Reporting under Foreign Exchange Management Act, 1999

A. INTRODUCTION:

 Foreign Exchange Management Act, 1999 (FEMA) is administered through the authorized persons and is based on the declarations and averments made to them by persons while undertaking the transactions. The Reserve Bank, therefore, has prescribed various reports and forms under FEMA to be submitted by/ through Authorized Persons/ Authorized Dealer Category – I Banks/ Authorized Banks. Accurate compilations and timely submission of these reports are of critical importance as they not only act as a supervisory tool but also help in fine-tuning the policies relating to foreign exchange transactions regulated under FEMA.

In this article, we have dealt with reporting requirements and the practical issues related to reporting required to be done by Indian Entities for receipt of Foreign Direct Investment.

B. IMPORTANT DEFINITIONS:

1. Foreign Direct Investment (FDI): means investment through capital instruments by a person resident outside India in an unlisted Indian company; or in 10 percent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company.

2. Capital Instruments: means equity shares, debentures, preference shares and share warrants issued by an Indian company.

Explanation:

1. Equity shares issued in accordance with the provisions of the Companies Act, 2013 shall include equity shares that have been partly paid.
2. The expression ‘Debentures’ means fully, compulsorily and mandatorily convertible debentures.
3. ‘Preference shares’ means fully, compulsorily and mandatorily convertible preference shares.
4. Share Warrants are those issued by an Indian Company in accordance with the Regulations issued by the Securities and Exchange Board of India.
5. Capital instruments can contain an optionality clause subject to a minimum lock-in period of one year or as prescribed for the specific sector, whichever is higher, but without any option or right to exit at an assured price.

3. Indian Entity: Shall mean an Indian company or an LLP.

C. PRE-REQUISITES FOR REPORTING:

All the reporting prescribed under the Act, except specifically stated otherwise, is required to be done through Single Master Form (SMF) available on the FIRMS platform at https://firms.rbi.org.in/.

1. ENTITY MASTER:

• The Indian entity which has received foreign Investment or indirect foreign investment or expects to receive it, is required to file an entity master on the FIRMS platform.
• Entity User is a person authorized by the entity to register an entity in the Entity Master of FIRMS application.
• One entity can have only one entity user. If the entity wishes to change the Entity user, it may contact RBI helpdesk at helpfirms@rbi.org.in.
• The user has to attach the authority letter in the prescribed format from the entity authorizing the person to register as the Entity User for submission of information in the Entity Master.

2. SINGLE MASTER FORM:

• FIRMS is an online platform for reporting of foreign investment in India in SMF.
• SMF is a master form for the reporting of 9 forms for foreign investment viz., FC-GPR, FC-TRS, LLP-I, LLP-II, CN, DRR, ESOP, DI, InVi.
• Business user: Business user (BU) is the applicant reporting for the transaction in Single Master form at FIRMS. A BU can use his login credentials for only the entity that has authorized him/her to report the transactions.
• BU has to select the IFSC code of the bank which would approve the eKYC and the reporting would be made in SMF.
• In case the IFSC details are changed i.e., BU wishes to submit the reporting to another branch or another bank, the entity being the same, user needs to repeat the registration process for Business user with the new IFSC code and obtain separate Login.
• At the time of registration, Authority letter and PAN Card of the individual registering as a BU has to be attached. Board Resolution is not required at the time of BU registration. Only the authority letter in the specified format is necessary.
• An Indian entity can file only one form through SMF at a given period of time. The subsequent forms can be filed once the previous form is processed and is approved/rejected.

D. REPORTING REQUIREMENTS FOR FDI:

1. Reporting Inflows: The actual inflows on account of issue of capital instruments shall be reported by the AD branch in the R-returns in the normal course.

2. Foreign Currency – Gross Provisional Return (FC- GPR):

a) The following cases/ instances/ of issue of shares / capital instruments to persons resident outside India and where such issue is reckoned as Foreign Direct Investment, shall report such issue in Form FC-GPR in the Single Master Form not later than thirty days from the date of issue of the capital instruments by an Indian company.

• An Indian Company issuing capital instruments to a person resident outside India, bonus or rights shares directly or on amalgamation/ merger with an existing Indian company.
• Capital instruments on account of a cross border merger in terms of Notification 389/ 2018 dated March 20, 2018.
• Shares against any funds payable by the Indian company to the person resident outside India.
• Sweat equity shares and shares issued upon exercise of employees stock option in terms of FEMA 20(R).
• Issue of shares on conversion of convertible notes.

Exemption: Allotment of shares under Initial Public Offer (IPO) or Qualified Institutional Placement (QIP) under the applicable SEBI Regulations need not be reported in Form FC-GPR.

b) The following documents to be submitted along with Form FC-GPR:

• A Declaration by authorized representative of the Indian Company in the prescribed format.
• A certificate form CS in the prescribed format.
• A valuation certificate or a plain paper declaration for rights issue, as the case may be.
• Copy of Memorandum of Association, if the investment is through subscription to Memorandum of Association or the Agreement/Board Resolution for Allotment, as the case may be.
• In case of Merger/ Demerger/ Amalgamation the relevant extracts to be attached
• For Rights/ Bonus issue acknowledgement letter of FC-GPR/FC-TRS, as applicable, of the original investment is to be submitted.
• Copy of Foreign Inward Remittance Certificate and KYC.

C. Other Aspects:

• The excess share application money is to be refunded within 15 days through banking channel from the date of allotment.
• In case of excess share subscription amount is remitted by the investor, the Company has to submit a declaration stating to either use the excess amount for further allotment or refund of the amount.
• If the excess share subscription amount is refunded, the Indian entity has to submit the proof of same along with Form FCGPR.
• Reasons for delay in submission if filed after 30 days of allotment, if required.
• In case the remitter of subscription amount and the investor are different, a letter from the foreign investor explaining the reasons for such remittance.
• In case of issue of convertible securities, Board Resolution attached to the Form FCGPR shall mandatorily mention the conversion price with ratio, terms and conditions of conversion and period of conversion.

3. Foreign Currency-Transfer of Shares (FC-TRS): Form FCTRS is required to be filed to the AD Bank within sixty days of transfer of capital instruments or receipt / remittance of funds whichever is earlier.

a) Form FCTRS is required to be filed

i) For transfer of Capital Instruments between:

1. a person resident outside India holding capital instruments in an Indian company on a repatriable basis and person resident outside India holding capital instruments on a non-repatriable basis; and
2. a person resident outside India holding capital instruments in an Indian company on a repatriable basis and a person resident in India.

The onus of reporting is on the resident transferor/ transferee or the person resident outside India holding capital instruments on a non-repatriable basis, as the case may be.

Exemption: Transfer of capital instruments between a person resident outside India holding capital instruments on a non-repatriable basis and person resident in India is not required to be reported.

ii. Sale of capital instruments on a recognized stock exchange by a person resident outside India has to be reported by such person.

iii. Transfer of capital instruments prescribed under the act, payment on deferred basis, shall be reported to the AD bank on receipt of every tranche of payment. The onus of reporting shall be on the resident transferor/ transferee.

iv. Transfer of ‘participating interest/ rights’ in oil fields shall be reported.

v. Form FCTRS is required to be filed by the Indian company buying back shares in a scheme of merger/ de-merger/ amalgamation of Indian companies approved by NCLT/ competent authority.

b) The following documents to be submitted along with Form FCTRS:

• Prior approval from RBI or any other regulatory approvals, wherever applicable.
• Consent letters for transfer of shares by transferor and transferee.
• A declaration by Non-resident as per the prescribed format.
• A copy of Valuation certificate and/or the transfer agreement.
• In case of sale by non-resident, acknowledgement of FC-GPR/ FC-TRS as applicable for the capital instruments being sold.
• Copy of FIRC/outward remittance certificate and KYC.
• Self-attested copy of Identity Proof of Buyer and Seller.
• Pre and Post Shareholding pattern of the Investee Company.

c) Other Aspects:

• Reasons for delay in submission of Form, if applicable to be attached to the Form.
• The Investee Company should not take on record the transfer unless the approval is given for the Form filed and a declaration of the same to be attached to the form.

4. Form Employees’ Stock Option (ESOP): An Indian company issuing employees’ stock option to persons resident outside India who are its employees / directors or employees / directors of its holding company / joint venture / wholly owned overseas subsidiary / subsidiaries shall file Form-ESOP, within 30 days from the date of issue of employees’ stock option.

5. Form Depository Receipt Return (DRR):The Domestic Custodian shall report in Form DRR, the issue / transfer of depository receipts issued in accordance with the Depository Receipt Scheme, 2014 within 30 days of close of the issue.

6. Form LLP (I):A Limited Liability Partnerships (LLP) receiving amount of consideration for capital contribution and acquisition of profit shares shall file Form LLP (I), within 30 days from the date of receipt of the amount of consideration.

7. Form LLP (II): The disinvestment / transfer of capital contribution or profit share between a resident and a non-resident (or vice versa) shall be filed in Form LLP(II) within 60 days from the date of receipt of funds. The onus of reporting shall be on the resident transferor/transferee.

8. Form InVI: An Investment vehicle which has issued its units to a person resident outside India shall file Form InVI within 30 days from the date of issue of units.

9. Form DI: An Indian entity or an investment Vehicle making downstream investment in another Indian entity which is considered as indirect foreign investment for the investee Indian entity shall file Form DI with the Reserve Bank within 30 days from the date of allotment of equity instruments.

 Note: The Indian entity making the downstream investment that is treated as indirect foreign investment for the investee Indian entity is required to bring in the requisite funds from abroad and not use borrowed funds in the domestic markets.

10. Form Convertible Notes (CN): The Indian start-up company issuing Convertible Notes to a person resident outside India shall file Form CN within 30 days of such issue. A person resident in India, who may be a transferor or transferee of Convertible Notes issued by an Indian start-up company shall report such transfers to or from a person resident outside India, as the case may be, in Form CN within 30 days of such transfer.

11. Annual Return on Foreign Liabilities and Assets (FLA):An Indian Company which has received FDI or an LLP which has received investment by way of capital contribution in the previous year including the current year, shall submit form FLA to the Reserve Bank on or before the 15th day of July of each year. The form FLA is a web based form and is to be submitted through https://flair.rbi.org.in/.

E. DELAYS IN REPORTING:

RBI introduced the concept of Late Submission Fees (LSF) vide Notification dated 7^th November 2017. The former FEMA regulations provided for compounding as the only remedy for making the default of delayed reporting good. LSF paved way for enabling systems to deal with the offences that are essentially procedural and technical in nature. For reporting entity FEMA compliances turned convenient without the need for investing time and effort involved in compounding for delayed reportings.

Authors: Prashant Jain, Co-Founder & Partner; Nisha Jhawar, Associate.

Disclaimer: The content of this article is intended to provide a general guide to the subject matter. For any queries, the authors can be reached at (i) prashant@samistilegal.in (ii) nisha@rna-cs.co.in.