All companies established in India must comply with the rules and regulations established by the government. This applies regardless of whether the companies own Indian or foreign legal entities or citizens. The only difference between the two is that foreign-owned subsidiaries have more rules and regulations to consider compared to companies owned by India. A foreign subsidiary is any company in which 50% or more of the shares are owned by a company registered in another foreign country. The specified foreign company in this case is called a holding or parent company. In order for a company to be a foreign subsidiary in India, the company itself must be registered in India. It does not matter in which country the parent company is registered. Compliance is based on many aspects of a company's operations. It is necessary to understand what all the requirements must be met depending on the type of registered company, the industry of activity, annual turnover and number of employees. A foreign company is defined under section 2 (42) of the Companies Act 2013, such a company must comply with the regulations and rules established under several laws and regulations, such as:
- Companies Act 2013, Income Tax Act 1961 - GST (VAT) 2017
- Rules and Regulations of the Securities and Exchange Board of India (SEBI)
- FEMA (Foreign Exchange Management Act) 1999
- Reserve Bank of India (RBI) compliance, etc.
Basic regulatory requirements. The following are the most important requirements that a foreign subsidiary must meet under sections 380 and 381 of the Companies Act 2013:
- Form FC-1 according to section 380. Form FC-1 is important as it must be filed within thirty days of the incorporation of the subsidiary in India. The form does not have to be submitted alone, it must be accompanied by the necessary files, certificates, etc. from other regulatory authorities in India such as the RBI.
- Form FC-3 under Section 380, which must be sent to the relevant Registrar of Companies (ROC) depending on where the company is incorporated in India. The form should contain details of the areas in which the company will conduct operations, as well as the company's financial statements.
- Form FC-4 under section 381: This form deals with the annual accounts of the company. It must be submitted within sixty days of the end of the previous financial year.
- Financial statements. The company must provide financial statements on its business and activities in India. It must be submitted within six months of the end of the financial year. They should contain:
- money transfer reports
- repatriated income reports
- related party transaction reports such as sales, property transfer, purchase reports, etc.
- Account Audit: All accounts of a foreign subsidiary must be audited by a practising Chartered Accountant. These accounts must be properly compiled and provided by the company for audit.
- Authentication and translation of documents:
All documents that a company submits to Registrars of Companies (ROC) must be confirmed by a practising lawyer in India. These documents must also be translated into English before they can be checked and submitted.
Compliance with the Income Tax Act and the Goods and Services Tax Act.
Depending on the frequency of compliance, there are three types of compliance:
- Periodic compliance: Periodic compliances are conformities that a company must comply with on a periodic basis. Unlike annual compliance, this type of match occurs at regular intervals several times a year. These requirements may be required quarterly or semi-annually.
- Annual compliance: Annual compliance is compliance that must be met once a year. Every year, the company must necessarily meet these requirements. For example, a company must annually do the following: - Filing GST - Filing TDS (Withholding Tax Deduction) under the Income Tax Act - Compliance with RBI Requirements - Compliance with SEBI Rules and Regulations - Annual Financial Statements
- Event-based compliance: As mentioned earlier, there are three types of matching; one of them is eventful. This means that these matches are only required in the event of a specific event or company action. • In accordance with RBI and FEMA rules, there are two event-based correspondences:
• FC-TRS: This applies to the transfer of shares of a foreign subsidiary between a resident Indian and a non-resident investor or vice versa. Such a transfer may be effected by sale or gift. The foreign direct investment policy requires that such a transaction be reported within sixty days from the date of transfer. The obligation to complete this form is imposed on the resident of India or the invested company, as the case may be. This is regardless of whether a resident of India is an interpreter or a recipient.
• FC-GPR: This applies to money transfers received by shareholders of a foreign subsidiary. The form indicates the method of transfer of funds by the company to its shareholders.
The importance of regulatory compliance.
A foreign subsidiary must comply with all the requirements, as failure to comply with them can have serious consequences. Failure to comply with the necessary requirements may result in the imposition of a fine on the company, and the imposition of fines, and may also lead to criminal charges with imprisonment in accordance with the relevant provisions of the applicable law(s). The following are the penalties that may be imposed on a company for non-compliance with its requirements, in accordance with section 392 of the Companies Act 2013 (effective April 1, 2014):
- Notwithstanding the provisions of Section 391, if it is found that a foreign company has violated any provisions of Chapter XXII of the Act, the company will be liable to a fine of Rs 100,000 to Rs 300,000. If the offence continues, a fine of Rs 50,000 will be added for each day.
- Every official of a foreign company who fails to meet his obligations is liable to imprisonment for up to 6 months and/or a fine of at least Rs 25,000, which may be increased to Rs 500,000. It is important for a company to comply with all of its regulatory requirements to ensure that it can continue its business operations properly without government interference.