In the era of globalization, businesses are expanding their operations across borders, leading to an increased prevalence of foreign subsidiaries.Managing an overseas subsidiary presents numerous possibilities and hurdles, especially concerning adherence to regulatory requirements. Within India, the Companies Act of 2013 establishes the legal structure governing the operations of companies, encompassing those with foreign subsidiaries. This article delves into the periodic compliances that foreign subsidiaries need to adhere to under the Companies Act, 2013.
Incorporation and Initial Compliances
Establishing foreign subsidiary Company in India involves a meticulous process to ensure compliance with the Companies Act, 2013. The initial steps include obtaining approval from the Reserve Bank of India (RBI), reserving a unique name, drafting Memorandum and Articles of Association, appointing directors, and setting up a registered office.
After incorporation, specific compliances must be addressed promptly:
- Declaration of Registered Office: File a declaration confirming the registered office’s location with supporting documents.
- Particulars of Directors: Submit details of directors within 30 days of incorporation and update promptly for any changes.
- Appointment of Auditor: Appoint an auditor within 30 days and ratify the appointment at the first Annual General Meeting (AGM).
- Statutory Register Maintenance: Regularly maintain registers of members, directors, and charges for inspection by authorities.
- Issue of Share Certificates: Issue share certificates within two months, providing essential details to shareholders.
- Tax and GST Registration: Obtain Permanent Account Number (PAN), Tax Deduction and Collection Account Number (TAN), and GST registration if involved in supplying goods or services.
Annual Filings and Financial Statements
Ensuring ongoing compliance with the Companies Act, 2013, is vital for foreign subsidiaries in India. Key aspects include:
Annual Filings:
- Annual Return: File comprehensive annual returns detailing the company’s activities and governance within the stipulated time to avoid penalties.
- Financial Statements: Submit audited financial statements, including the balance sheet and profit and loss account, within 30 days of the Annual General Meeting (AGM).
Financial Statements:
- Audited Records: Maintain accurate financial records, audited by a chartered accountant, ensuring compliance with accounting standards.
- Reports: Prepare and submit the director’s report, board report, and audit committee report (if applicable) to provide insights into the company’s performance and strategies.
Compliance Timeline:
- AGM Deadline: Convene the AGM within six months of the financial year-end to discuss and approve financial statements.
- Filing Deadline: Submit annual filings, including financial statements, to the Ministry of Corporate Affairs within 30 days of the AGM to avoid penalties.
- RoC Reporting: Promptly report any structural or financial changes to the Registrar of Companies.
Importance of Compliance:
- Transparency: Enhance financial transparency to reassure stakeholders and regulatory bodies.
- Legal Obligation: Fulfill legal obligations under the Companies Act to avoid penalties and reputational damage.
- Investor Confidence: Build trust among investors, facilitating growth and potential fundraising.
- Regulatory Trust: Establish the subsidiary as a trustworthy entity in the eyes of regulatory authorities.
Board and Shareholder Meetings:
Ensuring compliance with the Companies Act, 2013, is crucial for foreign subsidiaries conducting business in India. Here’s a concise overview:
Board Meetings:
The board meetings should be conducted as:
Frequency and Quorum: Conduct quarterly board meetings with the prescribed quorum.
Notice and Agenda: Provide timely notice and a detailed agenda for board meetings.
Minutes of Meetings: Maintain accurate minutes and seek approval at subsequent meetings.
Committee Meetings: Conduct committee meetings as required, following specific guidelines.
Shareholder Meetings:
The shareholder meetings should be conducted as:
- Annual General Meeting (AGM): Hold an AGM within six months of the financial year-end.
- Extraordinary General Meeting (EGM): Convene EGMs for urgent matters requiring shareholder approval.
- Notice and Resolutions: Ensure proper notice and detailed resolutions for shareholder meetings.
- Proxy Voting: Allow proxy voting and adhere to the specified timeline for submission.
Compliance Considerations:
These compliance considerations should be evalued:
- Filing of Resolutions: File resolutions with the Ministry of Corporate Affairs within 30 days.
- Director’s Report: Include key information in the director’s report presented at the AGM.
- Shareholder Resolutions: Comply with statutory requirements for shareholder resolutions.
- Electronic Meetings: Conduct virtual meetings following prescribed rules.
Importance of Compliance:
The importance of compliance is:
- Decision-Making Transparency: Ensure transparent decision-making through regular board meetings.
- Shareholder Participation: Facilitate active shareholder participation in key decisions.
- Legal Adherence: Fulfill legal obligations to avoid legal consequences.
- Stakeholder Confidence: Enhance stakeholder confidence, contributing to the subsidiary’s reputation.
Compliance with Transfer Pricing Regulations
Ensuring compliance with transfer pricing regulations is vital for foreign subsidiaries in India. Here’s a concise overview:
Transfer Pricing Regulations:
The transfer pricing regulations are:
- Arm’s Length Principle: Transactions between related parties must be fair and not artificially manipulated.
- Documentation: Maintain thorough documentation justifying international transaction pricing, including benchmarking studies.
- Transfer Pricing Report: Submit a comprehensive Transfer Pricing Report to tax authorities with details on transactions and supporting documentation.
Compliance Process:
The compliance process is as follows:
- Accountant Appointment: Appoint a chartered accountant for a transfer pricing audit to ensure compliance.
- Annual Review: Conduct an annual review of transfer pricing policies to align them with business strategies.
- Form Submission: File Form 3CEB, a report on international transactions, by the specified due date.
- Advance Pricing Agreements (APAs): Consider APAs with tax authorities for predetermined transfer pricing methodologies.
Importance of Compliance:
The importance of compliance is as follows:
- Avoid Penalties: Strict compliance mitigates the risk of penalties and legal consequences.
- Minimize Disputes: Proactive adherence reduces the likelihood of transfer pricing disputes with tax authorities.
- Tax Efficiency: Ensures optimal tax position in line with group strategies.
- Reputation Management: Transparent and compliant practices contribute to the subsidiary’s regulatory trust.
Goods and Services Tax (GST) Compliance:
It’s crucial for foreign subsidiaries offering goods or services in India to follow GST regulations. Here’s a brief explanation:
GST Registration:
The GST registration is important because:
- Mandatory Registration: Obtain GST registration for legal compliance when involved in taxable supplies.
- Threshold Limits: Monitor turnover thresholds to determine mandatory registration.
Compliance Process:
The compliance process is as follows:
- Input Tax Credit: Account for input tax credit on business-related goods and services.
- GST Returns: File regular GST returns on time, detailing sales, purchases, and tax payments.
- Invoice Compliance: Issue GST-compliant invoices with accurate details.
Interstate Transactions:
The interstate transactions can be understood by the following:
- IGST and CGST/SGST: Apply appropriate taxes for interstate transactions – IGST or CGST/SGST.
- E-way Bills: Comply with e-way bill requirements for goods movement across state borders.
Conclusion:
Operating foreign subsidiaries in India requires a meticulous understanding and adherence to the regulatory landscape. The Companies Act, 2013, along with other relevant regulations, lays down the foundation for compliance. Foreign subsidiaries must establish robust internal processes to ensure timely and accurate filing of documents, adherence to financial and legal norms, and overall compliance with the statutory framework. Non-compliance not only attracts penalties but can also adversely impact the reputation and sustainability of the foreign subsidiary in the Indian market. As businesses continue to globalize, staying abreast of evolving regulatory requirements is imperative for the seamless operation of foreign subsidiaries in India.
