In the present world, most big manufacturing companies have branch plants in different countries, and some of them are in India. Such a strategic direction lets them widen their presence in the market and receive available resources in the region. However, managing a subsidiary in India has its own legal precedents that a company has to follow as a part of standard operating procedures. This blog brings out these compliance needs and makes sure foreign entities know what is allowed under Indian laws.
Companies Act, 2013
The Companies Act 2013 is the main federal law in India that regulates companies. The roles of this Act can be described as explaining the following compliance measures as they apply to both domestic and foreign subsidiaries. Subsidiaries can be classified by the ownership, as per Section 2(42) of the Act foreign company is stated as any company that is incorporated outside India but has some place in India. S is this legal distinction crucial since it defines the law governing such institutions.
Foreign Exchange Management Act (FEMA), 1999
FEMA controls the foreign investment in India and explains how foreign funds can be accepted. Thus, the regulations should be followed by subsidiary companies in order for all the foreign investments to be legitimate and to have their papers in order. Adherence to FEMA besides in operations are also pivotal in establishing credibility in front of FEMA and almost all other state’s FEMA.
Key Compliance Requirements for Subsidiary Company
Registration and documentation
Gaining a Certificate of Incorporation
Every single subsidiary company is required to get a Certificate of Incorporation from the RoC in India. This certificate is an essential document that acts as legal evidence of the existence of the company. Some of the documents required during the application exercise include a memorandum and articles of association, as well as other details that concern the directors and the registered office address. This first step is very important because it lays down the framework upon which other business activities will take place.
Foreign Investment Approval
Foreign investment approval may be required depending on the subsidiary’s operating sector. Some industries have a restrictive policy towards allowing foreign ownership or operating under approval from the government. Refers to the FDI policy to establish what the particular directive is about Foreign Direct Investment. The lack of the necessary permits results in fines and sometimes even fines and imprisonment, as well as significant losses in sales.
Corporate Governance
Board Meetings and Minutes
The Companies Act lays down corporate governance norms to be followed and this apply to all the subsidiaries as well. This comprises regular meeting of the board and proper documentation of such meetings. The Act provides that at least four board meetings can be convened in every financial year with the interval of more than one hundred and twenty days not being allowed between two consecutive meetings. It is thus important that records of such meetings are well kept for efficiency in purposes of accountability and transparency.
Annual General Meeting (AGM)
All subsidiaries are expected to conduct an AGM annually. This meeting is held to address the financial reports, election and appointment of auditors as well as other financial statements. A written notice of AGMs should be served on all shareholders, directors and auditors at least twenty one days before the meeting is scheduled to be held. They can attract penalties or even slight doubts as to the efficiency of the company’s management if the AGMs are not held.
Financial Reporting
Statutory Audit
Each of the subsidiary companies is required to get their financial statements audited at least once in a year by a chartered accountant. The report of the auditor plays an essential role of presenting facts. As a result of this audit, one is also able to note any irregularities or recommend on how matters of management of finances should be handled.
Financial Statements to be filed
Each subsidiary shall prepare and file the annual financial statements with the RoC within 30 days from the date of the AGM. This filing has balance sheet, statement of profit and loss, statement of cash flow, and auditor’s report. It is important for such documents to be submitted on time in order to avoid penalties which may want to be associated with various controlling bodies.
Tax Compliance
Goods and Services Tax (GST)
In others words based on the turnover stated above sub alcoholic must register for GST. This registration enables them to VAT for the taxable supplies they make and pays to the right authorities thus meets the requirement of indirect tax. It is very important to be aware of GST provisions in order to keep records properly and complete returns effectively.
Income Tax
It is a legal requirement for all subsidiaries to produce income tax returns on an every year basis. They are required to keep record of accounts and are bounded by laws of transfer pricing if a transaction is done with an affiliated party. This means that subsidiary companies should pay particular attention to the ways in which they meet their tax obligations due to penalties stated in the Income Tax Act.
Regulatory Filings
Annual Return
It is mandatory for every subsidiary to send a return to the RoC within 60 days from the AGM. These returns contain information of the company’s registered office address, the nature of business activities, information regarding shareholders and directors. The failure to file annual returns correctly and within the correct time is always a big blow to the company.
Some of these events requiring filings include changes of directors, amendments to memorandum or articles of association and every major corporate event like merger, consolidation etc. It is corporate governance and compliance that call for timely update of such events to enable necessary filings.
Employment and lab or Laws
Compliance with labour Laws
The subsidiaries also work under several labour laws regulating employees’ matters, wages, working conditions, and safety laws. Some of these are the Employees’ Provident Fund act, Employees State Insurance act, and minimum wages act, among others. Appliances on the law can have various legal implications and affect the reputation of the company.
Registering with labour authority will be applicable.
Businessmen are also required to confined with the local labour departments and obtain licenses as per the number of employees and types of companies. Another form of harassment arises from labour department’s routine assessments which may also cause compliance checks, record keeping is therefore recommendable.
Challenges in Compliance
Pervasive and Continuous Legal Exemption
There are many regulatory issues that the Indian subsidiary or the parent company encounter in India and most of these are technical and therefore prove to be complicated to the foreign subsidiaries. It is a challenging task to comprehensively read, comprehend, analyse, and foresee the subtleties of national legislation and governing regulations, as well as sector-related micro-regulations that can develop or ultimately change in a given period.
Resource Allocation
Many a subsidiary may find it difficult to dedicate adequate resources to plunge into compliance functions. The problem is that some of the smaller subsidiaries may find it difficult to sustain focused compliance departments, which in turn creates chances of emerging oversights. Compliance is very vital and therefore it requires the organization to invest enough resources in its infrastructure functions.
Penalties By Non-Compliance
Penalties and Fines
Penalties for non-compliance with statutory requirements in the preparation of accounts are severe and include fines. The Companies Act outlines the measures which should be taken against different violations, moreover, they increase the sanctions for such non-observance depending on the repetition of the violation. Severe infringements can lead to criminal cases being brought against company executives.
Reputational Damage
Noncompliance with laws also has the potential to harm a company reduce relations with stakeholders and investors, and reduce customer loyalty. The public may take a long time and resources to trust an organization after defaulting on compliance, and thus affects the sustainability of business.
Legal Actions and Audits
One can get into legal stress due to failing to meet regulatory requirements or demands from the affected personalities. Compliance audits undermine others and they may well identify other problems, maximum regulatory penalties as well as reputational damage.
Conclusion
Having a subsidiary in India has its benefits for foreign companies, but simultaneously, it bears many compliance risks with India. Appreciation and compliance with these compulsory compliance requirements are essential for the promotion of subsidiary companies. Realising the importance of compliance management and cultivating it within the organizational systems, the business entities will minimise legal risks and set down the foundation for sustainable development in the Indian context.
Secondly, it can be also noted that proactive compliance strategies not only protect subsidiary from regulatory risk, but they also help to strengthen the company’s credentials in the particular country. Well, for one, regulatory changes remain constant and with growth, having knowledge of the environment in which the business will operate will be imperative in India.
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