FEMA Compliance for Overseas Subsidiaries & JVs: Common Mistakes Found During RBI Scrutiny

When an Indian business sets up an overseas subsidiary or joint venture, the real challenge starts after the structure is created. Opening a company abroad is easy; keeping it FEMA compliant year after year is where many groups slip.

From missed filings to casual remittances, foreign subsidiaries and their Indian parents often face questions from the Reserve Bank of India (RBI) during review or inspection. The good news? Most issues are predictable and avoidable if you understand the compliance requirements, maintain a simple internal process, and take timely advice from a knowledgeable tax consultant in Gurgaon or FEMA specialist.

This guide walks you through:

• What FEMA compliance in India really means for overseas subsidiaries and JVs
• The most common mistakes found by RBI during scrutiny
• A practical FEMA compliance checklist for private limited companies and startups
• How to ensure compliance and avoid unnecessary penalties or compounding

1. FEMA Compliance Basics for Overseas Subsidiaries & JVs

Whenever an Indian company invests or lends money outside India, FEMA gets involved. The Foreign Exchange Management Act and related FEMA regulations control:

• How foreign investments are made
• What structure is allowed (equity, loan, guarantee, etc.)
• What filings and approvals are needed
• How foreign exchange transactions are monitored over time

If you have:

• A foreign subsidiary company
• A joint venture abroad
• Or any other foreign entity where the Indian parent holds a stake

…then the Indian parent is involved in foreign exchange transactions and must comply with the Foreign Exchange Management Act (FEMA) and related regulations, RBI reporting requirements, and ongoing regulatory compliance..

FEMA focuses on ensuring that all foreign exchange or cross-border dealings:

• Follow the FEMA rules notified by the Government of India and RBI
• Stay within sectoral caps and limits for foreign direct investment and overseas direct investment
• Are properly reported so that India’s foreign assets and liabilities are transparent

In simple words: if your Indian business is dealing with foreign funds, FEMA is watching.

Read more: FEMA Compliance Requirements: Everything You Need to Know [2025]

2. FEMA Compliance Requirements – What RBI Expects to See

For foreign subsidiaries in India or Indian subsidiaries outside India, some core FEMA compliance items keep coming up:

• Correct route: Automatic route vs prior approval from RBI
• Proper use of Foreign Inward Remittance Certificates (FIRC) and foreign inward remittance documentation
• Timely filing of:
• Foreign Liabilities and Assets (FLA) returns
• ODI / FDI reporting forms
• Matching of:
• Shareholding and loans as per FEMA and RBI regulations, and
• Books of accounts under company law and tax law

Any company in India that is engaged in foreign exchange flows or receiving foreign investment is expected to:

• Maintain documentation
• File on time
• And show that it has made a genuine effort to ensure FEMA compliance

This applies equally to private limited companies, listed companies, and startups receiving foreign capital.

3. Common Mistake #1 – Treating FEMA as a One-Time Event

One of the biggest issues for foreign subsidiary company structures is thinking that:

“We took advice and filed everything when we set up the subsidiary so we’re done.”

In reality, FEMA compliance for foreign subsidiaries is ongoing. RBI and FEMA guidelines expect:

• Annual compliance, like FLA returns for foreign liabilities and assets
• Changes in shareholding, additional foreign investments, or loans to be reported
• Regular updates if the structure or foreign capital changes

Foreign subsidiaries must comply not just at the time of initial investment, but throughout their life. That means:

• Each year, you should check whether all foreign exchange transactions are covered
• Any new overseas direct investment or changes in stake in the borrowing company are reported

Ignoring this often leads to compliance issues during RBI review.

4. Common Mistake #2 – Weak Documentation of Foreign Inward Remittance

For foreign investment in India (such as a subsidiary in India or foreign subsidiaries in India structure), many private limited companies don’t maintain:

• Clear FIRC copies for each foreign inward remittance
• Proper share allotment records and RBI reporting
• Matching of foreign equity holders who hold stake with what has been reported under FEMA regulations

During scrutiny, RBI expects:

• That every foreign investor or foreign subsidiary remitting money can be traced in records
• That the company must show how the money was used for business in India, not prohibited activities
• That all forms for receiving foreign investment were filed correctly

If your private limited or foreign subsidiary company cannot tie back each receipt of foreign currency to proper documentation, you’re likely to face questions.

5. Common Mistake #3 – Not Filing or Mis-filing Foreign Liabilities & Assets (FLA)

Another regular pain point is the Foreign Liabilities and Assets return.

Any eligible Indian subsidiaries or entities involved in foreign exchange that have:

• Foreign equity
• Overseas investments
• External loans, or other cross-border exposures

…are often required to file the Foreign Liabilities and Assets (FLA) return with the RBI every year.

Skipping this, or filing it casually, is a frequent error in FEMA compliance in India. Some businesses:

• Forget to update values each year
• Ignore changes in foreign capital or loans
• Don’t reconcile data with audited financials

But for RBI, FLA is central to transparency in foreign assets and liabilities. Failure to comply with FEMA reporting here can result in penalties and the need to go through compounding.

Recommended: Compounding under FEMA: Meaning, Process & 2025 Amendments

6. Common Mistake #4 – Confusing FDI, ODI, and Trade Transactions

Many Indian companies and startups receiving foreign funds mix up three very different things:

• Foreign direct investment (FDI) – foreign investor buying shares in a company incorporated in India
• Overseas direct investment (ODI) – Indian company investing equity into a subsidiary or JV outside India
• Exports and imports under FEMA – payments in foreign currency for goods and services

Each category follows different FEMA rules, guidelines for foreign exchange, and compliance requirements.

For example:

• An advance received for export is not FDI.
• A loan given to an overseas JV is not the same as buying shares under the RBI Master Direction on Overseas Direct Investment (ODI)
• Money coming from a foreign lender isn’t FDI unless it is invested as equity.

Businesses involved in international trade and foreign investment need to clearly tag each transaction in their systems to avoid mis-reporting.

Know more: Overseas Direct Investment (ODI) Under FEMA In India - 11 Key Points To Be Considered 

7. Common Mistake #5 – Ignoring FEMA for “Small” or Informal Arrangements

Some groups think FEMA applies only when amounts are huge. But even smaller foreign transactions can trigger:

• Reporting obligations
• Questions about whether you comply with FEMA regulations
• Alignment of records for tax, audit, and compliance

Typical examples:

• Indian parent casually paying expenses of a foreign subsidiary and treating it as a loan without ODI reporting
• Foreign entity paying costs on behalf of Indian company without proper classification
• Foreign funds flowing in or out without linking to the right FDI / ODI / trade category

Remember:

If your company in India is involved in foreign currency flows, you must comply with FEMA irrespective of size.

8. FEMA Compliance for Private Limited Companies and Startups

For private limited companies, especially startups receiving foreign capital or exporting services, the compliance needs under FEMA can feel overwhelming at first.

Common scenarios:

• Startup raising foreign capital from VC funds abroad
• Tech company with foreign subsidiaries for global operations
• Services company doing fema compliance for export revenues and intra-group charges

In all such cases, a compliance checklist for private limited entities helps ensure:

• Correct tagging of receipts as FDI, export, or loan
• Timely filings and forms for foreign direct investment
• Reconciling shareholding, valuation, and inward remittances

FEMA compliance for private companies is not optional; a private limited incorporated in India must comply with FEMA if it is involved in foreign exchange transactions or receiving foreign investment.

9. FEMA Compliance Checklist for Private Limited & Overseas Structures

Here’s a simplified FEMA compliance checklist for private companies with overseas linkages:

• Before Investment / Remittance
• Identify if it’s foreign direct investment, overseas direct investment, loan, or export income.
• Check whether the route is allowed under automatic route or needs prior approval.
• At the Time of Transaction
• Route all foreign exchange transactions through your Authorized Dealer (AD) banks under FEMA.
• Capture purpose codes correctly (FDI, ODI, import/export, etc.).
• Post-Transaction Reporting
• File the relevant forms with RBI / AD bank for FDI or ODI.
• Record FIRCs and bank advices for every foreign inward remittance.
• Annual Compliance
• File Foreign Liabilities and Assets returns where applicable.
• Review foreign subsidiaries data, loans, and guarantees for consistency.
• Ongoing Monitoring
• Track changes in FEMA and RBI frameworks (e.g., 2022 FEMA amendments).
• Align FEMA reporting with statutory audit and tax filings.

This is not an exhaustive list, but it gives entities involved in foreign exchange a starting point to stay compliant with FEMA.

10. FEMA, AML, and Overall Compliance Culture

In recent years, FEMA and RBI regulations are increasingly seen alongside broader AML compliance and transparency goals.

FEMA compliance ensures that:

• All foreign exchange transactions are traceable
• Foreign investments and foreign liabilities and assets are correctly recorded
• Businesses involved in international trade cannot hide flows or evade India’s foreign exchange controls

In practice, compliance in India means building a culture where:

• CFOs, finance teams, and founders know when FEMA is triggered
• Foreign subsidiaries and JVs are reviewed regularly
• You don’t wait for a notice or inspection to fix gaps

11. How to Stay Compliant and Avoid Costly Surprises

To maintain compliance and avoid future penalties or compounding:

• Create a simple internal FEMA compliance checklist for all foreign transactions.
• Involve advisors who understand FEMA and RBI rather than focusing only on tax.
• Map all foreign investments, loans, and guarantees with their underlying approvals and filings.
• Treat fema compliance for foreign subsidiaries as part of regular governance, not side paperwork.

When you ensure compliance proactively, you:

• Protect your group from failure to comply with FEMA findings during scrutiny
• Build credibility with regulators, banks, and foreign investors
• Support smoother raising foreign capital in the future

Conclusion: FEMA Compliance Is Manageable – If You Don’t Ignore It

For foreign subsidiaries, JVs, and Indian companies investing abroad, FEMA compliance is not just another tick-box task. It is the backbone that allows Indian businesses to raise funds from foreign sources, invest in foreign joint ventures, and handle foreign exchange transactions legally and confidently.

Yes, the rules can feel technical. But most compliance issues RBI finds come from simple things: missed filings, weak documentation, or confusion about the route of foreign investments. With the right systems and support, foreign subsidiaries must comply and can comply without losing sleep.

At DSRV India, we support Indian businesses, private limited companies, and overseas structures with end-to-end FEMA and RBI compliance from initial investment planning to annual returns and handling RBI queries, working alongside experienced chartered accountant firms in Gurgaon where required.

If you have an overseas subsidiary or JV, or you’re setting up a subsidiary abroad / receiving foreign capital, this is the right time to review your FEMA compliance in India and close gaps before they become RBI findings.