Closing a Foreign-Owned Indian Subsidiary: Strike-Off or Voluntary Liquidation?

Not every India entry succeeds, and group restructurings often leave dormant subsidiaries behind. A foreign parent that wants to exit an Indian company has two main legal routes: removal of the company's name from the register (strike-off) under section 248 of the Companies Act, 2013, or voluntary liquidation under section 59 of the Insolvency and Bankruptcy Code, 2016. This article compares the two and highlights the FEMA, tax and practical steps that sit alongside the corporate process.

1. Route one: strike-off under section 248(2)

A company may apply to the Registrar of Companies to remove its name if it has not been carrying on any business or operation for the two immediately preceding financial years and has not applied for dormant status. It also covers a company that failed to commence business within one year of incorporation.

Key conditions and steps:

1. Extinguish all liabilities. The company must have no assets and no liabilities, or must pay off its liabilities, before applying.
2. Shareholder approval. A special resolution, or consent of 75% of the members by paid-up share capital.
3. Bring filings up to date. Financial statements and annual returns must be filed up to the end of the financial year in which the company ceased to carry on business.
4. File Form STK-2 with the prescribed fee, along with indemnity bonds from directors, affidavits, a statement of accounts certified by a Chartered Accountant not older than thirty days, and the shareholders' resolution or consent.
5. Public notice and objections. The Registrar issues a public notice in Form STK-6, inviting objections. If there are none, the name is struck off and the company is dissolved.

Where strike-off does not apply: listed companies, companies under investigation or inquiry, companies with pending prosecution, and certain others are excluded. A company with a pending dispute, a tax demand or a creditor objection will usually face an objection.

Advantages: simpler, cheaper and typically faster than liquidation.

Disadvantages: the Registrar or a creditor can apply to restore the company within a long window if it was struck off improperly, and directors remain liable for undisclosed liabilities under the indemnity.

2. Route two: voluntary liquidation under the Insolvency and Bankruptcy Code

Voluntary liquidation suits a company that has assets to distribute to its shareholders or that wants a court-supervised, final closure.

Key steps:

1. Declaration of solvency by a majority of directors, supported by an affidavit, audited financial statements for the last two years (or since incorporation) and a valuation report of the assets, stating that the company will be able to pay its debts in full.
2. Special resolution of the shareholders within four weeks of the declaration, appointing an insolvency professional as liquidator.
3. Creditor approval where the company has debts, by creditors representing two-thirds in value.
4. Public announcement, claims and realisation of assets by the liquidator, followed by distribution to stakeholders.
5. Final report and application to the National Company Law Tribunal for a dissolution order.

Advantages: a judicially recognised, final closure, suitable where there are assets, bank balances or contractual relationships to be wound up cleanly.

Disadvantages: longer and costlier than strike-off, mainly because of the Tribunal stage.

3. FEMA considerations for the foreign parent

The exit has to be completed under FEMA as well as company law.

• Repatriation of proceeds: liquidation proceeds or the return of capital can be repatriated through the AD bank, typically on the basis of a Chartered Accountant's certificate, the liquidator's or auditor's report, and a tax clearance or no-objection position as required.
• Pending FEMA reports: any outstanding FC-GPR, FC-TRS or FLA filings should be completed, and any delay regularised through a late submission fee, before closure. Unresolved FEMA defaults can hold up the AD bank's approval of the remittance.
• Downstream investments: if the subsidiary itself holds investments in other Indian entities, those must be dealt with first, with the corresponding FEMA reporting.

4. Tax and regulatory clean-up

Before either route, the company should:

• file all pending income-tax returns and close open assessments or appeals, or provide for them;
• cancel GST registration and file the final return;
• surrender professional tax, shops and establishments and other local registrations;
• close provident fund and ESI accounts after settling employee dues;
• close bank accounts after the final remittance, keeping evidence for the closure file.

A tax demand discovered after strike-off is a common reason for restoration proceedings, so a careful review of the income-tax and GST portals is essential.

5. Which route should you choose?

Conclusion

Closing an Indian subsidiary is a project, not a single filing. The corporate route matters, but most delays come from unfinished tax, GST, employee and FEMA items. A foreign parent that starts with a full compliance health check, settles liabilities first and then selects the route that fits the company's actual position will usually close the entity in the shortest practical time.

Author: N. Sudheer, M.Com., FCS, LL.B., Partner, A2 Consultants, Hyderabad. The views are personal and for general information only, and do not constitute legal advice.