Mandatory Audit of Foreign Subsidiaries of Indian Companies

RBI has through Foreign Exchange Management (Overseas Investment) Regulations, 2022 has amended the regulations governing overseas investment by Indian Companies. The amended regulations inter alia covers the reporting requirements of the Indian Party. 

As per the Reporting Requirements under the supra mentioned regulations, the Indian company which has made Overseas Direct Investment or making financial commitment are required to report the financial commitment at the time of making the outward remittance or at the time of making financial commitment, whichever earlier.

Further, the regulations requires the Indian Company which has made investment in overseas entity through ODI shall submit Annual Performance Report (“APR”) with respect of each foreign entity every year by 31st December.

It is also required that the APR form shall be based on the audited financial statement of the overseas entity wherever the Indian Company has a control of over 10% of the voting rights or share capital. Thus, in all cases where the Indian company holds over 10% of the equity capital of the foreign company, the APR is mandatorily required to be filed based on the audited financial statements and thus, the audit of the financial statements of the foreign company becomes mandatory in all such cases.

While the regulations provides that where the Indian Company does not have control in the foreign entity and the laws of the host country do not provide for mandatory auditing of the books of accounts, the APR may be submitted based on unaudited financial statements certified by the statutory auditor or by a chartered accountant where the statutory audit is not applicable. 

The term “Control” is not defined under the regulations but the same is defined under the Foreign Exchange Management (Overseas Investment) Directions, 2022 to mean the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders’ agreements or voting agreements that entitle them to ten percent or more of voting rights or in any other manner in the entity.

Thus, from the above, it can be concluded that every Indian company having Foreign Subsidiary is required to get the books of its Foreign Subsidiary audited from a Statutory Auditor.



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