Striking Off an Indian Subsidiary with Pending ROC & FEMA Filings

Background

A foreign multinational group had incorporated an Indian subsidiary (“Indian Company”) to carry out business development and support activities in India. In due course, the Indian Company became dormant and had ceased to carry on any substantial business operations.

Despite the cessation of business, the Indian Company had various statutory compliances pending, including filings before the Registrar of Companies (“ROC”) and Foreign Exchange Management Act, 1999 (“FEMA”). The group therefore decided to close down the Indian Company by way of voluntary strike off and sought guidance on how the outstanding FEMA and ROC compliances could be addressed prior to closure.

Situation as on Date of Discussion

The discussion noted that:

• The Indian Company had already ceased or had virtually ceased to carry on business.

• There were no substantial business operations that the foreign group contemplated carrying out in India in the near future.

• There were certain annual filings/statements pending before the ROC and certain event based filings/statements/statutory forms.

• There were certain FEMA related filings/reporting pertaining to foreign investment, shareholding, remittances and/or historical transactions were pending.

• The Indian Company had limited assets and liabilities and the foreign parent/winding up applicant (hereinafter referred to as “foreign group”) had no desire to continue to carry on any business after closure.

The foreign group therefore wondered whether the Indian Company could be wound up by way of strike off despite the aforesaid defaults, and if so, what steps should be taken to address these defaults.

Regulatory Issues

A. Companies Act / ROC Compliance

The Indian Company’s proposals were considered in the context of closure of a company by way of voluntary strike off.

Prior to such strike off, it would be necessary for the company to cure certain defaults/arrears of filing and/or payment, including:

1. Annual accounts and returns;

2. Event based filings due before the ROC;

3. Statutory registers and records;

4. Statutory dues of all kinds including tax and other government dues;

5. Litigations, notices and proceedings;

6. Amounts owed to creditors, workmen and other stakeholders;

7. Bank balances, investments and other assets;

8. Intercompany dues and liabilities including those owed to the foreign group.

In addition, the company would need to consider if any of the circumstances specified in relation to restriction on voluntary strike off applied.

B. FEMA Compliance

Separately, the foreign group would need to consider the implications of historical defaults in regard to foreign exchange regulations.

Depending on the facts and circumstances of the case, this may entail a review of:

• Reports of foreign investment, allotment of shares, etc., in respect of incorporation;

• Allotment of shares, transfers and other transactions in securities;

• Downstream investment(s), if any;

• Remittances;

• Repatriation of inward remittances to the foreign group;

• Reporting of resident vs non-resident shareholding, if any;

• Outstanding reports to RBI or Authorised Dealer (“AD”) bank(s);

• Documentary evidence required by the AD bank or other authorities.

It should be borne in mind that strike off of the Indian Company would not, in and of itself, automatically cure defaults before RBI under FEMA, which would need to be specifically addressed.

Our Approach

It would be necessary to take a structured approach to closure of the Indian Company. The exercise would entail the following steps:

Stage 1 – Compliance Diagnostic

A historic review of compliance would be necessary to understand all outstanding matters pertaining to the Indian Company. The review would include the following areas:

·        ROC Annual filings, event based filings and other corporate actions

·        FEMA Foreign investment, allotments/transfers, remittances and reporting

·        Tax Income-tax, GST and other tax liabilities

·        Finance Bank balances, assets and liabilities

·        Corporate records Minutes, registers and other statutory documents

·        Litigation Notices, proceedings and disputes

·        Stakeholders Creditors, workmen and other statutory authorities

By way of this review, the aim would be to separate out matters that needed to be cured before strike off could be affected from those that could be cured separately at a later stage.

Stage 2 – Reconstructing Historical Records

Since certain filings had not been made, or were incomplete, there would need to be a reconstruction of the records of the Indian Company, including:

·        Incorporation Documents

·        Earlier ROC filings

·        Board and shareholder approvals

·        Audited financial statements

·        Bank records

·        Remittance records

·        Share certificates and share registers

·        Foreign group records

·        AD bank records

·        MCA master data and filing history

Such reconstruction would be essential to address ROC as well as FEMA requirements, with the latter being especially critical since documentary evidence of transactions would be necessary for regularisation.

Stage 3 – ROC Regularisation

Based on the findings of Stage 1, the company would need to address all outstanding ROC filings, including those that were delayed with the requisite additional fees, if any, and other consequences of default. As part of this, the company would need to address all defaults in filing of financial statements, annual returns/statutory reports, etc., before applying for strike off.

Stage 4 – FEMA Review and Regularisation

A separate FEMA review matrix would be necessary to capture all outstanding matters. For each transaction, the following information would need to be captured:

·        Date of transaction

·        Nature of transaction

·        Amount

·        Party to/from whom the transaction was with

·        FEMA provision/reporting requirement applicable

·        Original due date for reporting

·        Whether reporting was done

·        Documentary evidence available

·        Action still required

For each default identified, the company would need to consult with its AD bank and discuss the manner in which such default could be regularised, including any additional documentation, late fee, compounding of defaults or other action that may be required for curing such default.

It should be noted that the FEMA regularisation track would be pursued separately from the ROC strike off application, since the latter would not automatically cure defaults under FEMA.

Stage 5 – Financial Clean Up

Before closure could be contemplated, all dues to employees, creditors, government/statutory authorities, the foreign group, etc., would need to be cleared. Similarly, any tax dues, bank balances, etc., would need to be addressed. The Indian Company would need to retain documentary evidence of such clearances/settlements.

Stage 6 – Strike Off Application

Having reviewed the outstanding matters, and having ensured that the requirements for voluntary strike off were fulfilled, the company could make the relevant application for strike off before the ROC. The application would be made on the basis of the company’s actual position, including actual assets, liabilities, etc. The following documents would need to be filed/retained for the record:

·        Evidence of cessation of business

·        Settlement of liabilities

·        No continuing operations

·        Shareholder approvals, if any

·        Board approvals and declarations

·        Tax and regulatory status

·        Treatment of assets and liabilities

Challenges

Challenge 1 – Incomplete/missing ROC filings

Outcome / Deliverables

The company would need to take a structured approach to closure, which would include identifying all defaults before various regulators and addressing them. The steps taken would include, among others:

• Identifying defaults before the ROC, classifying them as those requiring regularisation and those that could be cured upon strike off.

• Completing/regularising outstanding filings before the ROC.

• Reconstructing records of transactions pertinent to foreign exchange regulations.

• Identifying any defaults before the RBI or other foreign exchange regulators.

• Engaging with the relevant AD bank/regulator to cure such defaults, if any.

• Settling intercompany dues/liabilities.

• Reviewing tax, statutory and other liabilities.

• Preparing the company for strike off in accordance with its actual position.

Accordingly, the main deliverable would be a closure roadmap, including a list of actions to be taken to address defaults before the ROC and other regulators, including:

• Evidence of cessation of business;

• Settlement of liabilities;

• No continuing operations;

• Shareholder approvals, if any;

• Board approvals and declarations;

• Tax and regulatory status;

• Treatment of assets and liabilities.

It must be emphasised that the exercise would not end with filing of the strike off application, but that all steps would need to be undertaken to ensure that there was an audit trail with regard to defaults and their cure.

Learning

1. Strike off should not be treated as a regulator override

Defaults by an inactive company need to be cured even if the company is proposed to be struck off. In other words, the fact that a company is inactive cannot be used as an excuse to avoid defaulting on statutory filings or payments. In particular, while strike off may be used as a method of closure, it is not a substitute for regularisation of defaults before various regulators.

2. Records speak louder than words

For companies with foreign shareholders, it is essential that they maintain old bank records, share records, allotment records, remittance records, as well as correspondence with banks, especially in regard to transactions that have a bearing on foreign exchange regulations.

3. Transaction by transaction FEMA review is the best approach

When it comes to addressing defaults before the RBI, a blanket approach is not advisable. On the contrary, it is preferable to go through every foreign exchange transaction (investment, allotment, transfer, remittance, etc.) and determine whether reporting of the same has been completed or not.

4. Closure needs to be treated as a project

Closure of a company needs to be treated as a project, which entails planning, organising, staffing, directing and controlling. In particular, while attention needs to be paid to the requirements of the ROC, due regard must also be paid to the requirements of the tax and other authorities.

5. It is not enough to have settled liabilities – documentation is also important

Where closure of the company is being contemplated, it is essential that all outstanding liabilities, including intercompany liabilities, be discharged/settled. However, it is also important to maintain documentary evidence of such discharges/settlements. This applies to bank records, tax records, intercompany records, regulatory filings, etc.

Conclusion

Closure of an inactive Indian subsidiary with outstanding ROC and/or FEMA filings/statutory defaults entails a multi-step process. This process needs to begin with compiling a list of all defaults, including those before the ROC and the foreign exchange regulators. In addition, defaults before other authorities (tax, banking, etc.) need to be identified and steps taken to cure them. In particular, it is necessary to make a distinction between:

• Defaults before the ROC that need to be cured before strike off can be considered; and

• Defaults before other regulators that need to be cured separately.

Having completed the abovementioned steps, the company can move on to strike off, which entails filing the relevant application in the appropriate manner. For foreign owned Indian companies, it is essential to bear in mind that curing of defaults before the ROC by way of strike off of the company would not automatically cure defaults before other regulators, including foreign exchange regulators like the RBI. Accordingly, when contemplating closure by way of strike off, foreign owned Indian companies should be aware that it is necessary to address the requirements of each regulator separately. In particular, companies should develop a compliance matrix and/or closure roadmap, which would include a list of matters that would need to be addressed for the closure to proceed.