Your company incorporated a subsidiary overseas two or three years ago.
But the business never really took off.
There is:
- No revenue
- No employees
- No active bank account
- No meaningful business activity
- No recent transactions
So, do you still need to worry about FEMA compliance?
Yes- potentially.
One of the most common misconceptions among Indian companies is that an overseas subsidiary stops creating compliance obligations once it becomes dormant.
Under India’s overseas investment framework, the absence of fresh transactions does not automatically mean the overseas investment has disappeared from the regulatory record. If the Indian entity continues to have an outstanding overseas investment, certain reporting obligations can continue.
The important point is that FLA filing and ODI reporting are separate compliance requirements, and a company may need to address both depending on the facts of its investment. RBI specifically states that an entity with outstanding ODI as of March 31 may still have to report that position through the FLA return even if there was no fresh investment during the year.
The Biggest Mistake: “There Was No Activity, So There Is Nothing to File”
This is where many dormant overseas subsidiaries become compliance problems.
Businesses often look at compliance from a transaction perspective:
“We didn’t send any money this year, so there is nothing to report.”
FEMA compliance can work differently.
The more important question is:
Does the Indian entity still have an outstanding overseas investment or other reporting obligation?
RBI’s FLA FAQs clarify that if an entity has not made fresh ODI during the latest financial year but still has outstanding ODI as of March 31, it is required to report its outstanding position in the FLA return.
That means a dormant subsidiary can remain relevant for FEMA purposes even when its operations have effectively stopped.
What Happens to an Overseas Subsidiary After It Becomes Dormant?
Suppose an Indian company incorporated a wholly owned subsidiary in Singapore, the UAE, the UK or the US.
The Indian company invested ₹25 lakh into the subsidiary.
The subsidiary subsequently stopped operating.
There is no revenue, no employee and perhaps even no operational bank account.
The investment, however, has not necessarily ceased to exist merely because the business has become dormant.
Until the overseas investment is appropriately transferred, divested, liquidated, written off or otherwise regularised in accordance with the applicable FEMA framework and host-country law, the Indian company’s overseas investment position needs to be examined.
The current overseas investment framework is governed principally by the Foreign Exchange Management (Overseas Investment) Rules, 2022, the Foreign Exchange Management (Overseas Investment) Regulations, 2022, and RBI’s Overseas Investment Directions/Master Direction.
FLA Return: Why a Dormant Subsidiary Can Still Trigger Annual Filing
The Annual Return on Foreign Liabilities and Assets (FLA) is one of the most frequently misunderstood FEMA filings.
RBI’s FLA FAQ states that entities which have made overseas investment and continue to have an outstanding ODI position as of the end of March are required to report that position.
The FLA return is generally due by July 15 every year. RBI also states that failure to submit the return by the due date is treated as a FEMA violation and may attract the applicable consequences.
Example
Imagine:
2023: Indian company invests in an overseas subsidiary.
2024: Subsidiary becomes inactive.
2025: No transactions take place.
2026: Subsidiary still exists and the investment has not been formally closed.
The absence of transactions in 2025 or 2026 does not, by itself, answer the question of whether FLA reporting is required.
If ODI remains outstanding as of March 31, the Indian entity needs to examine and, where applicable, report its outstanding position.
RBI expressly distinguishes between fresh investment during the year and an outstanding investment position.
FLA Return and APR Are Not the Same Thing
This is another critical point.
Many businesses assume:
“We filed the FLA return, so our ODI compliance is complete.”
Not necessarily.
RBI specifically states that the FLA return and the Annual Performance Report (APR) are two different returns monitored by different RBI functions. Where applicable, both obligations have to be considered separately.
Therefore, an ODI compliance review should not stop after checking whether FLA returns were filed.
You should also review the ODI reporting trail, including the applicable Annual Performance Report (APR) requirements and the records maintained with the designated Authorised Dealer bank.
The current RBI Overseas Investment framework continues to provide for reporting and compliance obligations connected with overseas investments.
Does Having No Overseas Bank Account Remove FEMA Compliance?
No.
A foreign subsidiary does not become irrelevant under FEMA merely because its bank account has been closed or it never maintained an active bank account.
The relevant issue is not simply:
“Does the subsidiary have money in a foreign bank account?”
The more important questions are:
- Was an overseas investment made?
- Is the investment still outstanding?
- Was the investment properly reported?
- Were applicable ODI forms and filings completed?
- Were APRs filed where required?
- Were FLA returns filed?
- Does the foreign entity still legally exist?
- Has it been dissolved, liquidated or divested?
- Are there any pending amounts, receivables, liabilities or assets?
- Is the entity still engaged in a bona fide business activity?
A bank account is only one part of the overall picture.
What About the “Bona Fide Business Activity” Requirement?
The overseas investment framework does not treat overseas subsidiaries as mere paper vehicles.
RBI’s current Overseas Investment Master Direction provides that overseas investment may be made in a foreign entity engaged in a bona fide business activity, subject to the applicable framework.
This does not mean that every dormant subsidiary is automatically an unlawful shell company.
A business can legitimately become inactive because of:
- A failed expansion plan
- Change in commercial strategy
- Funding difficulties
- Regulatory restrictions
- Market conditions
- Merger or restructuring
- A planned exit
- Temporary suspension of operations
However, prolonged inactivity combined with poor documentation, missing filings and an unclear purpose for the overseas entity can create additional regulatory questions.
The solution is therefore not to label every dormant subsidiary a “shell company.”
The solution is to document what happened and regularise the FEMA position.
Can a Dormant Overseas Subsidiary Create Section 37A Risk?
This needs to be understood carefully.
Section 37A of FEMA is not triggered simply because a foreign subsidiary is dormant or because an FLA return was missed.
Section 37A deals with specific circumstances involving foreign exchange, foreign security or immovable property situated outside India where the statutory conditions relating to contravention of Section 4 are met. The provision allows the competent authority to take action concerning equivalent value in India, subject to the statutory framework. FEMA also provides for penalties in relevant cases.
Therefore, it would be incorrect to tell every company with a dormant overseas subsidiary:
“Your dormant subsidiary automatically creates Section 37A exposure.”
That is not the right legal analysis.
However, a dormant overseas structure with unexplained foreign assets, historical FEMA irregularities, missing documentation or potentially contravening transactions deserves a proper FEMA review.
Section 37A is therefore better understood as a serious enforcement risk in appropriate cases, rather than an automatic consequence of dormancy.
The Real Risk: Letting the Compliance Gap Compound
The bigger practical problem is often not the dormant subsidiary itself.
It is the accumulation of unresolved compliance issues.
For example:
Year 1: FLA filing missed.
Year 2: No review is conducted.
Year 3: APR/ODI records are also found to be incomplete.
Year 4: The company decides to close the overseas subsidiary but discovers that historical records do not match.
Year 5: The company needs the overseas investment documents for an audit, restructuring, sale, financing transaction or due diligence.
What was originally a simple filing issue can now become a historical FEMA regularisation exercise.
That is why dormant overseas subsidiaries should be reviewed before they become a problem during an audit, transaction, investment round or regulatory enquiry.
What Should an Indian Company Do With a Dormant Overseas Subsidiary?
There are generally three broad approaches.
1. Keep the Subsidiary and Regularise Compliance
If the company genuinely intends to retain the overseas subsidiary, it should review:
- ODI transaction history
- FLA filing history
- APR filing history, where applicable
- AD bank records
- Foreign entity financial statements
- Shareholding documents
- Investment value
- Outstanding receivables/payables
- Host-country corporate status
- FEMA reporting acknowledgements
Missing filings should then be addressed through the appropriate regulatory process.
2. Exit, Liquidate or Divest the Subsidiary
If the overseas company has no commercial purpose anymore, continuing to maintain it indefinitely may make little business sense.
The company can explore the appropriate divestment, liquidation, winding-up or closure route, depending on the jurisdiction, investment structure and FEMA requirements.
The exit should not be treated as simply “closing a foreign company.”
The Indian-side FEMA trail also needs to be closed properly.
3. Restart Genuine Business Operations
Sometimes the subsidiary was dormant because the original business plan was delayed.
If the company genuinely intends to revive the entity, it should document:
- Business purpose
- Funding plan
- Commercial activity
- Expected revenue
- Local operations
- Management structure
- Applicable host-country registrations
- Ongoing FEMA compliance
The objective should be to ensure that the overseas structure has a genuine commercial purpose and a defensible compliance record.
Can Missing FLA Returns Be Regularised?
Potentially, yes – but the correct route depends on the nature, period and circumstances of the non-compliance.
RBI provides a mechanism for Late Submission Fee (LSF) for certain delayed FEMA reporting, subject to the applicable framework and eligibility.
For other FEMA contraventions, compounding may be relevant.
These mechanisms should not be treated as interchangeable.
A company should first determine:
- What exactly was missed?
- Which financial years are affected?
- Was the original ODI compliant?
- Was the investment correctly reported?
- Are FLA returns missing?
- Are APRs missing?
- Is there any other FEMA contravention?
- Is LSF available for the particular delay?
- Is compounding required or appropriate?
- Has any regulatory or enforcement proceeding already started?
The correct remediation strategy depends on these facts.
A Practical FEMA Checklist for a Dormant Overseas Subsidiary
If your company has an overseas subsidiary that has been inactive for years, start with this checklist:
ODI Compliance Checklist
Investment
- When was the overseas investment made?
- How much was invested?
- Was it equity, debt or another form of financial commitment?
- Was the transaction reported through the designated AD bank?
FLA
- Was the FLA return filed every applicable year?
- Does the reported value reconcile with the company’s books?
- Are any years missing?
APR
- Was the applicable Annual Performance Report filed?
- Are historical APR records available?
- Do the APR figures reconcile with the overseas entity’s accounts?
Corporate Status
- Does the foreign subsidiary legally exist?
- Is it active, dormant, struck off or under liquidation?
- Does it have a bank account?
- Does it have assets or liabilities?
FEMA Closure
- Is the company planning to retain, revive, sell or close the subsidiary?
- Are any approvals or AD bank processes required?
- Is there a potential FEMA contravention requiring regularisation?
Documentation
- ODI forms
- AD bank correspondence
- Remittance records
- Share certificates or equivalent evidence
- Foreign financial statements
- FLA acknowledgements
- APR acknowledgements
- Corporate records
- Closure/liquidation documents
What Happens If You Ignore the Problem?
Ignoring a dormant overseas subsidiary does not necessarily make the compliance issue disappear.
It can make future transactions more difficult.
For example, when the company later wants to:
- Sell the overseas subsidiary
- Shut down the foreign company
- Transfer the investment
- Raise institutional funding
- Undergo a due diligence exercise
- Complete a merger or restructuring
- Respond to an RBI query
- Explain an overseas asset during an investigation
the historical FEMA record may suddenly become important.
A clean exit is generally easier when the company knows what it owns, what it reported and what remains outstanding.
The Bottom Line
A dormant overseas subsidiary is not automatically a FEMA violation.
But it should never be treated as “nothing to report” without checking the underlying ODI position and applicable reporting requirements.
If the Indian company still has outstanding ODI, the FLA obligation may continue. RBI also makes clear that FLA and APR are separate compliance requirements where applicable.
And while Section 37A is not automatically triggered by dormancy or an FLA filing lapse, unexplained overseas assets and serious FEMA contraventions can create significantly greater regulatory exposure.
The safest approach is simple:
Review the dormant overseas subsidiary. Reconcile the ODI records. Check FLA and APR history. Determine whether the entity should be retained or closed. Then regularise the FEMA position before the issue becomes more complicated.
Frequently Asked Questions
1. Does a dormant overseas subsidiary still require FLA return filing?
It can. If the Indian entity has outstanding ODI as of March 31, RBI’s FAQ indicates that the outstanding position may need to be reported through the FLA return even if there was no fresh ODI during the year. The FLA return is generally due by July 15.
2. Does no bank account mean there is no ODI compliance?
No. The existence or absence of a foreign bank account does not by itself determine whether ODI compliance exists. The investment position, reporting history and status of the foreign entity must be reviewed.
3. Is FLA filing the same as APR filing?
No. RBI expressly states that FLA and APR are separate returns. Where applicable, an entity may have to comply with both.
4. Is every dormant overseas subsidiary a shell company?
No. Dormancy alone does not establish that an overseas entity is a shell company or that an FEMA contravention has occurred. The company’s original purpose, actual activity, documentation and regulatory compliance must be examined.
5. Does a missed FLA return automatically trigger Section 37A?
No. Section 37A has specific statutory conditions and should not be treated as an automatic consequence of a missed FLA return. Its application depends on the underlying facts and the nature of the alleged contravention.
6. Can an old FEMA non-compliance be corrected?
Depending on the nature of the issue, correction may involve delayed reporting/LSF, compounding or another regulatory process. The appropriate route depends on the specific contravention and its history.
7. Should we close a dormant overseas subsidiary?
Not automatically. The decision depends on whether the company has a continuing commercial purpose for the entity, the host-country legal position and the FEMA implications of retaining, divesting or liquidating it.
8. What should I do if several years of FLA or ODI compliance are missing?
Do not simply start filing current-year returns without first reconstructing the historical position. Obtain the company’s ODI records, AD bank records, financial statements and previous RBI filings and have the complete FEMA compliance history reviewed.
Need Help With a Dormant Overseas Subsidiary?
If your company has an overseas subsidiary that has been inactive for years, do not wait until an RBI query, transaction or due diligence exercise forces the issue.
Femabide Advisorz provides FEMA advisory and compliance support covering ODI, FLA returns, APRs, RBI permissions and FEMA compounding.
For a review of your dormant overseas subsidiary and its FEMA compliance position:
Important Disclaimer
This article is for general informational purposes only and should not be treated as legal, tax or regulatory advice. The FEMA position of a dormant overseas subsidiary depends on the specific investment structure, transaction history, reporting records and applicable regulations. Obtain professional advice before taking action.
