Audit Requirement for APR Filing – Clarification under FEMA

Audit Requirement for APR Filing – Clarification under FEMA. Under FOREIGN EXCHANGE MANAGEMENT (OVERSEAS INVESTMENT) RULES, 2022 (No. FEMA 400/2022-RB August 22, 2022), the default rule is that the Annual Performance Report (APR) must be submitted based on the audited financial statements of the foreign entity. The extract states:
“The APR shall be based on the audited financial statements of the foreign entity.”
Provided that where the person resident in India does not have control in the foreign entity and the host country does not mandate statutory audit, APR may be submitted based on unaudited financial statements, certified by the statutory auditor of the Indian entity or by a Chartered Accountant.
When Audit Is Mandatory (Indian Resident Has Control)
If the person resident in India has “control” (as defined under ODI rules in case of overseas Investment), then:

Audited financial statements of the foreign entity are compulsory.

FEMA 400 does not explicitly require that the audit be performed only by a foreign Chartered Accountant/CPA.

The regulation merely requires “audited financial statements” without specifying the nationality of the auditor.

Why AD Banks Insist on Audit by Foreign CPA/CA
Although no FEMA/RBI regulation explicitly states that the audit must be conducted by a foreign auditor, AD Banks insist on it because: In several past APR/ODI clarifications, RBI raised objections where the foreign entity’s audit was performed by an Indian Chartered Accountant instead of an auditor registered in the host country. RBI’s reasoning was that audit must comply with the laws of the host jurisdiction, including eligibility and licensing of the auditor. Foreign corporate laws often require that an auditor be licensed or recognized locally. AD Banks therefore follow RBI’s internal guidance and precedents, even though there is no published circular mandating this.
Final thought from Compliance Calendar LLP
Hence, As per FEMA 400, APR must be filed on the basis of the foreign entity’s audited financial statements where the person resident in India has control. Although no RBI circular expressly mandates that such audit must be conducted only by a foreign CPA/CA, AD Banks seek audits performed by auditors qualified in the host jurisdiction. This is based on RBI’s internal clarifications in past ODI cases filed by Compliance Calendar LLP for clients, where audits signed by Indian CAs were questioned due to non-compliance with host-country audit laws. Accordingly, as a matter of prudence and in line with AD Bank instructions, audited financials of the foreign entity should be issued by a locally recognized auditor.More, the above analysis reflects Compliance Calendar LLP’s professional opinion based on the Foreign Exchange Management Act, 1999, the Overseas Investment Rules and Regulations, 2022, and prevailing RBI interpretations available through past AD Bank interactions. The final decision and acceptance of any APR filing, including the applicability of audited or unaudited financial statements, remain solely subject to the discretion of the Reserve Bank of India, the designated AD Bank, and any regulatory amendments or clarifications issued from time to time. Compliance requirements may evolve, and stakeholders are advised to review the latest regulations and consult their AD Bank before final submission.
Some FAQ based on APR Filing 
Q1. Does the Overseas Investment Rules, 2022 contain any clause about who must audit the foreign entity’s financial statements?
Ans. No. The Rules, 2022 do not prescribe:

who must audit the foreign entity,

whether the auditor must be a foreign CPA/CA,

or restrictions on Indian CAs auditing foreign entities.

The Rules only define “control”, “foreign entity”, and reporting requirements indirectly through Rule 20 (which refers to RBI regulations for reporting).
The audit requirement arises from the Overseas Investment Regulations (FEMA 400), not the Rules.
Q2. Where does the audit requirement for APR come from?
Ans. The audit requirement is stated in Regulation 22(2)(a) of FEMA 400 (Overseas Investment Regulations, 2022):
“The APR  shall be based on the audited financial statements of the foreign entity.”
A proviso says unaudited statements are allowed only when the person resident in India does not have control AND the host country does not mandate an audit.
Q3. Do the Rules or Regulations say that the audit must be done only by a foreign auditor?
Ans. No.FEMA 400 does not restrict the audit to:

foreign CPA

foreign CA

locally licensed auditors

It simply uses the term “audited financial statements.” There is no explicit RBI circular stating: “Audit must be done only by an auditor registered in the host country.”
Q4. So why do AD Banks insist that the audit must be done by a foreign CPA/CA?
Ans. Because of RBI’s responses in past case references (non-public clarifications by RBI LEC Division to AD Banks):

In several cases, RBI raised objections that audit by an Indian CA cannot be accepted if the host country law does not recognise the Indian CA as a statutory auditor.

RBI observed that audits must comply with host country corporate law.

AD Banks must follow RBI’s instructions from such case-specific clarifications.

So the requirement is not in the Rules, it is a compliance expectation from RBI through AD Banks.
Q5. Is there any RBI circular explicitly stating that Indian CAs cannot audit foreign entities for APR?
Ans. No published circular exists.However, RBI has, in past dispute cases stated:

FEMA Compliance APR filing, cannot be based on an Indian CA audit if the auditor is not an approved auditor under the corporate/financial laws of the foreign jurisdiction.

APR must be based on a financial statement that is valid and legally acceptable in the host country.

AD Banks therefore adopt a conservative approach.
Q6. What is the logic behind RBI’s position?
Ans. Because APR is:

a supervisory tool for ODI compliance,

based on the business performance of the foreign entity,

and must rely on legally valid audited information.

If the host jurisdiction requires a licensed local auditor, an Indian CA signing the audit does not satisfy host jurisdiction law, making the APR legally incomplete.
Q7. Can an Indian CA certify unaudited financials for APR?
Ans. Yes, only in the following case:

The Indian resident does NOT have control, and

The host country does NOT require mandatory audit.

This is permitted under the proviso to Regulation 22(2)(a).
Q8. What if the host country does not require an audit, but the Indian resident has control?
Ans. Even if the host country exempts small companies from audit, the APR still requires audited financials, because the Indian investor has control.
This is why foreign auditor appointments become necessary.
Q9. What happens if the APR is filed using statements audited by an Indian CA?
Ans. In 90% of such cases:

The AD bank raises a query, OR

RBI asks for revised APR, OR

RBI asks the AD Bank to provide host-country audit compliance.

This is based on RBI past objection cases, hence AD banks proactively reject such APRs.
Q10. Is there any regulatory penalty for not filing APR with a foreign-audited statement?
Ans. Yes.  If APR is not validly filed, it may result in:

Non-compliance under Regulation 22

Freezing of further ODI transactions

Restriction on disinvestment

Compounding proceedings under FEMA

Q11. Does an audit by a foreign auditor guarantee APR acceptance?
Ans. Yes, provided:

The auditor is recognised/licensed in the host country,

The entity’s laws permit such audit,

Format complies with FEMA and host-country requirements.

Q12. Is this approach consistent with global accounting and ODI practices?
Ans. Yes. Most jurisdictions require local audit compliance.
 India applies the same expectation through AD Banks.
Instructions for Filling Up the Annual Performance Report (APR)
1. Requirement to Submit APR
A person resident in India who has acquired equity capital in a foreign entity classified as Overseas Direct Investment (ODI) must file an APR for each foreign entity every financial year until the overseas investment is fully divested.

APR must be filed by December 31 every year.

If the foreign entity’s accounting year ends on December 31, the APR must be filed by December 31 of the following year.

2. Cases Where APR is NOT Required
APR submission is not required in the following situations:

If the person resident in India holds less than 10% equity capital and does not have control, and no other financial commitment (other than equity) exists.

When the foreign entity has initiated liquidation, APR need not be filed from the date of initiation.

For a broken period at the time of disinvestment.

However, any transactions undertaken from the date of the last APR submission until the date of disinvestment or liquidation must be reported in Form FC. 
3. Basis of APR: Audited or Unaudited Financials

APR must be based on audited financial statements of the foreign entity.

Exception: If the Indian investor does not have control and the host-country laws do not mandate statutory audit, the APR may be submitted based on unaudited financial statements, certified by The statutory auditor of the Indian entity, or A Chartered Accountant (for cases where statutory audit of Indian entity is not applicable), including resident individuals.

4. APR Filing in Case of Multiple Indian Investors
If more than one person resident in India holds ODI in the same foreign entity:

The investor holding the highest stake must file the APR.

If stakes are equal, the APR must be filed jointly.

Either investor may be authorized by the others to file on their behalf.

5. Reporting of Step-Down Subsidiaries (SDS)
The Indian investor must report details relating to:

Acquisition / setting up of SDS,

Winding up of SDS,

Transfer of SDS,

Any alteration in shareholding structure of the foreign entity.

Failure to report this in the APR is treated as non-submission of APR.
6. Mandatory Submission of All Previous APRs
All pending APRs of previous years must be submitted to the designated AD Bank before filing the current year APR.
7. Capital Structure (Para III)

The capital structure must be shown on a cumulative basis.

The percentage stake must reflect the total holdings of all persons resident in India in the foreign entity.

8. Figures in Para VII – Consistency Requirements
Amounts under “Since commencement of business” must be equal to or greater than the current year’s figures. 
9. Para VII (ii) – Redemption Details
Redemption of preference shares (other than CCPS) must also be reported.
10. Para VII (vii) – Other Receipts
Any receipts not specified (e.g., interest on loans, licence fees, etc.) must be declared under “Other receipts.”
11. Para IX – Retained Earnings

Report the portion of profits retained and reinvested in the foreign entity.

Retained earnings must be computed as per the IMF’s Balance of Payments and International Investment Position Manual.

Negative retained earnings must be treated as zero.

12. SDS Level Hierarchy
SDS levels must be calculated with the foreign entity as the parent:

SDS directly under the foreign entity → 1st level SDS

SDS under the 1st level SDS → 2nd level SDS, and so on.

Only those entities where the foreign entity holds control are considered SDS.
13. SDS Structure Compliance
SDS structures must comply with:

Limited liability requirements

Structural norms applicable to the foreign entity

If the SDS is engaged in financial services, the investment must comply with Para 2 of Schedule I of OI Rules.

14. Activity Code
Provide the activity code of the foreign entity and SDS as per:

NIC 1987, and

NIC 2008 (both to be furnished).

15. Date Format
Dates must be mentioned strictly in DD/MM/YYYY format.
16. Foreign Currency Code
The foreign currency name must be indicated using the SWIFT currency code.
17. Signature Requirement
Each page of Form FC must be signed and stamped with date by the person resident in India submitting the APR.
18. Currency Reporting
All amounts in:

Foreign currency (FCY), and

Indian Rupees (INR)

must be reported in actuals only, not estimates.
Why Choose CCL for Your FEMA Compliance Needs?

Experienced Team: Led by seasoned CS, CA, LLB, and Compliance Analysts with years of hands-on experience across corporate, tax, and regulatory domains including MCA, RBI, SEBI, IRDAI insurance Compliances.

End-to-End Service: One window for MCA, GST, Income Tax, FEMA/ODI/FDI, RBI returns, SEBI/IRDAI licensing, IPR filings, labour laws, accounting, and Secretarial support.

Accuracy & Timeliness: We ensure filings, documentation, and advisory are prepared correctly in the first instance reducing risks, penalties, and delays.

Client-Centric Approach: Dedicated SPOCs, transparent workflows, and regular updates ensure peace of mind and complete visibility.

Trusted Brand: Recognised by thousands of businesses for reliability, confidentiality, and problem-solving capabilities.

Solid Track Record: Successfully delivered complex advisory and regulatory projects for startups, MSMEs, corporates,IRDAI,  NBFCs, insurers, foreign subsidiaries, and Section 8 companies.

Under FOREIGN EXCHANGE MANAGEMENT (OVERSEAS INVESTMENT) RULES, 2022 (No. FEMA 400/2022-RB August 22, 2022), the default rule is that the Annual Performance Report (APR) must be submitted based on the audited financial statements of the foreign entity. The extract states:

“The APR shall be based on the audited financial statements of the foreign entity.”

Provided that where the person resident in India does not have control in the foreign entity and the host country does not mandate statutory audit, APR may be submitted based on unaudited financial statements, certified by the statutory auditor of the Indian entity or by a Chartered Accountant.

When Audit Is Mandatory (Indian Resident Has Control)

If the person resident in India has “control” (as defined under ODI rules in case of overseas Investment), then:

Audited financial statements of the foreign entity are compulsory.
FEMA 400 does not explicitly require that the audit be performed only by a foreign Chartered Accountant/CPA.
The regulation merely requires “audited financial statements” without specifying the nationality of the auditor.

Why AD Banks Insist on Audit by Foreign CPA/CA

Although no FEMA/RBI regulation explicitly states that the audit must be conducted by a foreign auditor, AD Banks insist on it because: In several past APR/ODI clarifications, RBI raised objections where the foreign entity’s audit was performed by an Indian Chartered Accountant instead of an auditor registered in the host country. RBI’s reasoning was that audit must comply with the laws of the host jurisdiction, including eligibility and licensing of the auditor. Foreign corporate laws often require that an auditor be licensed or recognized locally. AD Banks therefore follow RBI’s internal guidance and precedents, even though there is no published circular mandating this.

Final thought from Compliance Calendar LLP

Hence, As per FEMA 400, APR must be filed on the basis of the foreign entity’s audited financial statements where the person resident in India has control. Although no RBI circular expressly mandates that such audit must be conducted only by a foreign CPA/CA, AD Banks seek audits performed by auditors qualified in the host jurisdiction. This is based on RBI’s internal clarifications in past ODI cases filed by Compliance Calendar LLP for clients, where audits signed by Indian CAs were questioned due to non-compliance with host-country audit laws. Accordingly, as a matter of prudence and in line with AD Bank instructions, audited financials of the foreign entity should be issued by a locally recognized auditor.More, the above analysis reflects Compliance Calendar LLP’s professional opinion based on the Foreign Exchange Management Act, 1999, the Overseas Investment Rules and Regulations, 2022, and prevailing RBI interpretations available through past AD Bank interactions. The final decision and acceptance of any APR filing, including the applicability of audited or unaudited financial statements, remain solely subject to the discretion of the Reserve Bank of India, the designated AD Bank, and any regulatory amendments or clarifications issued from time to time. Compliance requirements may evolve, and stakeholders are advised to review the latest regulations and consult their AD Bank before final submission.

Some FAQ based on APR Filing

Q1. Does the Overseas Investment Rules, 2022 contain any clause about who must audit the foreign entity’s financial statements?

Ans. No. The Rules, 2022 do not prescribe:

who must audit the foreign entity,
whether the auditor must be a foreign CPA/CA,
or restrictions on Indian CAs auditing foreign entities.

The Rules only define “control”, “foreign entity”, and reporting requirements indirectly through Rule 20 (which refers to RBI regulations for reporting).

The audit requirement arises from the Overseas Investment Regulations (FEMA 400), not the Rules.

Q2. Where does the audit requirement for APR come from?

Ans. The audit requirement is stated in Regulation 22(2)(a) of FEMA 400 (Overseas Investment Regulations, 2022):

“The APR shall be based on the audited financial statements of the foreign entity.”

A proviso says unaudited statements are allowed only when the person resident in India does not have control AND the host country does not mandate an audit.

Q3. Do the Rules or Regulations say that the audit must be done only by a foreign auditor?

Ans. No.FEMA 400 does not restrict the audit to:

foreign CPA
foreign CA
locally licensed auditors

It simply uses the term “audited financial statements.” There is no explicit RBI circular stating: “Audit must be done only by an auditor registered in the host country.”

Q4. So why do AD Banks insist that the audit must be done by a foreign CPA/CA?

Ans. Because of RBI’s responses in past case references (non-public clarifications by RBI LEC Division to AD Banks):

In several cases, RBI raised objections that audit by an Indian CA cannot be accepted if the host country law does not recognise the Indian CA as a statutory auditor.
RBI observed that audits must comply with host country corporate law.
AD Banks must follow RBI’s instructions from such case-specific clarifications.

So the requirement is not in the Rules, it is a compliance expectation from RBI through AD Banks.

Q5. Is there any RBI circular explicitly stating that Indian CAs cannot audit foreign entities for APR?

Ans. No published circular exists.However, RBI has, in past dispute cases stated:

FEMA Compliance APR filing, cannot be based on an Indian CA audit if the auditor is not an approved auditor under the corporate/financial laws of the foreign jurisdiction.
APR must be based on a financial statement that is valid and legally acceptable in the host country.

AD Banks therefore adopt a conservative approach.

Q6. What is the logic behind RBI’s position?

Ans. Because APR is:

a supervisory tool for ODI compliance,
based on the business performance of the foreign entity,
and must rely on legally valid audited information.

If the host jurisdiction requires a licensed local auditor, an Indian CA signing the audit does not satisfy host jurisdiction law, making the APR legally incomplete.

Q7. Can an Indian CA certify unaudited financials for APR?

Ans. Yes, only in the following case:

The Indian resident does NOT have control, and
The host country does NOT require mandatory audit.

This is permitted under the proviso to Regulation 22(2)(a).

Q8. What if the host country does not require an audit, but the Indian resident has control?

Ans. Even if the host country exempts small companies from audit, the APR still requires audited financials, because the Indian investor has control.

This is why foreign auditor appointments become necessary.

Q9. What happens if the APR is filed using statements audited by an Indian CA?

Ans. In 90% of such cases:

The AD bank raises a query, OR
RBI asks for revised APR, OR
RBI asks the AD Bank to provide host-country audit compliance.

This is based on RBI past objection cases, hence AD banks proactively reject such APRs.

Q10. Is there any regulatory penalty for not filing APR with a foreign-audited statement?

Ans. Yes. If APR is not validly filed, it may result in:

Non-compliance under Regulation 22
Freezing of further ODI transactions
Restriction on disinvestment
Compounding proceedings under FEMA

Q11. Does an audit by a foreign auditor guarantee APR acceptance?

Ans. Yes, provided:

The auditor is recognised/licensed in the host country,
The entity’s laws permit such audit,
Format complies with FEMA and host-country requirements.

Q12. Is this approach consistent with global accounting and ODI practices?

Ans. Yes. Most jurisdictions require local audit compliance.

India applies the same expectation through AD Banks.

Instructions for Filling Up the Annual Performance Report (APR)

1. Requirement to Submit APR

A person resident in India who has acquired equity capital in a foreign entity classified as Overseas Direct Investment (ODI) must file an APR for each foreign entity every financial year until the overseas investment is fully divested.

APR must be filed by December 31 every year.
If the foreign entity’s accounting year ends on December 31, the APR must be filed by December 31 of the following year.

2. Cases Where APR is NOT Required

APR submission is not required in the following situations:

If the person resident in India holds less than 10% equity capital and does not have control, and no other financial commitment (other than equity) exists.
When the foreign entity has initiated liquidation, APR need not be filed from the date of initiation.
For a broken period at the time of disinvestment.

However, any transactions undertaken from the date of the last APR submission until the date of disinvestment or liquidation must be reported in Form FC.

3. Basis of APR: Audited or Unaudited Financials

APR must be based on audited financial statements of the foreign entity.
Exception: If the Indian investor does not have control and the host-country laws do not mandate statutory audit, the APR may be submitted based on unaudited financial statements, certified by The statutory auditor of the Indian entity, or A Chartered Accountant (for cases where statutory audit of Indian entity is not applicable), including resident individuals.

4. APR Filing in Case of Multiple Indian Investors

If more than one person resident in India holds ODI in the same foreign entity:

The investor holding the highest stake must file the APR.
If stakes are equal, the APR must be filed jointly.
Either investor may be authorized by the others to file on their behalf.

5. Reporting of Step-Down Subsidiaries (SDS)

The Indian investor must report details relating to:

Acquisition / setting up of SDS,
Winding up of SDS,
Transfer of SDS,
Any alteration in shareholding structure of the foreign entity.

Failure to report this in the APR is treated as non-submission of APR.

6. Mandatory Submission of All Previous APRs

All pending APRs of previous years must be submitted to the designated AD Bank before filing the current year APR.

7. Capital Structure (Para III)

The capital structure must be shown on a cumulative basis.
The percentage stake must reflect the total holdings of all persons resident in India in the foreign entity.

8. Figures in Para VII – Consistency Requirements

Amounts under “Since commencement of business” must be equal to or greater than the current year’s figures.

9. Para VII (ii) – Redemption Details

Redemption of preference shares (other than CCPS) must also be reported.

10. Para VII (vii) – Other Receipts

Any receipts not specified (e.g., interest on loans, licence fees, etc.) must be declared under “Other receipts.”

11. Para IX – Retained Earnings

Report the portion of profits retained and reinvested in the foreign entity.
Retained earnings must be computed as per the IMF’s Balance of Payments and International Investment Position Manual.
Negative retained earnings must be treated as zero.

12. SDS Level Hierarchy

SDS levels must be calculated with the foreign entity as the parent:

SDS directly under the foreign entity → 1st level SDS
SDS under the 1st level SDS → 2nd level SDS, and so on.

Only those entities where the foreign entity holds control are considered SDS.

13. SDS Structure Compliance

SDS structures must comply with:

Limited liability requirements
Structural norms applicable to the foreign entity
If the SDS is engaged in financial services, the investment must comply with Para 2 of Schedule I of OI Rules.

14. Activity Code

Provide the activity code of the foreign entity and SDS as per:

NIC 1987, and
NIC 2008 (both to be furnished).

15. Date Format

Dates must be mentioned strictly in DD/MM/YYYY format.

16. Foreign Currency Code

The foreign currency name must be indicated using the SWIFT currency code.

17. Signature Requirement

Each page of Form FC must be signed and stamped with date by the person resident in India submitting the APR.

18. Currency Reporting

All amounts in:

Foreign currency (FCY), and
Indian Rupees (INR)

must be reported in actuals only, not estimates.

Why Choose CCL for Your FEMA Compliance Needs?

Experienced Team: Led by seasoned CS, CA, LLB, and Compliance Analysts with years of hands-on experience across corporate, tax, and regulatory domains including MCA, RBI, SEBI, IRDAI insurance Compliances.
End-to-End Service: One window for MCA, GST, Income Tax, FEMA/ODI/FDI, RBI returns, SEBI/IRDAI licensing, IPR filings, labour laws, accounting, and Secretarial support.
Accuracy & Timeliness: We ensure filings, documentation, and advisory are prepared correctly in the first instance reducing risks, penalties, and delays.
Client-Centric Approach: Dedicated SPOCs, transparent workflows, and regular updates ensure peace of mind and complete visibility.
Trusted Brand: Recognised by thousands of businesses for reliability, confidentiality, and problem-solving capabilities.
Solid Track Record: Successfully delivered complex advisory and regulatory projects for startups, MSMEs, corporates,IRDAI, NBFCs, insurers, foreign subsidiaries, and Section 8 companies.