Foreign Subsidiary Company Compliances in India

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Every company established in India is obligated to adhere to the regulations stipulated by the government, irrespective of whether they are owned by Indian nationals or foreign entities. The key distinction lies in the fact that subsidiary companies owned by foreigners must comply with a more extensive set of rules and regulations compared to companies owned by Indian nationals.

What is a Foreign Subsidiary Company?

A foreign subsidiary company refers to a company in which 50% or more of its equity shares are owned by a corporation incorporated in a foreign country. In such instances, the foreign company is termed the holding or parent company.

To qualify as a foreign subsidiary company in India, the company itself must be established and incorporated within India. The origin country of the parent company is immaterial in this determination.

Adherence to compliance requirements depends on various facets of the company. Understanding the specific compliances essential for adherence involves considering factors like the company’s type of incorporation, industry of operation, annual turnover, and the number of employees. As per Section 2(42) of the Companies Act, 2013, a foreign company must comply with regulations and rules set forth by multiple legislations and orders such as:

Companies Act, 2013 – Income Tax Act, 1961
GST, 2017 – SEBI rules and regulations
FEMA (Foreign Exchange Management Act), 1999 – RBI compliances etc.

Essential Compliances

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The subsequent compliances listed below represent significant obligations that must be fulfilled by the foreign subsidiary company according to the provisions outlined in Section 380 and 381 of the Companies Act, 2013:

Form FC-1 per Section 380: This form holds significance as it requires submission within thirty days of the incorporation of the subsidiary company in India. It must not be submitted alone but should be accompanied by necessary documents, certifications, etc., obtained from other regulatory bodies in India, such as the RBI.

Form FC-3 per Section 380: Submission of this form to the relevant Registrar of Companies (ROC) depends on the location of the company’s incorporation in India. It necessitates details regarding the areas where the business intends to operate and the company’s financial records.

Form FC-4 per Section 381: This form pertains to the annual returns of the company and requires filing within sixty days from the conclusion of the preceding financial year.

Financial statements: The company is required to furnish financial statements regarding its Indian business and operations within six months from the conclusion of the financial year. These statements must encompass details such as fund transfers, repatriated earnings, and related party transactions, including sales, property transfers, purchases, etc.

Audit of accounts: A Practising Chartered Accountant must conduct an audit of all accounts belonging to the foreign subsidiary company. The company needs to ensure that these accounts are appropriately organized and made accessible for the audit process.

Authentication and translation of documents: All documents submitted by the company to the ROC must be authenticated by a practicing lawyer in India. Additionally, these documents should be translated into English before authentication and submission.

Compliances under the Income Tax Act and the GST Act

Foreign Subsidiary Company Compliances in India

There are three types of compliances based on the intermittency of these compliances:

Periodic Compliances:

Periodic compliances are those obligations that the company must fulfill regularly at set intervals. Unlike annual compliances, these occur repeatedly throughout the year at regular intervals, which could be quarterly or semi-annually.

Annual Compliances:

Annual compliances are obligations that must be fulfilled once per year. The company is mandated to adhere to these compliances annually. For instance, the company must perform the following tasks every year: – File GST returns – Submit TDS filings according to the Income Tax Act – Fulfill obligations under RBI regulations – Adhere to SEBI’s rules and regulations – Prepare and file Annual Financial Statements.

Event-Driven Compliances:

As previously mentioned, among the three types of compliances, one category is event-based. This indicates that these compliances become mandatory solely in response to specific events or actions undertaken by the company.

Under the RBI regulations and FEMA guidelines, there exist two compliances categorized as event-based:

FC-TRS: This pertains to the transfer of shares of a foreign subsidiary company from an Indian resident to a non-resident investor, or vice versa, through methods such as sale or gift. According to Foreign Direct Investment policies, this transaction must be reported within sixty days from the transfer date. The responsibility of filing this form lies with the Indian resident or the investee company, irrespective of whether the Indian resident is the transferor or the transferee.

FC-GPR: This concerns the remittance received by shareholders of a foreign subsidiary company. The form specifies the mode of remittance transfer from the company to its shareholders.

Importance of Meeting Compliances

Foreign Subsidiary Company Compliances in India

Adhering to all compliances is compulsory for a foreign subsidiary company, as non-compliance can result in severe consequences. Failure to meet these obligations may subject the company to fines, penalties, and potential criminal charges, including imprisonment, as stipulated by relevant provisions of applicable law(s). The ensuing penalties for non-compliance may include:

Under Section 392 of the Companies Act 2013 (effective from April 1, 2014):

Notwithstanding the provisions of Section 391, if a foreign company violates any regulations outlined in Chapter XXII of the Act, the company will face penalties in the form of fines ranging from no less than Rs 1 lakh to a maximum of Rs 3 lakh. In case the offence persists, an additional fine of Rs 50,000 will be imposed for each day the violation continues.

Any officer of a foreign company found to be in default can face imprisonment for a period of up to 6 months and/or a fine ranging from a minimum of Rs 25,000 to a maximum of Rs 5 lakh. It is crucial for a company to fulfill all its compliances to ensure smooth business operations without intervention from regulatory authorities.

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FAQS on Share Transfer & Transmission Services

Can a foreign company have a subsidiary in India?

A foreign company has the option to establish an Indian subsidiary as either a Private Limited or a Public Limited Company. Consequently, the subsidiary company will be obligated to comply with relevant Indian laws. The minimum requirements for incorporation will differ based on the selected structure.

Transmission is the process of transferring the ownership of shares from one person to another, without the involvement of the company’s registrar or transfer agent. In this process, the transferor is the one who transfers the shares and the transferee is the one who receives the shares.

What are the requirements for a foreign subsidiary?

Required Documents for a Foreign Subsidiary Company

Name of the appointed shareholder representing the foreign company (parent company). Director’s DIN (at least 2), if already allocated. Details such as Mobile Number, Email ID, Place of Birth, Educational Qualification, and occupation of Proposed Directors/subscribers/nominee shareholders.

What are the annual compliances of foreign subsidiary company?

The compliance requirements for a foreign subsidiary encompass tax filings with the revenue department, annual return submissions to the Ministry of Corporate Affairs, and other necessary filings with authorities such as the Reserve Bank of India (RBI) or the Securities and Exchange Board of India (SEBI).