Foreign Subsidiary Registration India — FDI, FEMA: Who Needs It and Who Does Not
Whether Foreign Subsidiary Registration India — FDI, FEMA applies to a given business is the first thing worth settling, and it is where most of the early questions land. The questions below are the ones raised most often in practice; the full scope of the service is on the Foreign Subsidiary Registration India — FDI, FEMA page.
Does a Chinese investor require special government approval even for a small stake?
Yes. Press Note 3 of 2020, now incorporated into the FEMA (Non-Debt Instruments) Rules, requires prior government approval for FDI from any entity in a country that shares a land border with India — China, Pakistan, Bangladesh, Nepal, Myanmar, Bhutan, and Afghanistan. This applies to any amount and any percentage stake held directly by an entity from such a country. Press Note 2 (2026) has eased one case: an investor incorporated outside those countries whose land-border beneficial ownership is non-controlling and up to 10% can invest through the automatic route, with a report to DPIIT. The rule covers direct investment and indirect investment where the ultimate beneficial owner is a national or entity from a land-bordering country. Outside that limited relaxation, even a 1% stake requires prior government approval, obtained from the concerned administrative ministry or department through the Foreign Investment Facilitation Portal administered by DPIIT, before the investment is made (the FIPB that once decided such cases was abolished in 2017).
In practice: An Indian company that received a small Chinese angel investment before 2020 may now need to address a legacy Press Note 3 compliance gap. Regularisation is through the government approval route — it can be done but takes months and requires a clear business justification. This is not a situation to discover during a due diligence exercise before a Series A.
My co-founder is a US citizen resident in San Francisco. Does their founding shareholding constitute FDI?
Yes. The FEMA NDI Rules apply to any non-resident acquiring shares of an Indian company. You must: (1) confirm the business activity is in a permitted FDI sector under auto route; (2) receive the subscription amount in the Indian company's bank account via SWIFT from the US; (3) allot shares within 60 days of receiving the funds; and (4) file Form FC-GPR with RBI within 30 days of allotment. The fact that the company is newly incorporated does not exempt the transaction.
In practice: This is among the most frequently missed compliance obligations in Indian startups. Founders assume that a founding subscription by an NRI or foreign national co-founder is a domestic matter. It is not — it is FDI from Day 1. We build the FC-GPR timeline into every incorporation engagement where a foreign co-founder is present.
What is a resident director — and can the foreign parent's nominee qualify?
Section 149(3) of the Companies Act 2013 requires every Indian company to have at least one director who has been physically present in India for not less than 182 days during the previous calendar year. For a newly incorporated company, this must be satisfied from the first year of the company's existence. A foreign national or NRI who has not met the 182-day physical presence test cannot serve as the sole director — even if they are the founder, CEO, or the foreign parent's nominee. The resident director does not need to be a shareholder or have any economic interest in the company.
In practice: Section 149(3) non-compliance is an ongoing violation that persists every year the company lacks a qualifying resident director. PNPC does not provide nominee director services (which would create a conflict with our advisory role), but we help clients identify the right person and structure the arrangement appropriately.
Can the Indian subsidiary borrow money from the foreign parent — what rules apply?
Yes — loans from a foreign parent to an Indian subsidiary constitute External Commercial Borrowings (ECB) and are governed by the RBI's External Commercial Borrowings framework, which was substantially revised with effect from 16 February 2026 by the Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026 (superseding the earlier Master Direction for new borrowings). ECBs must comply with: (1) eligible borrower and lender criteria; (2) a minimum average maturity period (standardised at 3 years, with a shorter period available to manufacturing entities within a prescribed cap); (3) pricing in line with prevailing market conditions, at arm's length where the lender is a related party such as a foreign parent; (4) end-use rules, which were eased in 2026 but still restrict real estate business and related on-lending, so confirm the end-use against the current framework before drawdown. Mandatory reporting: Form ECB to RBI through the AD bank within 7 days of entering into the loan agreement. Monthly Form ECB-2 return for outstanding ECBs above the reporting threshold.
In practice: Shareholder loans structured as informal inter-company advances without ECB compliance are a common and significant FEMA risk. We review every proposed cross-border loan structure before funds move, not after the remittance has been received.
What is downstream investment — and when does it apply to a foreign subsidiary?
, an 'Indian owned and controlled company with FDI' — into another Indian company. FEMA treats such downstream investment as indirect foreign investment. It must comply with the FDI sectoral cap and conditions applicable to the sector of the entity being invested in, as if the investment were being made directly by the foreign parent. The Indian subsidiary cannot make downstream investment in a prohibited sector. Additionally, every downstream investment that counts as indirect foreign investment must be notified to DPIIT within 30 days and reported to RBI in Form DI within 30 days of allotment. For an Indian holding company structure with FDI at the top, every downstream investment by the holding company carries FEMA compliance obligations.
In practice: Downstream investment rules catch many clients by surprise when they plan to set up an Indian holding company with FDI and have it own operating subsidiaries. The permissibility of each downstream investment depends on the sector of the operating entity — we assess this before any multi-entity structure is finalised.
What ongoing MCA annual filings does a foreign subsidiary need — same as a domestic company?
Yes — a foreign subsidiary incorporated as an Indian Pvt Ltd has exactly the same Companies Act annual obligations as any other Indian private company: AOC-4 (financial statements with notes) approximately by 29 October; MGT-7 (annual return) approximately by 28 November; ITR-6 by 31 October (30 November where a transfer pricing report is required, as it is for transactions with the foreign parent or other associated enterprises above the reporting threshold); four Board meetings per financial year with a maximum 120-day gap between consecutive meetings; AGM within 6 months of FY end; DIR-3 KYC for each director once every third consecutive financial year (by 30 June); ADT-1 if auditor changes; statutory audit mandatory regardless of turnover. Note: a foreign subsidiary does not qualify as a 'small company' under Section 2(85) of the Companies Act 2013 — that definition excludes any company that is a holding company or subsidiary company — so the simplified MGT-7A return available to small companies and OPCs does not apply; the standard MGT-7 is required. Additionally, the FEMA layer: FC-GPR within 30 days of each allotment, FLA annual return by 15 July every year, FC-TRS within 60 days of each share transfer.
In practice: The FEMA reporting layer is entirely separate from the MCA layer in terms of portal, authority, and process. We manage both as one integrated compliance calendar — not two disconnected mandates. Missing either layer has serious consequences.
Can an NRI incorporate an Indian company without being physically present in India?
Yes — the entire incorporation process can be completed remotely. An NRI requires: a valid passport apostilled by the Indian Embassy in the country of residence, foreign residential address proof notarised locally, and a DSC (Digital Signature Certificate) obtained through a 10-minute online video verification call. Share subscription by an NRI constitutes FDI under FEMA — Form FC-GPR must be filed with RBI within 30 days of share allotment. The company's registered office must be in India, and at least one director must have been physically present in India for 182 days — this person can be a trusted India-resident individual who need not hold any economic stake.
In practice: For UAE-based NRI clients, PNPC's Dubai office coordinates with our India offices so you deal with a single team across both jurisdictions. The DSC video verification is scheduled at a time convenient to you in the UAE — no travel required.
What is the UIN from the AD bank — and how is it obtained?
The Unique Identification Number (UIN) is a reference number issued by the AD bank after it has reviewed and accepted the inward foreign remittance (SWIFT wire) as a legitimate FDI transaction. The UIN is required before the company can file Form FC-GPR on FIRMS — it is a mandatory field on the FC-GPR form. To obtain the UIN, the company presents the inward remittance advice (bank debit advice or SWIFT MT103) along with the KYC documents of the foreign investor to the AD bank. The bank issues the UIN after completing its own FEMA due diligence on the remittance. This process typically takes 3–7 working days at most banks.
In practice: The UIN step is a common source of delay in the FC-GPR timeline. Initiating the UIN application immediately after the inward remittance is confirmed — not after share allotment — builds in the necessary buffer before the 30-day FC-GPR deadline expires.
My Indian subsidiary will pay royalties to the foreign parent for using its IP — what tax and FEMA rules apply?
Royalties paid by an Indian company to a foreign company for use of intellectual property (patents, trademarks, software, technical know-how) are subject to withholding tax in India under Section 195 of the Income Tax Act. The domestic withholding rate for royalties is 10% (plus surcharge and cess) under Section 115A. Under most India DTAAs, the rate is 10–15% (10% under India-UAE DTAA, 15% under India-US DTAA for royalties in general). Before remitting royalties, Form 15CA and Form 15CB from a Chartered Accountant confirming the applicable rate and tax compliance are mandatory — the AD bank will not process the remittance otherwise. From a FEMA perspective, royalties are permissible remittances under the automatic route subject to arm's length pricing under transfer pricing rules — the royalty must be a genuine arm's length payment, not a disguised profit extraction mechanism.
In practice: Royalty arrangements are a primary focus of Indian transfer pricing audits. The arm's length rate for a royalty must be supported by a comparable uncontrolled price (CUP) or cost-plus analysis. We draft intercompany licence agreements and TP documentation that anticipates audit scrutiny.
Where this sits in the wider engagement
Foreign Subsidiary Registration India — FDI, FEMA rarely arrives on its own. The statutory basis and the current requirements are set out on the Foreign Subsidiary Registration India — FDI, FEMA service page, and the related services are grouped under Business Setup.
What PNPC does
PNPC Global has practised since 1986 across India and the UAE. On Foreign Subsidiary Registration India — FDI, FEMA we take the work end to end — reviewing the facts, preparing and filing what is required, and dealing with the authority through to closure.