In this Leading Questions piece, Sheena Ogra and Avantika Shukla address some of the key questions surrounding corporate compliances and FEMA compliance that organisations need to keep in mind in the context of fundraising and foreign investment. As India's startup and investment ecosystem continues to evolve, regulatory compliance has become far more than a post-closing formality. Any non-compliance in maintaining secretarial records or failure to undertake necessary filings with regulatory authorities can not only expose an organisation to hefty penalties but, where the organisation is looking to raise funds, can also invariably affect investor confidence, thereby causing delays in closing a transaction and, in certain instances, even affect the overall goodwill of such an organisation. Therefore, in this piece, we address the legal and practical considerations that a company should keep in mind from a compliance standpoint to minimise potential risks and strengthen its focus on being compliant before, during and after a fundraise or equity infusion.

Question: What board and shareholder approvals should a company obtain before accepting foreign direct investment (FDI)?

Answer: The first step is to check whether the proposed investment falls under the automatic route or requires prior government approval under the FDI policy and other applicable laws in India. This assessment should include evaluation of the sectoral cap, pricing requirements, investor eligibility and any sector-specific conditions. Once that is clear, the company should obtain the necessary corporate approvals. Typically, the Board approves the proposed fundraising and its key terms, authorises the execution of the transaction documents, approves the issue and allotment of securities, and takes such other actions as may be required to implement and complete the transaction. If the investment is through a preferential issue, shareholders' approval by way of a special resolution is also required, along with necessary filings with the Registrar of Companies under the Companies Act, 2013 (“Companies Act”).

Companies should also ensure they comply with FEMA pricing guidelines, obtain the necessary valuation report and, where applicable, complete the dematerialisation of their securities, as these aspects should not be left for the end of the transaction. Taking care of these approvals and compliances before closing helps avoid delays and makes the fundraising process much smoother.

Question: Following a funding round, which MCA and FEMA filings are mandatory, and what are the applicable timelines?

Answer: Post-allotment compliance should be treated as time-sensitive and not as a backend administrative step. After the allotment of shares, companies must file e-Form PAS-3 with the Registrar of Companies within 30 (thirty) days (it is pertinent to note here that, specifically in the case of preferential allotment, utilisation of funds cannot happen prior to filing the PAS-3 form). In addition to these filings, the company should also update the statutory registers and complete the necessary demat-related compliances, where applicable. Under FEMA, Form FC-GPR must be filed on the RBI FIRMS Portal within 30 (thirty) days of allotment. Depending on the transaction structure, additional filings, such as those relating to convertible notes, share transfers or downstream investments, may also be required. Delays may attract late submission fees, adjudication or compounding exposure, and often can become diligence discussion points in subsequent or future rounds of funding.

Question: Our company has missed an MCA filing deadline. What are the consequences, and can the default be regularised?

Answer: Delayed MCA filings can result in additional filing fees and, in certain cases, monetary penalties on the company and its officers. They may also become a concern during investor due diligence. In most cases, however, the default can be regularised by filing the overdue forms, paying the applicable fees and, where necessary, following the prescribed adjudication or compounding process. A practical approach would be to regularise early, document the reasons for the delay and maintain a clean compliance trail before the issue is picked up in a future diligence exercise.

Question: What corporate approvals and regulatory steps are required before implementing an ESOP scheme?

Answer: For any organisation, especially startups, an ESOP is more than an employee incentive-it is an important part of the fundraising and talent strategy. Before implementing an ESOP scheme, the company should obtain Board approval followed by shareholders' approval by way of a special resolution under the Companies Act. Once the scheme is approved, the company should maintain the prescribed registers, issue grant letters, and make the necessary disclosures. It is pertinent to highlight that founders should determine the ESOP pool carefully, as this directly affects dilution of the shareholders on a cap table during funding rounds. In addition, the ESOP scheme should be tailored to the requirements of the organisation and its employees, apart from adhering to the requirements stipulated under applicable laws. Therefore, an ESOP scheme must, apart from setting out the eligibility criteria, total pool allocation, lock-in period, vesting conditions, exercise price or formula and exercise period, also contain clearly drafted provisions pertaining to good leaver/bad leaver scenarios, including tax implications, amongst other aspects. Where options are granted to non-residents, FEMA reporting and pricing implications should also be examined separately. If the ESOP is implemented through an employee benefit trust, it must comply with the conditions prescribed under the Companies Act, including the requirement that the aggregate value of shares purchased or subscribed by the trust, together with the financial assistance provided by the company, remains within the prescribed limits.

Question: When issuing shares to a foreign investor, what is the correct sequence of corporate actions, allotment and regulatory filings?

Answer: The sequence matters because each corporate and regulatory step builds on the previous one. Companies should first confirm whether the proposed investment is permissible under the extant FDI policy, including the applicable entry route, sectoral caps, and pricing guidelines. The articles of association should also be reviewed to confirm the necessary authorisations (whether the kind of securities to be issued are allowed under the articles) and to identify any existing investor consent or pre-emptive rights/waiver requirements which may have been specifically captured. Relevant Board/shareholders' approvals and waivers from any existing investors should be obtained prior to moving ahead with the closing of the transaction documents. Appropriate Board and shareholder approvals should be obtained as a condition precedent, and at the time of the closing and as post-closing requirements.

Before the allotment, the company must ensure that the valuation report is in place. Further, eligible companies (such as those which are foreign subsidiaries or companies which do not qualify as small companies) should ensure that the ISIN has been obtained and the necessary demat arrangements are in place. Once the subscription money is received through the permitted banking channels, it is important to ensure that the KYC and inward remittance documents are available from the authorised dealer bank. Thereafter, once the securities are allotted within the prescribed timelines, statutory registers must be updated and the necessary filings completed, including Form PAS-3 with the Registrar of Companies and Form FC-GPR with the RBI. As a practical matter, these steps should be mapped into the transaction closing checklist, with responsibility and timelines assigned for each corporate action and regulatory filing, to ensure that the allotment and subsequent filings are completed within the prescribed timelines. Completing these steps in the correct order helps avoid regulatory delays and post-closing compliance issues.

Question: Which corporate secretarial records and statutory registers are typically reviewed during investor due diligence?

Answer: Investor diligence on the corporate secretarial aspect usually begins with a review of the company's incorporation and constitutional documents, Board and shareholders' minutes and resolutions, annual filings and the statutory registers maintained by the company. They typically examine statutory registers, including the register of members, directors and key managerial personnel, charges, share transfers, employee stock options, significant beneficial owners (where applicable) and related party transactions, where applicable. The review may also extend to records supporting share issuances and transfers, including share certificates, allotment records, valuation reports and demat records, as applicable. For companies that have received foreign investment, the secretarial records may also be reviewed alongside the relevant FDI-related records, including FC-GPR/FC-TRS filings and supporting documentation. For startups, ESOP records, grant letters, vesting schedules, exercise records and related demat compliance are also closely reviewed. Well-maintained records help expedite due diligence, build investor confidence and can materially shorten diligence timelines and reduce negotiation leverage issues around indemnities or closing conditions.

Question: How can startups build an effective annual corporate compliance calendar to avoid regulatory lapses?

Answer: The best approach is to treat compliance as an ongoing business function rather than a year-end clean-up exercise. Startups should maintain a compliance calendar covering annual, quarterly, and event-based obligations under the Companies Act, FEMA, and other applicable laws, together with Board meetings, annual filings, auditor- and director-related filings, maintenance of statutory registers, beneficial ownership checks, FEMA reporting, FLA return deadlines, and demat-related obligations.

The calendar should also track contractual obligations under investment documents, such as investor reporting, information rights, reserved matters, consent requirements and transfer restrictions. For a growth-stage company, having a compliance calendar is not simply compliance hygiene; it is a signal to investors that the company is organised, diligence-ready and serious about governance.

Sheena Ogra is a Partner and Avantika Shukla is a Senior Associate at Ahlawat & Associates.