Ravindra B Jain

Introduction

Foreign Exchange Management Act, 1999 (‘FEMA’) is one of the key Indian legislations brought into force with an objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India. Reserve Bank of India (‘RBI’), which is the Apex Bank, governs FEMA and Regulations made thereunder.

In India, Foreign Direct Investment (‘FDI’) inflows have been witnessing increase every year. Similarly, Indian companies are going global by investing abroad in the recent past.

The importance of FEMA compliances is indispensable considering the fact there are penal consequences in case of non-compliances. The purpose of this article is to inculcate basic knowledge on Annual Compliances specified under FEMA for Indian Companies having FDI and for Indian entities having investments in overseas Joint Venture (‘JV’) and/or Wholly Owned Subsidiary (‘WOS’) (‘collectively referred as ODI’). The said compliances are detailed hereunder:

A. Annual Return on Foreign Liabilities and Assets:

1. In order to capture the statistics relating to FDI and ODI in a more comprehensive manner as also to align it with international best practices, the RBI has introduced the requirement to file Annual Return on Foreign Liabilities and Assets (‘FLA Return’) on or before 15 July every year.

2. FLA Return is required to be submitted mandatorily by all the India resident companies which have received FDI and/ or made ODI in any of the previous year(s), including current year i.e. who holds foreign assets or liabilities in their financial statements as on 31 March.

3. The Indian company which is under an obligation to file the FLA Return needs to download excel based utility from the RBI website. After filling in the requisite details, the Indian Company can file the FLA Return by e-mailing the same to the RBI at fla@rbi.org.in.

4. The following important aspects can be kept in mind in relation to filing of FLA Return:

  • FLA Return is expected to be filed on the basis of audited financial statements of the Indian entity. However, if the Indian company’s accounts are not audited before 15 July, then the FLA Return should be submitted based on unaudited (provisional) accounts. Subsequently, once the accounts gets audited and there are revisions from the provisional information submitted by the Indian Company, then the Indian Company is supposed to submit the revised FLA return based on audited accounts by end of September.
  • Investment made by Non Resident Indians (‘NRI’) on non-repatriation basis as per schedule 4 of the FDI Regulations is not considered as FDI and hence, the same may be considered as domestic investment in the FLA Return.
  • If the Indian company does not have any outstanding investment in respect of FDI and/or ODI as on end of the reporting year, the Company need not submit the FLA Return. Similarly, if the Indian company has not ‘received any fresh FDI and/or ODI in the latest year but the company has outstanding FDI and/or ODI, then that company is still required to submit the FLA Return every year by 15 July.
  • Partnership firms, LLPs, Branches or Trustees which are having ODI as on end of the reporting year, then the same are also required to file excel based FLA Return. These persons should send a requestmail to get a dummy CIN number which will enable them to file the Excel based FLA Return. If any entity has already got the dummy CIN number from the previous year, they should use the same CIN number in the subsequent years also.

B. Annual Performance Report:

1. An Indian Party (IP) / Resident Individual (RI) which has made an Overseas Direct Investment (ODI) has to submit an Annual Performance Report (APR) in Form ODI Part II to the AD bank by 31 December every year in respect of each Joint Venture (JV) / Wholly Owned Subsidiary (WOS) outside India

2. The due date for filing of APR has been extended from 30 June to 31 December every year. Further, the APR is required to be certified by the statutory auditor of the Indian party. Certification of APRs by the Statutory Auditor or Chartered Accountant shall not be insisted upon in the case of Resident Individuals and self-certification can be accepted in such case.

3. A copy of audited financial statements of the overseas JV/WOS (on standalone basis) in relation to which APR can also be filed along with the APR. However, it is pertinent to note that where the law of the host country does not mandatorily require auditing of the books of accounts of JV / WOS, the APR may be submitted by the Indian party based on the un-audited annual accounts of the JV / WOS provided:

  • The Statutory Auditors of the Indian party certifies that ‘the un-audited annual accounts of the JV / WOS reflect the true and fair picture of the affairs of the JV / WOS’ and
  • That the un-audited annual accounts of the JV / WOS has been adopted and ratified by the Board of the Indian party.

4. The APR cannot be submitted based on un-audited financial statements of the overseas JV/WOS except as in circumstances as mentioned above.

5. In case, multiple Indian parties and / or resident individuals have invested in the same overseas JV / WOS, the obligation to submit APR shall lie with the Indian party or resident individual having maximum stake in the JV / WOS. Alternatively, Indian parties and / or resident individuals holding stake in the overseas JV / WOS may mutually agree to assign the responsibility for APR submission to a designated entity which may acknowledge its obligation to submit the APR by furnishing an appropriate undertaking to the AD Bank.

6. It is pertinent to note that FLA Return and APR for ODI are two different returns and the same are required to be submitted by an Indian entity having ODI.

Conclusion

Non-filing of FLA Return and / or APR (as may be applicable) on or before due date will be treated as a violation of FEMA and compounding proceedings may be initiated for violation of FEMA. Hence, these compliances need to be adhered in a timely manner.

(Author can be reached at +91 22 2287 5770 /  ravindra.jain@rsmindia.in)

(Republished with Amendments)

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