An Indian company that incorporates or acquires a foreign subsidiary is subject to a dual regulatory regime: the Foreign Exchange Management Act, 1999 (“FEMA”) and the Companies Act, 2013 (“the Act”). The FEMA governs the overseas investment, and the Companies Act governs the corporate and accounting obligations.
The FEMA Regime
The overseas direct investment (“ODI”) is governed by the Foreign Exchange Management (Overseas Investment) Rules, 2022, and the RBI's directions. The Indian company must comply with the eligibility criteria, the investment limits, and the reporting requirements. The investment must be reported in Form FC, and the company must file the annual performance report (“APR”) for the foreign subsidiary.
The ODI regime prohibits investment in certain jurisdictions and certain activities, and it requires the Indian company to obtain the RBI's approval in specified cases. The FEMA compliance is a condition of the investment, and the failure to comply attracts penalty under the FEMA.
The Companies Act Obligations
The Indian company must include the foreign subsidiary in its consolidated financial statements under Section 129(3). The consolidation must comply with the accounting standards, and the foreign subsidiary's accounts must be converted into Indian rupees. The company must also disclose the foreign subsidiary's details in the board's report and the annual return.
The foreign subsidiary is a “subsidiary” for the purposes of the Act, and the Indian company must comply with the related party transaction provisions, the internal financial controls, and the audit requirements.
The Overlap
The FEMA and the Companies Act overlap in the areas of reporting, accounting, and governance. The Indian company must maintain a coordinated compliance calendar, and it must ensure that the FEMA filings and the Companies Act filings are consistent. The failure to comply with the FEMA can lead to penalty, and the failure to comply with the Companies Act can lead to the disqualification of the directors.
Call to Action
Anuj Desai & Associates advises Indian companies with foreign subsidiaries on the FEMA and Companies Act compliance—from the ODI reporting and the APR to the consolidation and the board's report disclosures. If your company has a foreign subsidiary, we can help you manage the dual compliance.
📧 office@anujdesaiassociates.com
📞 9619456656
🌐 https://anujdesaiassociates.com
🔗 linkedin.com/in/ca-anuj-desai-122547230
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