Setting Up an Indian Subsidiary for Founders: The Parallel Route

Expanding your business into India is an exciting yet complex process, and as a founder, it’s essential to choose the right structure for your subsidiary. One option that some businesses consider is the Parallel Route, where two independent companies are set up—one in India and the other in your international headquarters. But before you decide to go down this path, it’s important to understand how it works and the potential challenges it might bring.

How the Parallel Route Works

The Parallel Route is fairly straightforward in theory. It involves incorporating a company in your home country (such as the US), which directly owns the shares of the business. Then, in India, you either continue with an existing entity or set up a new company that operates independently. These two companies—one in India and the other abroad—are connected through a services agreement, which formalizes the relationship and the exchange of services between the two entities.

Key Features of the Parallel Route:

• Separate Entities: The two companies are legally independent of each other, even though they’re linked by the services agreement.
• Services Agreement: The companies operate separately, but they interact under a formalized agreement that outlines the services exchanged between them. This helps to define the working relationship between the Indian subsidiary and the parent company.

Key Considerations Before Choosing the Parallel Route

While the Parallel Route might seem like a practical option for some, there are several important considerations to keep in mind.

1. No Tax or Cost Benefits

One of the major drawbacks of the Parallel Route is that it doesn’t offer any tax benefits or cost savings. Both companies are still subject to transfer pricing regulations, which means any services exchanged between the Indian subsidiary and the parent company must be priced according to market standards. These regulations ensure that the transactions between the two companies are fair and transparent, but they also mean that you won’t be able to take advantage of lower tax rates or reduced costs by creating separate entities in different countries.

While this structure allows for operational flexibility, it doesn’t provide any immediate financial advantages that might help reduce costs.

2. A Less Proven Model

The Parallel Route is still relatively new, especially in the startup world. Many companies that choose this path have not yet gone through advanced funding rounds or the due diligence process that investors typically expect. Because the structure is not widely tested, investors may be cautious about backing a company that uses this approach. They might see it as a risky model, which could make it harder for you to attract funding as your business grows.

This is particularly important to consider if your long-term goal involves scaling the business and raising investment. While the Parallel Route might work for the initial setup, it could limit your future options in terms of raising capital and expanding the business.

3. Do You Really Need an Indian Entity?

Another crucial question to ask yourself is whether you even need a separate entity in India to accomplish your goals. If your primary focus is simply to hire talent, you might not need to set up a full subsidiary at all. There are several alternative ways to hire and manage talent in India, such as outsourcing or partnering with local recruitment agencies, that don’t require the creation of an independent business entity.

By exploring other options, you could avoid the complexity of managing two separate companies while still achieving your goal of expanding your workforce. This could save you both time and resources, especially if hiring talent is your main priority.

Conclusion

While the Parallel Route can offer a flexible way to expand into India, it’s not without its drawbacks. There are no tax or cost benefits, and the structure has not been widely tested in the long term, especially for startups. If your main aim is to hire talent or test the market in India, this route might be worth considering. However, if you plan to scale quickly or raise investment in the future, you may want to think carefully about whether this model is the right choice for your business.

Before making any decisions, it’s important to weigh the pros and cons of this approach in the context of your long-term goals. If you're looking for more insights into setting up an Indian subsidiary and want to explore other options, check out our YouTube video. In the video, we delve deeper into different routes, share real-world examples, and discuss the strategies that can help you navigate the complexities of expanding your business into India.