What Happens to an Indian Subsidiary Company if the Parent Company Registered in a Foreign Country Gets Delisted from the Stock Exchange?

Cross-border business structures are becoming more prevalent in the global economy today. A lot of multinational companies create subsidiaries in India in order to leverage its growing market, pool of talent, and strategic advantages. But what happens, when the foreign parent company, who is registered on a stock exchange, is delisted? Is the Indian subsidiary company immediately impacted? What happens to the shares of the subsidiary, the operations of the Indian subsidiary, and the regulatory standing with Indian authorities? This is an important question, and this article will look at the legal, financial and strategic aspects of a delisting of the foreign parent company on the Indian subsidiary.

Understanding the Relationship Between a Parent Company and Its Indian Subsidiary

Before discussing the effects of delisting, it is important to know how the Indian subsidiary company works.

An Indian subsidiary company is a company headquartered in India but owned or controlled by a foreign company. In general, the foreign parent holds over its total share capital as over 50% in which case it has a substantial influence over the subsidiary's the decision and operations.

A company will choose the Indian Subsidiary Company registration to expand its global footprint and maintain a legally established structure to operate in India. The process for Indian subsidiary registration in India involves:

• Obtaining approval for foreign direct investment (FDI) through the automatic route or the government route

• Registering the subsidiary under the Companies Act, 2013

 • And following the Reserve Bank of India (RBI) and Ministry of Corporate Affairs (MCA) regulations.

 When established Indian subsidiary is considered a separate legal entity notwithstanding its ownership subsidiary by a foreign company.

What Does Delisting of a Foreign Parent Company Mean?

When a foreign parent company gets delisted from a stock exchange, it is simply no longer publicly traded. Delisting can be involuntary or voluntary:

(1) Voluntary: The company voluntarily delists in connection with restructuring, a merger or due to privatization;

(2) Involuntary: The stock exchange forces the parent company to delist because it fails to abide by the rules, is insolvent, or misses other listing standards.

A delisting impacts the parent company’s shareholders, apparent market valuation and transparency issues, but while subsidiaries are usually legally distinct entities from their parent company, and are often not directly delisted with the parent company.

Immediate Impact of Parent Company Delisting on the Indian Subsidiary

The action of a foreign parent company to delist from trading on foreign exchanges does not automatically impact the legal existence or business operation of its Indian subsidiary company. The consequential effect, if any, may be said to be indirect and would be contingent upon other important considerations:

1.Corporate Ownership/Shareholding

The corporate ownership/ shareholding structure remains the same – the foreign parent retains its equity in the Indian subsidiary company unless it decides to sell its equity or transferred the holding in shares. The shares of the Indian subsidiary company remain in existence in the same form that is unaltered and is affected unless there is substantial restructuring of operations and corporate governance at the group level.

2. Continuation of Operations

The Indian subsidiary company is a legal entity by virtue of the Companies Act, 2013 registration, meaning it can independently and legally continue its business in the customary way. The delisting of its parent company does not invalidate the legal requirements of its registration or otherwise invalidate its operations on a day-to-day basis. Its management team, employees, customers and suppliers would continue in the same manner as before the delisting.

3. Brand Reputation and Financial Effects

One aspect of delisting that could have a substantial effect is brand reputation and credibility among investors. When delisting is initiated due to financial distress or regulatory issues, stakeholders of the Indian subsidiary may complain of long-term sustainability and concern over the Indian subsidiary's financial viability. This could impact the following areas:

• Availability of new capital,

• Employee retention,

• Strategic partnerships with other businesses, and

• Confidence from customers (clients).

If the delisting is voluntary (e.g. due to privatization or restructuring), little if any negative fallout is likely to occur for the Indian subsidiary.

4. Compliance and Disclosure

The Indian subsidiary will continue to be subject to governance under applicable Indian laws and continue with filings under the Registrar of Companies (ROC), tax authorities, and other regulators. If the delisting leads to changes in management and/or ownership then the changes must be disclosed and amended as required in accordance with the Company Law and FEMA (foreign exchange management act).

What Happens to the Shares of the Indian Subsidiary Company?

The stock of the Indian subsidiary remains intact with the parent company's delisting from a security exchange in a foreign country.

Here's why:

• Parent company's delisting does not change the ownership structure in the shares of the Indian subsidiary.

• The parent maintains its shares in the Indian subsidiary unless it liquidates or sells the stake.

• The shares are bound by Indian corporate law and not by the foreign exchange and location where the parent was listed.

However, if the following events occur, it's capable of starting a ripple effect:

1.In the Event of Acquisition or Merger of the Parent Company

If the parent company is acquired or merged with a company after delisting, the ownership of the Indian subsidiary may transfer to the acquiring company. In these events all changes of ownership will have to be reported to the MCA, RBI, and other authorities as required by Indian subsidiary compliance requirements.

2. In the Event of Bankruptcy of Parent Company

If the parent company is delisted due to bankruptcy or liquidation, the shares of the Indian subsidiary may become a part of the asset liquidation. Debts may then interest a liquidator or an insolvency professional to sell or reorganize the Indian subsidiary interests to obtain some value for creditors.

3. If the Parent Company Goes Private

If the parent company delists voluntarily to go private, the Indian subsidiary's company may simply continue to operate as it was, but as a private entity. The private entity may additionally have more operational flexibility because public entity reporting requirements will no longer be required.

Legal Protection for Indian Subsidiary Companies

India's corporate sector provides a high level of regulatory protection for foreign company subsidiaries. Once you establish an Indian subsidiary company, it is regarded as a separate entity under Indian law.

Consequently, even if the parent organization is challenged elsewhere in the world, the Indian subsidiary will:

• Continue to engage in business as if it was an independent business,

• Continue to enter into contracts,

• Continue to raise money from domestic investors, and

• Continue to control its assets, subject to Indian law.

An Indian subsidiary's liabilities do not carry over as liabilities of the parent company, and vice versa, unless there are cross-guarantees, or other explicit financial obligations.

Strategic Steps an Indian Subsidiary Can Take Post-Delisting

In the case of a delisting of a foreign parent company, it would be prudent for the management of the Indian subsidiary to be proactive in ensuring stability.

1.Revisit Governance

The governance mechanism and structure, the composition of the board, and the financial reporting mechanisms should be assessed to put in place measures to maximize governance continuity and compliance with Indian law.

2. Increase Transparency

There should be regular and open channels of communication with employees, customers, and business partners about the status of the company parent so as not to create misinformation and potential panic.

3. Assess Ownership and Financial Risk

If the parent is in financial distress, the subsidiary should consider reviewing intercompany loan agreements, shared services and/or financial guarantees to understand the risk that they may be exposed to, and to limit their risk.

4. Consider Capital Independence

The Indian subsidiary can explore avenues for independent local financing or local venture capital to enhance its independence and liquidity and/or life.

5. Maintain Compliance

Ensure regular filings, such as Annual Returns (ROC), Income Tax and GST and Foreign Investment filings (i.e FC-GPR/FLA Return) to ensure the registration of the Indian subsidiary company remain compliant and valid, regardless of the delisting of the parent company.

Why Proper Indian Subsidiary Registration Matters

For international businesses that are expanding into India, opting for an Indian subsidiary company registration has some significant advantages:

• A separate legal identity in India,

• Ability for 100% foreign ownership (subject to sector restrictions),

• Potential tax and regulatory advantages, and

• Ability to protect brand and intellectual property.

Conversely, should unexpected circumstances emerge, such as delisting tracks in India, the independent design of the Indian subsidiaryregistration allows continuity of operations and business stability.

For this reason, many international businesses prefer to register subsidiaries over liaison or branch offices in India, because there are more freedoms and protection from global markets and environment.

Compliance Implications for the Indian Subsidiary

Irrespective of the status of parent, the Indian subsidiary company is still independently liable for complete compliance with the clause and mandates noted below.
Some compliance duties considered key mandate:

1.Annual ROC Filing:

The company has to file the Form AOC-4 and MGT-7, regularly with the Registrar of Companies (ROC).

2. Tax Filings:

The company will file annual income tax return under the Income Tax Act, 1961.

3. Reporting of change in Foreign Investment:

The company needs to report any changes in shareholding of the company to the Reserve Bank of India, under FEMA.

4. Board & AGM meetings:

There are statutory (mandatory) board and shareholder meetings, under the Companies Act.

5. Statutory Audits:

Annual audits of the accounts and auditor reports are submitted on an annual basis.

In short, the Indian subsidiary company continues to operate independently and is not covered from the compliance obligations, even in the event that there are no parent, it is delisted from the exchange or restructuring in another country.

Strategic Considerations for the Indian Subsidiary

If the delisting of the parent company reflects a financial crisis facing the parent company and/or a restructuring of the company's business model, it may make sense for the Indian subsidiary to take the following actions:

1.Attracting New Investors

The parent company can look for new capital or partners in-country to ensure that the operation remains a going concern.

2. Rebranding or Separating from Parent Company

Establish a separate (brand) identity/establish themselves as a company independent of the parent company if they withdraw from the Indian partnership.

3. Corporate Governance Reforms

Improve internal governance and strengthen local leadership in order to increase investor confidence as needed.

4. Consult with Regulators

Consult with the appropriate legal advisers as well as the Reserve Bank of India (RBI) and Ministry of Corporate Affairs of India (MCA) around potential effects of any cross-border ownership change.

Final Thoughts

In a connected world economy, corporate events like delisting can bring a brief period of uncertainty into the marketplace. However, the framework of India’s legal system permits continuation of business by a subsidiary company, regardless of whether the parent company remains a public company, goes private, or even ceases to exist. The Indian subsidiary company is its own legal identity and is insulated from these corporate events, providing comfort to future investors and businesses interested in registering an Indian subsidiary company in India. Momentarily, the delisting issue may affect visibility, however, viability remains strong and Indian subsidiary registration in India remains stable, compliant, and able to continue to grow.