The most common mistakes foreign companies make in India are holding shares in the wrong names, sending funds in the wrong sequence, filing FC-GPR late, issuing shares without a valuation, paying the parent without treaty documents, and missing the first Auditor and INC-20A deadlines. Each carries a defined penalty or regularization cost and is easy to prevent when planned at the start.
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Key facts
| Most costly | Missed FEMA reporting and share allotment deadlines |
|---|---|
| Most common | No intercompany agreement before the first invoice |
| Most avoidable | Late Auditor appointment and missed first filings |
| Best prevention | A single plan covering structure, funding, tax, people and compliance |
| Basis | Public RBI and ROC orders, the Companies Act, 2013 and industry guidance, not client files |
The 13 mistakes, with real consequences
- Choosing the structure by default. What goes wrong: A company picks a liaison or branch office to move quickly, then starts commercial work that the office is not permitted to do, which breaches RBI and FEMA conditions. Consequence: The activity is restricted, and the company often has to convert to a subsidiary later. Fix: Match the structure to the planned activity before incorporating. See structure comparison.
- Holding the shares in the wrong names. What goes wrong: To speed up incorporation, shares are sometimes placed with local individuals or a foreign individual instead of the parent company. Consequence: Ownership, control and FEMA reporting become unclear and harder to fix later. Fix: The parent holds the shares. Where a nominee holds one share to meet the two-shareholder minimum (Section 3(1)(b) of the Companies Act, 2013), record it in writing on behalf of the parent.
- Ignoring the Resident Director requirement. What goes wrong: The board is formed with foreign directors only. Consequence: The company does not meet Section 149(3) of the Companies Act, 2013, which needs at least one director who has stayed in India for 182 days in the financial year. Fix: Appoint a Resident Director at the start. See Resident Director.
- Sending funds in the wrong sequence. What goes wrong: The parent wires share capital before the bank account, valuation and allotment plan are ready. Opening a bank account with foreign shareholders can also take longer than expected. Consequence: Shares must be allotted within 60 days of receiving the funds or the money must be refunded, and the inward remittance must be reported. Practitioners report that this sequence produces most FEMA contraventions for foreign subsidiaries, usually from misunderstanding the steps rather than intent. Fix: Agree the sequence and the bank timeline before any transfer. See funding and FEMA.
- Filing FC-GPR late. What goes wrong: The 30-day filing window after allotment passes unnoticed. Consequence: A delay is generally regularized by paying a Late Submission Fee, which depends on the amount involved and the length of the delay, and the facility is generally available for up to three years from the due date. Other cases need compounding with the RBI. The RBI publishes its compounding orders: in one, an Indian company that filed about 1 year 11 months late on a share issue of about ₹2 crore had the contravention compounded for ₹1.1 lakh. The amount is small, but the time and management attention are not. Fix: Put the 30-day date in the calendar on the day of allotment.
- Starting too small, or paying set-up costs without a plan. What goes wrong: The company is incorporated with nominal share capital and then needs repeated capital increases, each needing a valuation, allotment and FC-GPR. Or the parent pays pre-incorporation expenses and later wants to recover them. Consequence: Under the RBI's foreign investment rules, equity can be issued against pre-incorporation expenses only up to 5% of the authorized capital or USD 500,000, whichever is less, subject to conditions. Costs outside these conditions can create a FEMA issue. Fix: Budget at least the first 12 months when sizing capital, and decide how pre-incorporation costs will be recovered before they are incurred.
- Skipping the valuation. What goes wrong: Shares are issued at a convenient price without a valuation. Consequence: Shares cannot be issued to a non-resident below fair value, and the FC-GPR needs the valuation certificate. Fix: Obtain the valuation before every issue. See share valuation.
- No intercompany agreement. What goes wrong: Services start and invoices go out without a signed agreement or benchmarking. Consequence: Deductions, Withholding Tax and arm's length pricing (Section 161 of the Income-tax Act, 2025, previously Section 92 of the Income-tax Act, 1961) rest on weak evidence, and transfer pricing is a frequent area of scrutiny. Fix: Sign the agreement before the first service and keep documentation every year. See transfer pricing.
- Paying the parent without treaty documents. What goes wrong: The first payment goes out before the parent's Tax Residency Certificate and Form 41 (previously Form 10F) are on file. Consequence: The higher domestic Withholding Tax rate (Section 393 of the Income-tax Act, 2025, previously Section 195 of the Income-tax Act, 1961) is applied, and treaty relief is denied or delayed. Fix: Request the treaty documents from the US side before the first payment. See treaty and PE risk.
- Using a US employment contract. What goes wrong: A US template, including at-will terms, is used for Indian employees. Consequence: Indian law requires its own notice, benefits and IP terms, so the contract may not hold. Fix: Use Indian-law contracts from the first hire. See hiring and payroll.
- Missing the first compliances. What goes wrong: The first Auditor appointment and Form INC-20A are forgotten after incorporation. Consequence: The Auditor must be appointed within 30 days of incorporation (Section 139(6) of the Companies Act, 2013). For INC-20A (Section 10A), the penalty is ₹50,000 on the company and ₹1,000 per day on each officer in default, up to ₹1,00,000 each, and the company cannot start business or borrow until it is filed. ROC adjudication orders have imposed the penalty even for a one-day delay. Fix: Put both dates in the compliance calendar on day one. See compliance calendar.
- Treating compliance as separate filings. What goes wrong: The company files its Companies Act returns but misses FEMA reporting or transfer pricing, or assumes incorporation means it is ready to operate. Consequence: Each regime has its own deadlines and penalties, and a gap in one is not covered by compliance in another. Fix: Give one owner the whole sequence, with one calendar across company law, FEMA, tax and payroll.
- Not planning the exit. What goes wrong: Closing or selling is considered only when the group wants to leave. Consequence: Closing or selling a subsidiary has its own tax, FEMA and Registrar steps, and plans made late cost more. Fix: Decide the likely exit route when choosing the structure. See restructuring and exit.
Source note: These mistakes and consequences come from public RBI compounding orders, Registrar of Companies penalty orders, the Companies Act, 2013, the RBI's foreign investment rules and published industry guidance. They are not client cases, and amounts shown are examples from published orders, not predictions.
Pre-filing checklist
- Structure confirmed for the activity and the plan.
- Names and background of directors and shareholders agreed, with one Resident Director.
- Documents apostilled or notarized as required.
- Funding plan and valuation ready; bank account and FEMA reporting steps understood.
- Intercompany agreement drafted.
- Treaty documents requested from the US side.
- Compliance calendar and responsibilities assigned.
How to avoid all 13
Treat the setup as one project rather than a list of filings. A single owner who understands company law, FEMA, tax and payroll will catch the dependencies between them, which is where most mistakes happen.
What this means for a US parent
- Most mistakes are about timing. Share your plan with us before you transfer funds or sign contracts.
Mistakes to avoid
- Treating India as a series of separate filings instead of one plan.
How AU Corporate handles this
We handle the whole sequence, from structure to ongoing compliance, so the dependencies are managed in one place.
Related services: India business setup
Official sources
Rules on this page can be verified at the primary sources: Ministry of Corporate Affairs, Reserve Bank of India, Income Tax Department and the GST portal.
Frequently asked questions
What is the most expensive mistake?
Missing the FEMA timelines for allotment and reporting, because regularization takes time and can involve compounding.
Can mistakes be fixed later?
Many mistakes in Indian compliance can be fixed later through late filing, regularization or compounding, but at extra cost and effort. Prevention is cheaper.
Is a checklist needed for every filing?
A single plan with owners and dates works better than a checklist for every filing, and it should be set up at the start of the engagement.
What happens if the subsidiary stops filing or misses deadlines?
If a subsidiary stops filing or misses deadlines, late fees accrue daily, directors can be disqualified after continued non-filing, the Registrar can strike the company off, and FEMA defaults need compounding with the RBI. Regularizing a lapsed company is possible but costs more than staying current, so a compliance calendar helps.
What is Form FC-GPR and when is it due?
Form FC-GPR is the report an Indian company files with the RBI after issuing shares to a foreign investor. It must be filed within 30 days of the share allotment through the RBI's FIRMS portal, with supporting valuation and Company Secretary certificates. Late filing attracts a Late Submission Fee or compounding.
Can EOR employees move into the subsidiary later?
EOR employees can move into the subsidiary later with planning. Employees must agree to the transfer, their service history and benefits such as gratuity and provident fund should carry over, and contracts and notice periods need to be handled, with timing planned so that there is no gap in employment.
What is Form INC-20A?
Form INC-20A is the declaration of commencement of business (Section 10A of the Companies Act, 2013), filed within 180 days of incorporation, confirming that shareholders have paid for their shares. Missing it brings penalties and can lead to the company being struck off.
What are the DRP and the ITAT?
The Dispute Resolution Panel (DRP) hears objections to a draft assessment order and is available to foreign companies and transfer pricing cases. The Income Tax Appellate Tribunal (ITAT) is the main appellate forum on facts and law, with further appeals to the High Court.
Can a branch office be converted into a subsidiary later?
A business can be moved into a new Indian subsidiary, usually by transferring the activity and assets to the new company. The tax, FEMA and contract consequences should be planned in advance.
What is the most common mistake foreign companies make when setting up in India?
The most common mistake foreign companies make in India is treating setup as a series of separate filings instead of one plan. Incorporation is only the start, and the FEMA, tax, transfer pricing and payroll steps that follow are where most breaches arise.
What is the penalty for not filing Form INC-20A?
The penalty for not filing Form INC-20A is ₹50,000 on the company and ₹1,000 per day on each officer in default, up to ₹1,00,000 each, under Section 10A of the Companies Act, 2013. The company also cannot commence business or borrow until the form is filed.
What happens if Form FC-GPR is filed late?
If Form FC-GPR is filed late, the delay is generally regularized by paying a Late Submission Fee, which depends on the amount involved and the length of the delay. Delays outside what the fee route covers, or related breaches, need compounding with the RBI under FEMA, which takes more time and cost than filing on time.
Can a foreign parent be reimbursed for pre-incorporation expenses?
A foreign parent can recover pre-incorporation expenses by receiving equity in the subsidiary against them, up to 5% of the authorized capital or USD 500,000, whichever is less, subject to conditions in the RBI's foreign investment rules. Costs outside these conditions can create a FEMA issue, so the recovery route should be decided before the costs are incurred.
Why do foreign companies face FEMA problems after incorporation?
Foreign companies face FEMA problems after incorporation mostly because of sequence and timing: funds are received, shares allotted and reports filed in the wrong order or after the deadline. These contraventions usually arise from misunderstanding the steps rather than intent.
Related guides
Incorporation Process for a US-Owned Indian Subsidiary, Step by Step
The eight steps to incorporate a wholly owned subsidiary in India from the USA: forms, order of steps, typical 4 to 6 week timeline and first 90 days.
Read the guide →Funding the Indian Subsidiary: FEMA Rules, Share Allotment and Form FC-GPR
How a US parent invests in an Indian subsidiary: equity, CCPS, ECB, the 60-day allotment rule, pricing, and RBI reporting through Form FC-GPR on FIRMS.
Read the guide →Compliance Calendar for an Indian Subsidiary: What Is Due and When
The recurring compliance of an Indian subsidiary: monthly, quarterly, annual and event-based filings under company, tax, GST, FEMA and labour law.
Read the guide →Tax Notices and Disputes in India: What US Companies Should Do
What to do on receiving an Indian income tax, GST or transfer pricing notice: first steps, appeal routes, DRP, ITAT, MAP and Advance Pricing Agreements.
Read the guide →Sources
Last updated 14 October 2026. General information only, not legal or tax advice. Indian rules change often; confirm current requirements before acting.