary company are owned by its parent company, which may either be an Indian entity or a foreign association. Almost always, the shares of a subsidiary company are controlled by the parent company with an ownership of more than fifty percent, making this entity its dependent-influenceable being.
- Control: Though the parent company may hold a majority stake in the subsidiary, it doesn’t need to control each aspect of the subsidiary’s operations. Based on the agreements and corporate governance structure in place, the subsidiary may specify its corporate strategy and goals, which frequently significantly vary from that of the parent company.
If you want to discontinue your Indian subsidiary company, you must close it in a timely manner. Otherwise, you need to observe certain compliance against the company. If you fail to maintain company compliance, you might be penalized or fined. After closing the company, all responsibilities and compliance will be null. You don’t need to submit an annual audit report for the company or hire a CS/CA to submit the audit report. Therefore, you should wind up the Indian Subsidiary to avoid all such penalties and complications.
Closing of Subsidiary Company
The procedure of closure of the subsidiary company in India
A subsidiary company needs to file the specified forms with the Registrar of Companies for its termination and striking off the name from the registers:
- E-Form STK-2
- E-Form MGT-14
Process in the event of voluntary strike-off
In the event of the voluntary closure of a subsidiary company, you should follow the specified process:
- The company needs to authorize or assign a director or an officer to start a board meeting.
- A notice for the board meeting mentioning the agenda must be dispatched to the members seven days before the meeting.
- You should convene the board meeting and move a resolution concerning the closure of a subsidiary company.
- You should send communication regarding the Extra-Ordinary General Meeting or the Annual General Meeting (AGM).
- A general meeting must convene to approve the Special Resolution by the members and the board of directors.
- In the following step, the company needs to file Form MGT-14 by attaching all the essential documents.
- Then, the Form STK-2 must be submitted by attaching all the collateral documents recommended by the statutes.
Finally, the Registrar of Companies authenticates all the documents attached to the forms submitted by the company and examines whether the entire terms and conditions have been satisfied for the closure of the subsidiary company. After all such documents and information undergo thorough checking, the ROC begins the procedure of striking off the company from the registers after issuing a public notice according to the norms under the Insolvency and Bankruptcy Code (IBC), 2016.
Documents to be attached in forms for closure of subsidiary company
While submitting the forms for the closure of the subsidiary company in India, specified documents are needed:
- In Form STK-3, you must deliver a properly notarized bond by the entire board of directions.
- Affidavit in Form STK-4.
- Indemnity bonds in Form STK-3.
- The certified exact copy of the properly signed Special Resolution approved by the directors.
- A statement about the pending cases and litigation (if any) of the company in the court of law.
- Copy of the board resolution that endorses the filing of the forms for closure of the subsidiary company.
- A statement concerning the assets and liabilities of the company. This statement has to be verified by a practising Chartered Accountant.
- The company must obtain a no-objection certificate from the relevant regulatory authority that administers it.
- Copy of all the appropriate orders linked to delisting from the stock exchange (if any).
The time utilized for the closure of the subsidiary company in India
On receipt of an application for the closing and striking off of a subsidiary company with the Registrar of the Company (ROC) via E-Form STK-2, all the documents attached to it are authenticated thoroughly. The ROC then issues a public notice and dispatches notice to the company and its director. If they do not respond within the specified timeline, the company name is struck off from the registers. The entire closure process can take 3 to 4 months.
If the Registrar receives any objection concerning the closure of a subsidiary company, the entire process can become lengthy or, in some instances, may be rejected by the ROC.
Eligibility for calling for voluntary winding up
As per the provision of Section 59(1) of the act, a company can opt for the closure of a subsidiary company as below –
- One who proposes to liquidate the company voluntarily
- A company that has not perpetrated any default or offence.
Procedure of Voluntary Liquidation
The liquidation process utilized for the voluntary termination of the subsidiary company involves the following steps:
Public Announcement: The liquidator has to present an announcement publically within 5 days of their appointment. This is essential for furnishing the claims concerning liquidation within 30 days. Such a notice announcement must be issued in one local or regional daily newspaper and one daily English newspaper in the jurisdiction of the location of business of the company registration. The same must be furnished on the company’s official website also.
The announcement or public notice should include the following particulars –
- Name and address of the liquidator.
- Date of start of the liquidation.
- Last date of deposition of any claim by the shareholders or members or any other associated person.
- Registration number and contact details for the liquidation.
- Mode of tendering any such claims.
Opening of a bank account: Amongst the most crucial steps in closing a subsidiary company is opening a new bank account with an authorized or scheduled bank. The account opened must be termed after the corporate person or company involved, with the word ‘in liquidation’ at the conclusion. The account functions for making or receiving payments against the decided amount. The liquidating company must utilize this account solely for any future settlements and transactions.
Although the whole closure process is fairly comprehensive and time-consuming, improved planning can make it smooth and hassle-free.
Wrapping Up
The closure of a foreign subsidiary of an Indian company is a strategic response to a number of factors that impact business. This move is usually overseen by financial aspects, high operating costs or a very low return of any kind. Problems connected with compliance and taxation also dictate this measure. Changes in market dynamics, economic downturns, and changes in demand can all lead to this decision. In addition, it is the reformation of government regulations in the host country that can lead to the closure of a subsidiary. Ultimately, this move displays a company’s adaptability and its promise to optimize its international business portfolio, guaranteeing financial viability, and emphasizing core operations.
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