19 June 2023
A Indian company is having 100% owned Foreign Subsidery.
There is a Loan given by HOLDING to Foreign Subsidery. Now Subsidery is sick and out of business and under liquation process in Foreign country ( as per local laws)
Need to understand the impact in HOLDING company books. a) Under what Heading Holding company have to provide in books b) Is there any pre or post restriction in FEMA / RBI Permission c) Is there any other options to mitigate the losses.
09 July 2024
In the scenario where an Indian holding company has a 100% owned foreign subsidiary that is under liquidation in a foreign country and has outstanding loans from the holding company, here are the key considerations:
### Impact on Holding Company (Indian Company):
**a) Provision in Books:** - The holding company (Indian entity) will need to account for the loan given to the subsidiary appropriately in its books. - Typically, the loan to the subsidiary would be classified as a financial asset in the holding company's books under the appropriate accounting standards (Indian Accounting Standards or IFRS, as applicable).
**b) FEMA / RBI Restrictions:** - From a FEMA (Foreign Exchange Management Act) perspective, loans given by an Indian entity to its foreign subsidiary are considered as outward remittances. - RBI (Reserve Bank of India) regulations govern such transactions, including reporting requirements and approvals for the initial loan disbursement. - In case the subsidiary is under liquidation, there might be implications related to repayment of the loan and repatriation of funds from the liquidation proceeds. - The holding company would need to comply with FEMA regulations regarding the treatment of the loan in the event of liquidation of the foreign subsidiary. This might involve reporting to the RBI and ensuring that any remittance of funds back to India complies with regulatory requirements.
**c) Mitigating Losses:** - **Legal Recourse:** Evaluate if there are any legal avenues to recover part or all of the outstanding loan through the liquidation process in the foreign country. This would involve understanding local laws and procedures related to creditor rights in liquidation. - **Insurance Coverage:** Check if the loan to the subsidiary is covered under any credit insurance policy that might mitigate losses due to default or liquidation. - **Tax Implications:** Assess the tax implications in both jurisdictions (India and the foreign country) related to the loan and liquidation proceeds. - **Strategic Considerations:** Evaluate strategic options such as renegotiating terms with creditors, if feasible, or restructuring the debt to mitigate losses.
### Steps to Take:
1. **Review Contractual Agreements:** Review the loan agreement between the holding company and the subsidiary to understand the rights and obligations in case of default or liquidation.
2. **Consult with Experts:** Seek advice from legal, financial, and tax experts who are familiar with both Indian and foreign laws to navigate through the liquidation process and optimize recovery.
3. **Compliance with Regulatory Requirements:** Ensure compliance with all regulatory requirements under FEMA and RBI for any remittances or repatriation of funds from the liquidation proceeds.
4. **Financial Reporting:** Ensure proper accounting treatment of the loan and any adjustments needed in the holding company's financial statements based on the outcome of the liquidation process.
In conclusion, while the liquidation of a foreign subsidiary presents challenges, proactive management of legal, financial, and regulatory aspects can help mitigate losses and optimize recovery within the framework of applicable laws and regulations.
CAclubindia
