RBI Compliances under FEMA Regulations

In this article, i have explained important event based FEMA Compliances under FDI Norms by the Indian entities.

All the reporting under FEMA Act, 1999 except specifically stated otherwise, is required to be done through the Single Master Form (SMF) available on the FIRMS platform at https://firms.rbi.org.in.

For the purpose of reporting in the SMF, an 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. The procedure for filing the entity master is available on the website www.rbi.org.in.

Important Definitions:

• Investment on repatriation basis means an investment, the sale/ maturity proceeds of which are, net of taxes, eligible to be repatriated out of India. The expression investment on non-repatriation basis may be construed accordingly.

• Foreign Venture Capital Investor’ (FVCI) means an investor incorporated and established outside India and registered with Securities and Exchange Board of India under Securities and Exchange Board of India (Foreign Venture Capital Investors) Regulations, 2000.

• A convertible note is an instrument issued by a start-up company evidencing receipt of money initially as debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of such startup company, within a period not exceeding five years from the date of issue of the convertible note, upon occurrence of specified events as per the other terms and conditions agreed to and indicated in the instrument.

• Investment Vehicle is an entity registered and regulated under relevant regulations framed by SEBI or any other authority designated for the purpose. For the purpose of Schedule 8 of FEMA 20(R), an Investment Vehicle is a Real Estate Investment Trust (REIT) governed by the SEBI (REITs) Regulations, 2014, an Infrastructure Investment Trust (InvIt) governed by the SEBI (InvIts) Regulations, 2014 and an Alternative Investment Fund (AIF) governed by the SEBI (AIFs) Regulations, 2012. It does not include a Venture Capital Fund registered under the erstwhile SEBI (Venture Capital Funds) Regulations, 1996.
• Capital Instruments’ means equity shares, debentures, preference shares and share warrants issued by the Indian company.

• Equity shares: Equity shares are those issued in accordance with the provisions of the Companies Act, 2013 and will include partly paid equity shares issued on or after July 8, 2014.
• Share warrants: Share warrants issued on or after July 8, 2014 will be considered as capital instruments.
• Debentures: ‘Debentures’ means fully, compulsorily and mandatorily convertible debentures.
• Preference shares: ‘Preference’ shares means fully, compulsorily and mandatorily convertible preference shares.
• Non-convertible/ optionally convertible/ partially convertible preference shares issued as on and up to April 30, 2007 and optionally convertible/ partially convertible debentures issued up to June 7, 2007 till their original maturity are reckoned to be FDI compliant capital instruments.
• Non-convertible/ optionally convertible/ partially convertible preference shares issued after April 30, 2007 and optionally convertible/ partially convertible debentures issued after June 7, 2007 shall be treated as debt and shall require conforming to External Commercial Borrowings guidelines, compliance of which is discussed below in this article.

Note: The capital instrument has to be issued by the Indian company within sixty days from the date of receipt of the consideration.

The reporting formalities for foreign investment are given below:

• Reporting for issue of Capital Instruments:
  

Foreign Currency – Gross Provisional Return (Form FC- GPR): An Indian company issuing capital instruments to a person resident outside India, and where such issue is reckoned as Foreign Direct Investment under FEMA Regulations, shall report such issue in Form FC-GPR in the Single Master Form. 

Time limit for filing of FC-GPR: within 30 days from the date of issue of the capital instruments. 

The following cases / instances of issue of shares / capital instruments to persons resident outside India by an Indian company will require filing of Form FC-GPR: 

• Bonus or rights shares directly or on amalgamation/ merger with an existing Indian company;
• Capital instruments on account of a cross border merger;
• 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;
• Issue of shares on conversion of convertible notes by the Indian company to the person resident outside India;
• Issue of shares on conversion of convertible notes.

Note: 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.

• Reporting for Transfer of shares

Foreign Currency-Transfer of Shares (FC-TRS): 

Applicability for filing of FC-TRS

Form FCTRS is required to be filed for transfer of capital instruments between:

• 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

• a person resident outside India holding capital instruments in an Indian company on a repatriable basis and a person resident in India,

Note: 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.

Non applicability for filing of FC-TRS: 

• Transfer of capital instruments between a person resident outside India holding capital instruments on a non-repatriable basis and person resident in India.

The following are the instances where an Indian company will require filing of Form FC-TRS:

• Sale of capital instruments on a recognized stock exchange by a person resident outside India.
• Transfer of capital instruments viz., payment on deferred basis, shall be reported in Form FC-TRS to the AD bank on receipt of every tranche of payment. The onus of reporting shall be on the resident transferor/ transferee;
• Transfer of ‘participating interest/ rights’ in oil fields;
• buying back shares in a scheme of merger/ de-merger/ amalgamation of Indian companies approved by NCLT/ competent authority;

Time limit for filing of FCTRS: within sixty days of transfer of capital instruments or receipt/ remittance of funds, whichever is earlier.

• Reporting of conversion of External Commercial Borrowing (ECB )into equity

Details of issue of shares against conversion of ECB have to be reported to the Regional Office concerned of the Reserve Bank, as indicated below:

• In case of full conversion of ECB into equity, the company shall report the conversion in Form FC-GPR as well as in Form ECB-2.

Time limit: within seven working days from the close of month to which it relates.

• In case of partial conversion of ECB, the company is required to report the converted portion in Form FC-GPR as well as in Form ECB-2 clearly differentiating the converted portion from the non-converted portion.

• Reporting of ESOPs and sweat equity shares (Form ESOP):

An Indian company issuing employees’ stock option (ESOP) 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.

Time Limit: within 30 days from the date of issue of ESOPs.

• Annual Statement shares allotted to Indian employees/ Directors under ESOP Schemes : This statement is required to be submitted to the Central Office of the Reserve Bank of India by the Indian Company through its AD bank.

• Annual Statement of shares repurchased by the issuing foreign company from Indian employees/ Directors under ESOP Schemes –: This statement is required to be submitted to the Central Office of the Reserve Bank of India by the Indian Company through its AD bank.

• Reporting of ADR/GDR Issues (Form DRR):

The domestic custodian shall report the issue/ transfer of sponsored/ unsponsored depository receipts as per DR Scheme 2014 in Form DRR.

Time Limit: within 30 days of close of the issue/ program.

• Reporting of 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(s) including the current year, shall submit form FLA.

Time Limit: FLA shall be sent by e-mail to the Reserve Bank on or before the 15th day of July of every year.

Explanation: Year for this purpose shall be reckoned as April to March.

• Annual Performance Report

An Indian Party and Resident individual which has made direct investment abroad is required to submit to the Reserve Bank every year, an Annual Performance Report (APR) in Part II of Form ODI in respect of each Joint Venture or Wholly owned subsidiaries incorporated outside India.

Time Limit: on or before December 31 of Every year

• Reporting requirements of Limited Liability Partnerships (LLPs):

• Form FDI- LLP (I): LLPs receiving amount of consideration for capital contribution and acquisition of profit shares is required to submit a report in Form Foreign Direct Investment-LLP (I).

Time Limit: within 30 days from the date of receipt of the amount of consideration.

• Form FDI- LLP (II): LLPs shall report disinvestment/ transfer of capital contribution or profit share between a resident and a non-resident (or vice versa) in Form Foreign Direct Investment-LLP (II).

Time Limit: within 60 days from the date of receipt of funds.

• Reporting of issue or transfer of Convertible Notes (Form CN)

• A startup company issuing Convertible Notes (CNs) to a person resident outside India shall file Form CN.

Time Limit: within 30 days of issue.

• Transfer of Convertible Notes of a startup company by way of sale between a person resident in India and a person resident outside India shall be reported by the transferor/transferee, resident in India, in Form CN.

Time Limit: within 30 days of such transfer

• Reporting of Foreign Portfolio Investment

Investment other than by NRIs/ OCIs

• Reporting Form LEC (FII): The AD banks have to ensure that the FPIs registered with SEBI who are investing under schedule 2 of FEMA 20(R) and all investment (other than that made by NRIs/ OCIs) which is considered as Foreign Portfolio Investment within the meaning of FEMA Regulations is reported in Form LEC(FII).

• Reporting Form FC-GPR: The Indian company which has issued shares to FPIs which is considered as FDI under FEMA Regulations shall be reported in Form-FCGPR.

Investment by NRIs/ OCI

The designated link office of the AD bank shall furnish to the Reserve Bank, a report on a daily basis, for their entire bank, investments made by NRIs/ OCIs which is considered as Foreign Portfolio under FEMA Regulations.

• Downstream Investment (Form DI):

Meaning of Downstream Investment:

Downstream investment is investment made by an Indian entity which has total foreign investment in it or an Investment Vehicle in the capital instruments or the capital, as the case may be, of another Indian entity.

If the investor company has total foreign investment in it and is not owned and not controlled by resident Indian citizens or is owned or controlled by persons resident outside India then such investment shall be “Indirect Foreign Investment” for the investee company.

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 company under FEMA Regulations shall file form DI with the Reserve Bank.

Time Limit: within 30 days from the date of allotment of capital instruments.

• Investment by Foreign Venture Capital Investor (FVCI)

• Investment in capital instruments by FVCIs is required to be reported in Form FC-GPR;

• Transfer of capital instruments between an FVCI and a person resident in India is required to be filed in Form FC-TRS.

• External Commercial Borrowing (ECB)

Indian companies are allowed to access funds from abroad in the following methods:

1. External Commercial Borrowings (ECB)
2. Foreign Currency Convertible Bonds (FCCBs)
3. Preference shares
4. Foreign Currency Exchangeable Bonds (FCEBs)

ECB can be accessed under two routes, viz., (i) Automatic Route; and (ii) Approval Route.

The reporting requirements are given below:

1. Application for raising ECB under the Approval Route and for allotment of Loan Registration Number (LRN) for ECB – Form ECB;

1. Reporting of actual transactions of ECB – ECB 2 Return;

• Form for reporting of details of Trade Credit – Form TC;

1. Statement on Guarantee/ Letter of Undertaking/ Letter of Comfort issued by AD banks in respect of Trade Credit;

Time limit: within seven working days from the close of month to which it relates.

• Immovable Property (Form IPI)

A person resident outside India who has established a branch, office or other place of business in India for carrying on any activity, excluding a liaison office, and acquires any immovable property in India, which is necessary for or incidental to carrying on such activity, is required to file with the Reserve Bank, a declaration in the form IPI,

Time limit: within ninety days from the date of acquisition of immovable property.

• Overseas Direct Investment (ODI)
  

• Overseas investments (or financial commitment) in Joint Ventures (JV) and Wholly Owned Subsidiaries (WOS) have been recognised as important avenues for promoting global business by Indian entrepreneurs.

The reporting formalities are given below:

• Form ODI: An Indian Party and a Resident Individual making an overseas investment is required to submit form ODI.

• Trade
  

• EDF Form: Export Declaration Form (EDF) is used to declare export of goods from Non-EDI ports.

• Softex form: All software exporters are required to file single as well as bulk SOFTEX form in excel format to the competent authority for certification.

• Advance Payments against Long term Exports: AD Category- I banks can also allow exporters having a minimum of three years’ satisfactory track record to receive long term export advance up to a maximum tenor of 10 years to be utilized for execution of long term supply contracts for export of goods subject to conditions specified.

Receipt of such advance of USD 100 million or more should be immediately intimated to the Trade Division, Foreign Exchange Department, Central Office, Reserve Bank of India.

• Follow-up of Overdue Bills: With operationalization of EDPMS on March 01, 2014, realization of all export transaction for shipping documents after February 28, 2014 should be reported in EDPMS at https://www.edpms.rbi.org.in.

• Guarantees

The reporting requirement in case of guarantees are listed below:

A non-resident can guarantee fund and non-fund based facilities availed by one resident from another.

Authorized Dealer Category-I banks are required to furnish such details by all its branches, in a consolidated statement, during the quarter, to the Chief General Manager, Foreign Exchange Department, ECB Division, Reserve Bank of India (and in MS-Excel file through email).

Time Limit: within 10th day of the following month.

Conclusion

Non-filing of applicable forms/returns on or before due date will be treated as a violation of FEMA Regulations and heavy penalties may be imposed by RBI. Hence, these compliances need to be adhered in a timely manner.

(Author can be reached at csrohitparmar@gmail.com)