Loading
The parent of a China-owned Indian subsidiary asked AU Corporate to review its compliance, which another consultant had handled. We found no FEMA compliance, prepared the compounding application, and the RBI compounded all 14 contraventions.
AU Corporate, a New Delhi firm of Chartered Accountants, Company Secretaries and lawyers serving foreign parents since 2016, was appointed to carry out a due diligence of the existing compliance of an Indian subsidiary of a Chinese company, which another consultant had handled. The review found that no FEMA compliance had been done: the FC-GPR for the initial share subscription was never filed and no FLA return had been filed since incorporation. AU Corporate prepared the compounding application with all the documents, the RBI compounded all 14 contraventions, and the client then appointed AU on a monthly retainership for tax and FEMA compliance.
| Item | Detail |
|---|---|
| Parent company | A company based in China (name withheld) |
| Indian entity | An Indian subsidiary whose compliance was earlier handled by another consultant |
| Appointment | Due diligence of the subsidiary's existing compliance |
| Findings | No FC-GPR for the initial subscription, no FLA return since incorporation, and no FEMA compliance done |
| Outcome | 14 contraventions compounded by the RBI and the subsidiary made compliant |
| Relationship | Monthly retainership for tax and FEMA compliance |
The Indian subsidiary of a Chinese company had its compliance handled by another consultant. The parent appointed AU Corporate to carry out a due diligence of what had been done, so that it could rely on the subsidiary's compliance position.
A FEMA due diligence looks at how foreign money came into the subsidiary and what was reported to the RBI afterwards, which is the part of compliance that a parent often cannot check for itself.
The engagement in order. The facts are those of this case, and the timeline of each compounding case depends on the RBI.
The parent appointed AU Corporate to carry out a due diligence of the subsidiary's existing compliance.
The review found that no FEMA compliance had been done, which included no FC-GPR for the initial share subscription and no FLA return from the year of incorporation.
AU Corporate listed the defaults and arrived at a total of 14 contraventions that needed to be regularised.
AU Corporate prepared the application for compounding with all the relevant supporting documents and submitted it to the RBI.
The RBI compounded all 14 contraventions.
The subsidiary became compliant, and the client appointed AU Corporate on a monthly retainership for tax and FEMA compliance.
General background for foreign parents, not a description of this client's papers.
When an Indian company issues shares to a foreign investor, it must report the issue to the RBI in Form FC-GPR within 30 days of allotment.
An Indian company with foreign investment must file the annual return on foreign liabilities and assets every year by 15 July.
Some reporting delays can be regularised by paying a late submission fee, and other contraventions need compounding.
Compounding is the RBI's way of settling a FEMA contravention on the company's application, by paying an amount that the RBI decides.
Once compounded, the subsidiary files pending reports and follows a calendar for each filing, so the defaults do not recur.
The RBI compounded all 14 contraventions, and the Indian subsidiary became compliant with FEMA.
The client then appointed AU Corporate on a monthly retainership for tax and FEMA compliance, so that the filings are made on time from now on.
14
Contraventions Compounded
Monthly
Retainership Secured
General guidance for a parent company that has taken over an Indian subsidiary from another provider.
When you change consultants, check every share issue, loan and annual return before you rely on the filings.
Report each share issue to the RBI within 30 days of allotment, including the initial subscription.
The annual return is due every year by 15 July, even if there was no new investment.
A complete application with all supporting documents makes the process smoother.
Track FEMA, tax and company law dates together so that no date is missed.
The Foreign Exchange Management Act, 1999, which governs foreign investment, loans and remittances.
The report filed with the RBI after an Indian company issues shares to a foreign investor.
The annual return on foreign liabilities and assets that an Indian company with foreign investment files with the RBI.
A breach of a FEMA rule, such as not filing a required report.
The process of settling a FEMA contravention by applying to the RBI and paying the amount it decides.
A review of a company's records and filings to find gaps before relying on them.
Each service has its own page with the process, the deadline calendar and answers to common questions.
Straight answers to questions foreign finance teams ask. Can't find yours? Ask us in the form below.
Written and reviewed by Abhishek Jaiin, Chartered Accountant (ICAI Membership No. 544646) · Last reviewed:
This is general guidance based on Indian law and practice as at the date above. It is not advice for your specific case, and rules can change.
A FEMA due diligence is a review of how foreign money entered the Indian subsidiary and whether each share issue, loan, transfer and annual return was reported to the RBI. A parent does it when it changes consultants, buys a business, raises funds or finds that it cannot confirm the filings. AU Corporate lists any gaps and the cost of fixing them.
An Indian subsidiary of a foreign company must report share issues in FC-GPR, share transfers in FC-TRS, any external commercial borrowing from the parent, downstream investments, and the annual return on foreign liabilities and assets by 15 July. AU Corporate prepares and files each of these and tracks the dates.
If FC-GPR is never filed for the initial subscription, the foreign investment has not been reported to the RBI, which is a FEMA contravention. The company must file it late and regularise the delay by a late submission fee or compounding. AU Corporate checks which route applies and prepares the papers.
If the FLA return has not been filed since the year of incorporation, each missed year is a separate contravention. The company must file the pending returns and regularise the delay with the RBI. AU Corporate prepares the missing returns from the audited accounts and includes the delays in the application.
Compounding under FEMA is the process of settling a contravention by applying to the RBI, admitting it and paying the amount the RBI decides, instead of facing formal proceedings. In this case study, the RBI compounded all 14 contraventions. AU Corporate prepares the application with all the documents.
The company lists its contraventions, files an application with the RBI with the supporting documents and declarations, and the RBI examines it, may call for a hearing or more information, and passes a compounding order stating the amount to be paid. AU Corporate prepares the application and answers the RBI's queries.
Several contraventions of the same company can be included in one application, as in this case study, where 14 contraventions were compounded. Each missed filing is counted as a separate contravention. AU Corporate groups them in a way that the RBI can examine in one proceeding.
A compounding application generally needs the details of each contravention, the share issue and remittance records, copies of the late filings, the audited accounts, the board approval and a declaration that the company is not under investigation. AU Corporate collects and checks each document before it applies.
The compounding application generally includes a declaration that the company is not under investigation. If an investigation by the Directorate of Enforcement is pending, the RBI compounds only after that agency gives a no-objection. AU Corporate checks the position and tells you what is needed.
The compounding amount is decided by the RBI, based on the amount involved and the length of the delay, following its guidelines. AU Corporate gives you an estimate before applying and charges reasonable fees for the application. The amount payable to the RBI is separate.
FEMA compounding can take several months from the application to the RBI's order, depending on the number of contraventions, the completeness of the papers and the RBI's queries. AU Corporate prepares a complete application and answers queries quickly. No timeline can be guaranteed.
Leaving old FEMA defaults makes the position harder to fix later, because the contraventions remain and can surface during an investor's due diligence, an audit or a remittance request from the bank. Compounding gives the company a settled record. AU Corporate explains the cost and the risk of each option.
Investors, buyers and banks usually ask for proof of FEMA compliance, so unreported share issues or missing annual returns can delay a funding round, a sale or a remittance to the parent. AU Corporate fixes the defaults first and prepares a compliance record that you can show.
India requires government approval for an investment where the investor or its beneficial owner is from a country that shares a land border with India, which includes China, under Press Note 3 of 2020. The rules have been reviewed since. AU Corporate checks the current position and your ownership chain.
To find out, check whether an FC-GPR was filed for each share issue, whether an FLA return was filed for every year since incorporation, and whether loans, transfers and remittances were reported. The authorised dealer bank and the RBI's reporting portal hold the records. AU Corporate carries out this check as a FEMA due diligence.
A new consultant can take over FEMA compliance at any time. AU Corporate starts with a due diligence of the past filings, fixes any gaps and then runs a calendar for future filings, as in this case study, where the client appointed AU on a monthly retainership after the compounding.
The RBI publishes its compounding orders on its website, so the order for a compounded contravention can be public. AU Corporate explains this before an application is made, and does not publish a client's name or details without the client's approval.
After compounding, the company files any pending reports, keeps its records in order and follows a calendar for every future FEMA filing, so the defaults do not recur. In this case study, the client appointed AU Corporate on a monthly retainership for tax and FEMA compliance.
AU Corporate does not publish client names or performance figures without the client's approval. If you have a similar issue, AU Corporate can discuss it with you on a call and may be able to arrange a reference where the client agrees.
AU Corporate has served parent companies from more than 10 countries, including the USA, UK, Singapore, Australia, Germany, Japan, China, Hong Kong, Spain, France and the UAE. The RBI rules are the same for every foreign investor, and we adjust the documents to match your home-country records.
Tell us where your parent company is, when the subsidiary was incorporated and who handled FEMA reporting so far. We will reply with a clear plan and quote.