APR Compliances: Auditing Obligations & Exceptions

Introduction

As India is continuously reviving its measures to encourage and attract more and more FDI, the measures to promote Indians to do business outside India by way of Overseas Direct Investments are also parallelly evolving. Motivated by objectives such as diversification, optimal utilization of production capacity, and brand enhancement, businesses venture abroad to establish a presence and unlock the full potential of their operations. ODI encompasses a spectrum of strategic financial activities involving the acquisition of unlisted equity capital or subscription within the memorandum of association of foreign entities. This extends to investments constituting ten percent or more of the paid-up equity capital in listed foreign entities, as well as investments with control even when the stake is below the ten percent threshold. Beyond benefiting the investing entities, ODI fosters economic cooperation with host countries and contributes to the branding of a country as an investor-friendly hub, establishing a mutually advantageous relationship.

Prior to the Introduction of Overseas Investment 2022- Prior to August 22nd, 2022, the regulations that dictated the reporting obligations for Indian residents making overseas investments were governed by the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004. These regulations were established through Notification No. FEMA 120/ RB-2004, dated July 7, 2004.

After the Introduction of Overseas Investment 2022- However, starting from August 22nd, 2022, new rules called the Overseas Investment Rules (OI Rules) were introduced to govern the reporting requirements for residents making overseas investments. These OI Rules outline the reporting obligations for Resident Individuals and provide comprehensive guidelines for compliance. The specific reporting requirements are detailed in the document titled “Master Direction – Reporting under Foreign Exchange Management Act, 1999”.

With the introduction of the OI Rules, the reporting framework for overseas investments by Indian residents underwent a significant change. The previous regulations were replaced by the new rules, which provide updated guidelines and instructions for reporting obligations. These rules ensure that Resident Individuals are aware of and comply with the necessary reporting requirements when making overseas investments as per the provisions of the Foreign Exchange Management Act,1999.

Table representing the Framework and Purpose of Overseas Investment, 2022

S.no	Particulars	Issued by	Purpose
1.	FEM (Overseas Investment) Rules,2022 (‘OI Rules’)	Central Government	It deals with overseas direct investment into the equity capital of the foreign entity.
2.	FEM (Overseas Investment) Regulations,       2022 (‘OI Regulations’)	Reserve Bank of India (‘RBI’)	It deals with financial commitment by Indian Resident in instruments other than Equity.
3.	FEM (Overseas Investment) Directions, 2022 (‘OI Directions’)	Reserve Bank of India (‘RBI’)	This deals with the implementation of OI Rules and OI Regulations
4.	Master Direction – Reporting under Foreign Exchange Management Act (“FEMA Reporting Master Direction”	Reserve Bank of India (‘RBI’)	This deals with reporting requirements under FEMA, including that relating to ODI.

In this article our major focus is to give a brief introduction about Annual Performance Report Form and the changes in the said Form under New OI Rules.

Any Indian individual or entity undertaking Overseas Direct Investment is obliged to file an Annual Performance Report (APR) with respect to its foreign entity based on its accounting year completed in the host country by 31st of December every year.

Under the revised Rules & Regulations, all reporting with respect to overseas investment by a person resident in India shall be made in accordance with Regulation 10 of OI Regulations through the designated AD bank as per the revised reporting forms and instructions.

These rules cover different things about filing Annual Performance Reports (APR) such as who needs to file these reports, what happens if there are many Indian investors, when the foreign company’s financial reports should be checked, and which events, apart from Overseas Direct Investment, should be mentioned in the APR. It is essential to understand some of the new rules in these regulations because the deadline to submit APRs is December 31, 2022. Knowing these changes can help avoid any unexpected problems right before the deadline.

Previously Annual Performance Report (APR) was a covered under “FORM ODI PART-II” under FEMA 120 but under the new OI Rules since the introduction of Form FC a separate form is introduced for APR i.e., “FORM APR”.

Form APR captures the change in the share-holding pattern, financial position of the foreign entity, repatriation from the foreign entity, details regarding acquisition/ setting up / winding up/ transfer of a Step-Down Subsidiary (SDS), or alteration in the shareholding pattern in the foreign entity during the reporting year in the APR.

Person Responsible to File APR in Case of More Than One Person Making an ODI

In case more than one Indian resident have made ODI, person holding higher stake in foreign entity has to submit APR. APR may be filed jointly by such persons, in case where the holding are equal.

Let us understand this with the help of an example

Certainly! Let’s say there are three individuals from India—Amit, Priya, and Raj—who have separately invested in a company called XYZ Inc. located in the United States.

• Amit holds a 40% stake in XYZ Inc.
• Priya also holds a 40% stake.
• Raj holds a 20% stake.

According to the Overseas Direct Investment (ODI) regulations in India, the person holding the highest stake in the foreign entity (in this case, both Amit and Priya with 40%) is responsible for submitting the Annual Performance Report (APR). If the holdings were unequal, the person with the highest stake would have been solely responsible for filing the APR.

However, in this scenario where there are equal holdings, Amit and Priya, the individuals with the highest stakes, would jointly file the APR for their investment in XYZ Inc. This joint filing complies with the provision that specifies when individuals have an equal stake in a foreign entity.

Circumstances Where APR Is Not Required to be Filed

However, there are certain cases as to where APR is not required to be filed:

i. a person resident in India is holding less than 10 per cent. of the equity capital without control in the foreign entity and there is no other financial commitment other than by way of equity capital; or

ii. a foreign entity is under liquidation.

iii. where a full year is not completed at the time of disinvestment the details of transactions if any that had been undertaken during the time from the date of submission of the last APR till the date of disinvestment may be duly reported in the Form FC. (Previously Form- ODI)

Audited Financial Statement of Foreign Entity:

Prior to the introduction of the new OI Rules, the Annual Performance Report (APR) could be filed based on either the Audited Financials or Unaudited Financials of the foreign entity. However, if it was filed based on Unaudited Financials, certain provisions had to be followed. These provisions are outlined below:

“If the law of the host country does not mandatorily require auditing of the books of accounts of JV / WOS, the Annual Performance Report (APR) may be submitted by the Indian party based on the Un­audited Annual Accounts of the JV / WOS provided:

a) The Statutory Auditors of the Indian party certify that the law of the host country does not mandatorily require auditing of the books of accounts of JV/WOS and the figures in the APR are as per the un-audited accounts of the overseas JV/WOS.

b) That the unaudited annual accounts of the JV / WOS has been adopted and ratified by the Board of the Indian party.

Note: – In general the Annual Performance Report cannot be submitted on the basis of Unaudited Annual Accounts of the overseas JV/WOS. The above-mentioned circumstances are an exception to the general rule”.

These provisions provide specific guidelines for cases where the host country’s laws do not require the auditing of the books of accounts of the JV/WOS. In such situations, the APR can be filed based on the Unaudited Financials, provided the conditions mentioned above are met.

Post introduction of the new Overseas Investment Rules on 22^nd August 2022 Form APR is mandatorily required to be filed on the basis of Audited Financial Statements Foreign Entity. However, there are certain exceptions where APR can be filed on the basis of Unaudited Financial Statements Foreign Entity. These exceptions are stated below.

“They are: –

(i) Where the person resident in India does not have a ‘control’ in the foreign entity and

(ii) the law of the host jurisdiction does not provide for ‘mandatory auditing’ of books of accounts

However, if APR is filed based on Unaudited Financial Statements, the unaudited financial statements of the foreign entity must be certified either by the Statutory Auditor of the Indian Entity or by a chartered accountant in cases where statutory audit is not applicable”

‘Control’ shall mean the right to appoint majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreement or voting agreement. The right is exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders’ agreements or voting agreements that entitle them to ten percent or more of voting rights or in any other manner in the entity.

The below table shows the summarized provisions of Audited Financial Statements of Foreign Entity – new Overseas Investment rules,2022:

S.NO.	Control	Whether Audit is mandatory	APR can be filled on the basis of which Financial Statements	Who can audit the financial statements
1	Yes	Yes	Audited	Foreign CA/CPA
2	Yes	No	Audited	Foreign CA/CPA/Indian CA
3	No	Yes	Audited	Foreign CA/CPA
4	No	No	Unaudited	Mandatory certificate is required by statutory auditor of Indian Entity or Indian CA where audit is not applicable to Foreign entity

Therefore, under the new OI Rules, it is generally required to file Form APR based on Audited Financial Statements of the foreign entity. However, exceptions exist where filing based on Unaudited Financial Statements is permitted, subject to the conditions mentioned above.

Penalty- Calculation of LSF

Form APR is to be submitted with AD Bank by 31^st December every year to give the financial position of the foreign entity. Delay in reporting of Form APR will result in penalty and lead to payment of Late Submission Fees of Rs. 7,500. Non filling of APR up to December 31st every year be treated as violation under FEMA, 1999.

Calculation of LSF

In conclusion, Annual Performance Reports represent a vital component of compliance within FEMA, 1999, governing overseas investments. Mastery of APR filing intricacies empowers investors to not only fulfill their legal responsibilities but also navigate international investments adeptly, securing both regulatory adherence and profitable ventures beyond India’s borders.