RBI Mandatory Compliances for setting up a Wholly Owned Subsidiary (WOS) / Subsidiary Company in India

RBI Mandatory Compliances for setting up a Wholly Owned Subsidiary (WOS) / Subsidiary Company in India. You can register a Wholly Owned Subsidiary (WOS) or Subsidiary Company in India. The company can be registered with the MCA and later the compliance has to be made as per RBI compliance. All the foreign investment reporting, except specifically stated otherwise, is done through an online reporting portal called the Foreign Investment Reporting and Management System (FIRMS at https://firms.rbi.org.in) that provides a single point of access to various services and information related to businesses in India. 
Companies can use the FIRMS Portal to register their businesses, file their annual returns, apply for various licenses and permits, and access other government services. The portal is managed by the Ministry of Corporate Affairs in India, which is managed by the RBI. The FDI details include information such as the name of the foreign company, the amount of investment, the sector in which the investment is being made, and the mode of investment. With the implementation of SMF, Form FC-GPR, FC-TRS, LLPI, LLP-II, CN, ESOP, DRR, DI, and InVi are to be filed on the online portal.Foreign companies are required to file the FDI details within 30 days of the investment being made in India. Failure to comply with the FDI reporting requirements can result in penalties and legal action by the RBI. Therefore, it is important for foreign companies to ensure that they comply with the FDI reporting requirements when setting up a WOS or subsidiary in India.Foreign Direct Investment (FDI) in India is governed by the Foreign Exchange Management Act (FEMA) and its related regulations. Compliance with these regulations is essential for companies or start-ups who looking to receive Investment in terms of FDI in India.
FDI or Foreign Direct Investment can take various modes in India -                
1. Joint Venture: This is a partnership between a foreign company and an Indian company. The foreign company brings in the capital and technology, while the Indian company provides the local expertise and infrastructure. Here are a few recent examples of FDI in India:-
⇒ Walmart: In 2018, Walmart acquired a 77% stake in Flipkart, an Indian e-commerce company, for USD 16 billion. This is one of the largest FDI deals in India's history.
⇒ Amazon: Amazon has been investing heavily in India's e-commerce sector since 2013. In 2019, the company announced a USD 1 billion investment to expand its operations in India.
⇒ Kia Motors: In 2017, Kia Motors, a South Korean automaker, announced a USD 1.1 billion investment to set up a manufacturing plant in Andhra Pradesh, India. The plant has a capacity to produce 3 lakh cars annually.
⇒ Vodafone: In 2020, Vodafone Group Plc injected USD 1.2 billion into its Indian subsidiary, Vodafone Idea, to help the struggling telecom company pay off its outstanding dues to the Indian government.
⇒ Suzuki Motor Corporation: Suzuki, a Japanese automaker, has been operating in India for several decades through its subsidiary Maruti Suzuki India Limited. In 2018, the company announced a USD 1.4 billion investment to set up a new manufacturing plant in Gujarat, India.
 
Foreign Direct Investment (FDI) in Indian startup companies is becoming increasingly popular as India's startup ecosystem continues to grow and attract global investors. Here's an example of FDI in an Indian startup company:Recently in 2021, Indian ed-tech startup Unacademy raised USD 440 million in a funding round led by Temasek, a Singapore-based investment company, along with SoftBank Vision Fund 2 and other investors. This funding round was one of the largest FDI inflows into an Indian startup.Unacademy is an online learning platform that offers courses and live classes to students preparing for various competitive exams in India. The company has grown rapidly in recent years and has become a leader in the Indian edtech space. With the FDI investment, Unacademy plans to expand its product offerings, acquire other startups, and explore international markets. The FDI investment not only provides the startup with the necessary funds to grow, but also brings in global expertise and knowledge that can help the company scale even further. Overall, FDI in Indian startup companies is seen as a positive development that can help drive innovation, create jobs, and boost economic growth in India.2. Wholly-owned subsidiary: In this mode, a foreign company can set up a subsidiary in India, which is wholly owned by the foreign company. The subsidiary can carry out business activities in India independently.Example- Samsung Electronics Co. Ltd., a South Korean multinational electronics company, has a Wholly-owned subsidiary in India called Samsung India Electronics Pvt. Ltd. Samsung India was established in 1995 as a subsidiary of Samsung Electronics and operates as a 100% owned subsidiary of the parent company.Samsung India is engaged in the manufacturing and sales of a wide range of consumer electronics and home appliances, such as smartphones, televisions, refrigerators, air conditioners, and washing machines. The company has several manufacturing facilities in India, which serve both domestic and international markets. By setting up a Wholly-owned subsidiary in India, Samsung Electronics was able to establish a strong presence in the Indian market and leverage the country's large and growing consumer base. The Wholly-owned subsidiary model also allows Samsung Electronics to have complete control over the operations of the Indian subsidiary, from manufacturing to sales and distribution. Overall, the Wholly-owned subsidiary model is a popular mode of Foreign Direct Investment (FDI) in India and has been used by many multinational companies to establish a strong presence in the Indian market.3. Acquisition: A foreign company can acquire an existing Indian company, which is already operational in India.In 2018, Walmart Inc., a US-based multinational retail corporation, acquired a 77% stake in Flipkart, an Indian e-commerce company, for $16 billion. The acquisition was one of the largest foreign acquisitions in India and marked Walmart's entry into the Indian e-commerce market.Flipkart was founded in 2007 and had grown to become one of the leading e-commerce companies in India, with a wide range of products and services including electronics, fashion, groceries, and mobile recharge. By acquiring Flipkart, Walmart gained access to the fast-growing Indian e-commerce market and a large customer base in India.The acquisition was a significant development for both Walmart and Flipkart. For Walmart, the acquisition was part of its strategy to expand its global e-commerce business and compete with Amazon, which had a strong presence in India. For Flipkart, the acquisition provided the necessary funds and resources to continue its growth and expansion plans. The acquisition also faced some challenges, such as protests from small traders and retailers who were concerned about the impact of the deal on their businesses. However, the deal was eventually approved by the Indian government, and Walmart was able to complete the acquisition of Flipkart. Overall, foreign acquisitions in India are seen as a way to gain access to the country's large and growing market and to leverage the strengths of Indian companies in various sectors.4. Strategic Alliance: In this mode, a foreign company and an Indian company can collaborate on specific projects or activities.Recently in 2020, Reliance Industries Limited (RIL), an Indian multinational conglomerate, announced a strategic partnership with Google, a US-based multinational technology company, to develop an affordable smartphone for the Indian market. Under the partnership, Reliance's telecom arm, Jio Platforms, would work with Google to develop an Android-based operating system for the smartphone.The partnership aimed to leverage Google's technology expertise and Reliance's strong presence in the Indian market to provide an affordable smartphone option to the large and growing Indian consumer base. The partnership also involved collaboration on other initiatives, such as the expansion of Jio's digital services and the development of new cloud services for businesses.This strategic alliance was seen as a significant development for both companies. For Reliance, the partnership with Google provided access to new technology and expertise that could help the company continue its growth and expansion plans in India. For Google, the partnership provided an opportunity to expand its presence in the Indian market, which is expected to see significant growth in the coming years.Foreign Strategic Alliances in India are seen as a way to leverage the strengths of Indian companies and the global expertise of foreign companies to create innovative products and services that can serve the needs of the Indian market. Such partnerships can also help in building long-term relationships and collaborations that can drive mutual growth and benefit.  
 
Before or after Investment there are some key compliance need to be made under FEMA for FDI in India:-
 
1. Approval and reporting requirements: Depending on the sector and the amount of FDI involved, companies may need to obtain prior approval from the Foreign Investment Promotion Board (FIPB) or the Reserve Bank of India (RBI). They must also report FDI transactions to the RBI through the eBiz portal.
2. Investment instruments: FDI can be made in the form of equity shares, compulsorily convertible preference shares, and other securities. The pricing, valuation, and transfer of these instruments must comply with FEMA regulations.
3. Capitalization and repatriation: FDI must be brought into India through a designated bank account and can be repatriated subject to certain conditions, such as compliance with taxation and FEMA regulations.
4. Compliance documentation: Companies must maintain documentation related to FDI transactions, including approvals, reports, and pricing/valuation documents.
5. Penalties for non-compliance: Non-compliance with FEMA regulations can result in penalties, including fines and imprisonment, as well as restrictions on future FDI transactions.
6. Authorized dealers and Indian entities are required to comply with FEMA regulations when dealing with foreign exchange transactions, such as investments, remittances, and transfers. Compliance includes obtaining necessary approvals, adhering to foreign investment limits, and filing required reports with the RBI.Compliance with FEMA laws in India are crucial for companies seeking to receive FDI in India. We at Compliance Calendar LLP would suggest to all Companies must ensure that they understand and comply with the relevant regulations to avoid penalties and ensure smooth FDI transaction process.
Valuation report under the Foreign Exchange Management Act (FEMA)
This is a report that provides a fair market value assessment of the assets or shares involved in a transaction between a foreign investor and an Indian entity. The valuation report is required for various purposes, such as for determining the foreign investment limits and for reporting to the Reserve Bank of India (RBI).→ The valuation report is prepared by a registered valuer who is qualified and has relevant experience in the specific area of valuation. The valuer must be registered with the Insolvency and Bankruptcy Board of India (IBBI) and should follow the valuation standards issued by the Institute of Chartered Accountants of India (ICAI) or any other regulatory body.→ Valuation plays an important role in FEMA (Foreign Exchange Management Act) compliance related to FCGPR (Foreign Currency Convertible Preference Shares) and FCTRS (Foreign Currency Transfer of Shares) transactions. → A valuation report is required to be filed with the Reserve Bank of India (RBI) under the Foreign Exchange Management Act (FEMA) in certain cases of foreign investment in India. → Valuation report is essential for filing FEMA and ensuring compliance with applicable laws and regulations. It provides foreign investors and Indian authorities with a clear understanding of the fair market value of the investment, which is critical for determining the foreign investment limits and other regulatory requirements.
Here are some key components of a valuation report under FEMA-
 
» Purpose of Valuation: The report should clearly state the purpose of the valuation, which is usually to determine the fair market value of the shares or assets being acquired or transferred.
» Valuation Methodology: The report should describe the valuation methodology used and the assumptions made in arriving at the fair market value. Common methods used for valuation include the discounted cash flow method, market comparable method, and asset valuation method.
» Financial Statements: The report should include financial statements of the company being valued, including balance sheets, income statements, and cash flow statements.
» Industry Analysis: The report should provide an analysis of the industry in which the company operates, including market size, growth potential, and competitive landscape.
» Comparable Transactions: The report should provide a comparison of the valuation of the company being valued with other similar companies in the same industry or geographic location.
» Risk Assessment: The report should identify the risks associated with the investment and assess their impact on the fair market value of the shares or assets being acquired or transferred.
» Valuation Certificate: The report should include a certificate signed by a qualified valuer, confirming that the valuation has been conducted in accordance with applicable laws and regulations and that the fair market value of the shares or assets has been determined.
Here are some key points regarding valuation especially in these cases: -
 
FCGPR: The valuation of shares issued under FCGPR should be done in accordance with the provisions of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017. These regulations require the valuation of shares to be done by a Chartered Accountant or a SEBI-registered Merchant Banker, using internationally accepted valuation methods. The valuation report should be submitted to the RBI along with the FCGPR Form within 30 days of the issue of shares.
FCTRS: The valuation of shares issued under FCTRS should be done in accordance with the provisions of the Companies Act, 2013 and the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017. The valuation should be done by a Merchant Banker registered with the SEBI, using the discounted free cash flow method or any other internationally accepted valuation method. The valuation report should be submitted to the RBI along with the FCTRS Form within 30 days of the issue of shares.
What are the basic Compliances needs to check-
 
In both cases, it is important to ensure that the valuation is carried out in compliance with the relevant regulations and guidelines issued by the RBI, and that the valuation report is prepared by a qualified and experienced valuer. This can help ensure smooth compliance with FEMA regulations and avoid any issues or penalties for non-compliance.The methods used to determine FMV include the discounted cash flow method, the price-earnings multiple method, the net asset value method, and the comparable company analysis method.Companies must maintain documentation related to valuation, including the method used, the assumptions made, and the basis of calculation. In case of any dispute or investigation, this documentation will be required to demonstrate compliance with FEMA regulations.The process for filing FDI compliances in India can vary depending on the specific requirements and regulations applicable to the company and the sector in which it operates. However, here are some general steps that can be followed:-
1. Identify the applicable FDI regulations: The first step is to determine the applicable FDI regulations based on the company's sector, type of investment, and other factors.
2. Obtain necessary approvals: If prior approval is required for FDI in the company's sector, it must be obtained before the investment is made.
3. Report the investment: Within 30 days of receiving the investment, the company must file a report with the Reserve Bank of India (RBI) through an online reporting portal. The report should include details of the investment, such as the amount, the identity of the investor, and the type of securities issued.
4. Comply with pricing guidelines: If the investment involves issuance of shares or other securities, the pricing must be in compliance with the applicable pricing guidelines under FDI regulations.
5. Maintain necessary documentation: The company must maintain all necessary documentation related to the FDI investment, such as share certificates, board resolutions, and financial statements.
6. File reports and documents with RBI: Companies must file reports and documents with the RBI through an online reporting portal, such as the Foreign Investment Reporting and Management System (FIRMS).7. Maintain records: Companies must maintain records related to FDI compliance for at least five years, including board resolutions, reports, and other documents.8. Ensure ongoing compliance: Companies must ensure ongoing compliance with FDI regulations and monitor any changes to the rules or reporting requirements.9. Comply with other requirements: The company must comply with all other applicable FDI requirements, such as limits on FDI in certain sectors and restrictions on repatriation of funds.It is important for companies to ensure that they comply with all applicable FDI regulations to avoid penalties and other difficulties. Professional legal and financial advice can be sought to ensure compliance with FDI regulations.
Mode of Approval under FDI –
 
Depending on the sector in which the investment is being made, prior approval from the Indian government or the Reserve Bank of India (RBI) may be required. Here are some key points regarding FDI approval in India:-1. Automatic route: FDI is permitted under the automatic route in many sectors, meaning that prior approval is not required. However, certain conditions must be met, such as adherence to sector-specific caps on FDI, compliance with security and other regulatory requirements, and adherence to pricing guidelines.
2. Approval route: In sectors where FDI is not permitted under the automatic route, or where the investment exceeds the sector-specific caps, prior approval from the Indian government or RBI is required.
3. Approval process: The process for obtaining FDI approval involves the submission of an application to the relevant authority, which will review the proposal and either grant approval or request additional information. The timeline for approval can vary depending on the sector and the complexity of the proposal.
4. Compliance: Companies receiving FDI must comply with all applicable FEMA rules and regulations, and maintain appropriate documentation to demonstrate compliance.
Timelines for filing various forms under FEMA Regulations in India:
 
» FC-GPR : Within 30 days from the date of issue of the capital instruments.
» FC-TRS: Within 60 days of transfer of capital instruments or receipt/remittance of funds whichever is earlier.
» LLP I: Within 30 days from the date of receipt of the amount of consideration.
» LLP II: Within 60 days from the date of receipt of funds.
» CN: Issue : Within 30 days of issue ; Transfer : Within 30 days of transfer.
» ESOP : Within 30 days from the date of issue of ESOPs.
» DRR: Within 30 days of close of the issue/ program.
Late Submission Fees-
 
RBI Revised late submission fees (LSF) recently for delayed filing of various foreign exchange-related forms, including the Annual Performance Report on Foreign Direct Investment (FDI), with effect from November 7, 2017.

The LSF is levied on companies that fail to submit the required reports within the prescribed timelines. As mentioned earlier, the LSF is calculated based on the duration of the delay in filing the report, and the fees increase with the length of the delay.

The introduction of LSF by the RBI aims to encourage timely and accurate submission of reports related to foreign investment transactions, and to penalize companies that fail to comply with the reporting requirements. Companies are advised to ensure timely and accurate filing of all necessary reports to avoid any LSF or other penalties that may be imposed by the RBI.

Compliance Calendar suggestion to all Entrepreneur/Start-up Founders/Directors
It is important for businesses to ensure timely and accurate filing of foreign exchange-related forms to avoid any late submission fees (LSF) and penalties imposed by the RBI. The introduction of late submission fees is aimed at promoting compliance with the foreign exchange regulations and ensuring timely and accurate reporting of foreign exchange transactions in India.
Filing of FLA (Foreign Liabilities and Assets) return
 
The Foreign Liabilities and Assets (FLA) return is a mandatory annual filing required to be submitted by Indian companies who have received foreign direct investment (FDI) or have made investments in foreign entities. 
Both Wholly Owned Subsidiaries (WOS) and subsidiaries with foreign investment are required to file the Annual Performance Report on Foreign Direct Investment (FDI) in the prescribed format under the FEMA regulations. This report is commonly known as the FLA (Foreign Liabilities and Assets) return and is required to be filed with the Reserve Bank of India (RBI) by July 15th of every year. 
The FLA return captures details of foreign investment, including equity capital, reinvestment of earnings, and other capital, made by Indian companies in foreign entities. It also requires details of foreign assets and liabilities of the Indian company, including trade credits, borrowing, and other liabilities. 
(RBI) has introduced the FLAIR (Foreign Liabilities and Assets Information Reporting) portal for the submission of the Foreign Liabilities and Assets (FLA) return. The FLAIR portal is an online platform that enables Indian companies to file their FLA returns with the RBI electronically.
The FLAIR portal was introduced in 2019, The FLAIR portal provides a user-friendly interface for Indian companies to file their FLA returns, and it also enables the RBI to collect and process the data efficiently. Filing of FLA return through the FLAIR portal, Indian companies must first register on the portal by providing their company details, including their corporate identification number (CIN) or limited liability partnership identification number (LLPIN). Once registered, Indian companies can access the FLAIR portal and file their FLA returns in the prescribed format. 
The FLA return is mandatory for all Indian companies who have received FDI or made an overseas investment in the previous financial year. It covers all investments made by the Indian company in foreign entities, including equity capital, reinvestment of earnings, and other capital. The report also requires details of foreign assets and liabilities of the Indian company, including trade credits, borrowing, and other liabilities.
Both WOS and subsidiaries with foreign investment are required to file the FLA return to the RBI irrespective of the level of investment or sector in which they operate. Failure to file the FLA return can result in penalties imposed by the RBI, including late submission fees and other penalties. Therefore, it is essential for companies to ensure timely and accurate filing of the FLA return to avoid any penalties and maintain compliance with the FEMA regulations.
Tax Benefit for Startups who having FDI In India 
 
FEMA compliance by startups with foreign investment in India can lead to tax benefits under certain circumstances.
For example, if the startup is compliant with FEMA regulations and has received FDI, it may be eligible for tax exemptions under the Income Tax Act. The Indian government has introduced various tax incentives to promote foreign investment and encourage startups to comply with FEMA regulations.
Further, FEMA compliance also helps startups in claiming tax benefits under Double Taxation Avoidance Agreements (DTAA) with foreign countries. DTAA is an agreement between two countries to avoid double taxation of the same income. By complying with FEMA regulations, startups can claim benefits under DTAA and avoid paying taxes twice on the same income.
Additionally, FEMA compliance can also help startups in claiming tax deductions for expenses incurred on transactions related to foreign exchange. For instance, expenses incurred on foreign travel, foreign consultancy services, or foreign currency exchange can be claimed as tax deductions by FEMA compliant startups.
FEMA compliance by startups with foreign investment in India can lead to various tax benefits and exemptions, such as exemptions under the Income Tax Act and benefits under DTAA. Startups should prioritize FEMA compliance to not only ensure regulatory compliance but also to take advantage of these tax benefits.
Conclusion:
Startups and other companies may not be aware of this requirement or may not have the necessary knowledge or expertise to file the FLA return. However, it is important for them to ensure timely and accurate filing of the FLA return to maintain compliance with the FEMA regulations and avoid penalties imposed by the RBI. 
To avoid such situations, startups and other companies can seek the help of Compliance Calendar having team of professionals such as chartered accountants, company secretaries, or legal advisors who have expertise in foreign exchange regulations and can assist with the preparation and filing of the FLA return. Complying with FEMA regulations helps startups to have a smoother business experience in India and reduces the risk of regulatory hurdles or disruptions including Filing FEMA returns regularly helps in building investor confidence in the startup as it demonstrates the company's commitment to compliance and transparency. 
For example, let's say a startup in India receives FDI from a US-based company. The Indian startup must file the necessary FEMA returns to report the FDI received and comply with the regulations. Failing to do so can result in penalties and legal issues for both the Indian startup and the US-based company. Therefore, FEMA filing is critical to ensure smooth operations and growth for startups with FDI in India.
Here Another example to illustrate the importance of FEMA filing for startups in India-
 
Let's say there is a startup in India that has received FDI from a foreign company for its operations. The startup must comply with FEMA regulations, which include filing returns, obtaining approvals, and reporting any transactions related to foreign exchange. Failure to do so may lead to penalties, cancellation of the FDI, or even legal action.
Suppose, if any startup needs to repatriate profits earned from its operations in India to the foreign company, it must comply with FEMA regulations by filing the necessary returns and obtaining approvals. Non-compliance in such cases can lead to legal action or penalties, affecting the startup's reputation and growth prospects.
In conclusion, FEMA filing is crucial for startups that have FDI or subsidiary in India, as it ensures compliance with foreign investment guidelines and helps in monitoring the inflow and outflow of foreign exchange. Startups must prioritize FEMA compliance to avoid legal implications and ensure smooth operations. Compliance Calendar provided end-to-end support for all FEMA/RBI related compliance.

RBI Mandatory Compliances for setting up a Wholly Owned Subsidiary (WOS) / Subsidiary Company in India

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