Setting up an Indian Subsidiary for founders in India (Gift route)

Establishing an Indian subsidiary as a founder in India can be a challenging endeavor, especially when navigating complex regulatory frameworks. One creative approach that gained traction in the past was the "gift route." While this method once provided a workaround for setting up an Indian subsidiary, recent changes in regulations have brought its relevance into question. Let’s explore what the gift route entailed, how it changed, and what founders should consider now.

How Did the Gift Route Work?

The gift route was an innovative way for Indian founders to establish an Indian subsidiary. Here’s how it worked:

1. A friend or relative would set up an international HQ, often in a country like the US.
2. This foreign HQ would then create a subsidiary in India.
3. The shares of the international HQ would be gifted to the actual founders in India.

This approach took advantage of the exemption on gifted shares, allowing founders to indirectly establish an Indian subsidiary without directly violating the rules under the Foreign Exchange Management Act (FEMA).

What Changed in 2022?

In August 2022, the Reserve Bank of India (RBI) introduced new regulations that changed the game for the gift route. Here’s what you need to know:

Mandatory Reporting

Now, any shares received as a gift must be reported to the RBI. This adds a layer of oversight that didn’t exist before.

FEMA Restrictions

FEMA regulations state that Indian founders with a foreign company cannot directly set up a subsidiary in India. While the gift route initially offered a workaround, the new reporting requirement has made it much less practical.

Why is the Gift Route Losing Relevance?

The gift route was popular because it allowed founders to sidestep some of FEMA’s strict rules. However, with increased scrutiny and mandatory reporting, this approach is no longer as viable. Founders now need to explore alternative methods that fully comply with the law.

What Should Founders Do Now?

If you’re looking to set up an Indian subsidiary, here are some steps to consider:

Get Expert Advice

Work with legal and financial professionals who understand FEMA compliance and international business structuring.

Explore Other Options

Research alternative, legal routes to establish an Indian subsidiary that align with RBI and FEMA guidelines.

Stay Informed

Keep track of any updates to the regulations so you can adapt your strategy as needed.

Final Thoughts

Setting up an Indian subsidiary isn’t just about finding a creative loophole—it’s about building a solid foundation for your business while staying compliant with the law. While the gift route might no longer be an option, there are still plenty of ways to achieve your goals. Take the time to understand the regulatory landscape and make informed decisions.

For more insights and a detailed discussion on this topic, check out our YouTube video where we share practical advice to help founders like you navigate these complexities.