The reporting obligation applies to entities which may be legal persons or legal arrangements, such as a corporation, a trust, or a partnership etc. To determine whether an entity has a potential reporting obligation in India, it must be determined whether the entity is a Reporting Financial Institution (RFI). RFI are required to maintain and report certain information in respect of each“Reportable Account”.
RFI is defined in Rule 114F(7) to mean:-
(a) a financial institution which is resident in India, but excludes any branch of such institution that is located outside India; and
(b) any branch of a financial institution (other than a non-reporting financial institution) which is not resident in India, if that branch is located in
Financial Institution will not include Non-reporting Financial Institutions (See paragraph 2.5) even though they satisfy the above conditions.
Following Steps may be followed to determine whether a person is a RFI and thus has reporting obligations:
Figure : The steps to identify a Reporting Financial Institution
2. Step 1: Is it an Entity?
Only Entities can be RFIs. The term “Entity”would include legal persons and legal arrangements, such as corporations, partnerships, trusts, foundations and HUF. Individuals, including sole proprietorships, are therefore not RFIs.
(Ref: Page 60 of CRS and 201 of Commentary)
3. Step 2: Is the Entity a Financial Institution?
The definition of Financial Institution in the Rule 1 14F(3) classifies FIs in four different categories, namely,
3.1. Custodial Institution
Custodial Institution is defined in Explanation (a) to Rule 114F(3) to mean any entity that holds, as a substantial portion of its business, financial assets for the account of others and where its income attributable to the holding of financial assets and related financial services equals or exceeds twenty percent of its gross income during:-
Entities such as central securities depositories (CSDL and NSDL), custodian banks, brokers, and depository participants, would generally be considered Custodial Institutions.
(Ref: Page 44 of CRS and 160 of Commentary)
3.2. Depository Institution
Depository Institution is defined in Explanation (b) to Rule 1 14F(3) to mean any entity that accepts deposits in the ordinary course of a banking or similar business.
An Entity is considered to be engaged in a “banking or similar business” if, in the ordinary course of its business with customers, it regularly engages in activities such as:
(a) accepts deposits or other similar investments of funds;
(b) makes personal, mortgage, industrial, or other loans or provides other extensions of credit;
(c) purchases, sells, discounts, or negotiates accounts receivable, installment obligations, notes, drafts, checks, bills of exchange, acceptances, or other evidences of indebtedness;
(d) issues letters of credit and negotiates drafts drawn thereunder;
(e) provides trust or fiduciary services;
(f) finances foreign exchange transactions; or
(g) enters into, purchases, or disposes of finance leases or leased assets.
Savings banks, commercial banks, savings and loan associations and credit unions would generally be considered Depository Institutions.
(Ref: Page 44 of CRS and 160 of Commentary)
3.3. Investment Entity
Explanation (c) to Rule 114F(3) defines two types of investment entities:
A. Entity’s primary business consists of one or more of the following activities for or on behalf of a customer, namely:-
the gross income from such business activities has to be equal or more than 50% of the gross income over a three year period.
B. Entity’s primary income is from business of investing, reinvesting, or trading in financial assets and such entity managed by another entity that is a depository institution, a custodial institution, an investment entity or a specified insurance company and also the gross income of the entity from such business activities is more than 50% of the entities gross income over a three year period.
An Entity is “managed by” another Entity if the managing Entity performs, either directly or through another service provider, any of the activities or operations described in subparagraph A above, on behalf of the managed Entity. However, an Entity does not manage another Entity if it does not have discretionary authority to manage the Entity’s assets (in whole or part). Where an Entity is managed by a mix of Financial Institutions, NFEs or individuals, the Entity is considered to be managed by another Entity that is a Depository Institution, a Custodial Institution, a Specified Insurance Company, or an Investment Entity described in subparagraph A above, if any of the managing entities is such another entity.
Non-Banking Finance Companies (NBFCs) will be either depository institution or investment entity as per its activities. NBFC which accepts deposit in the course of a banking business or a similar business as mentioned in the definition of depository institution will be considered as Depository Institution and will report accordingly. An NBFC which is working as investment entity, will report accordingly.
It is clarified that the terms and phrases used in the definition of investment entity shall be interpreted in a manner consistent with similar language set forth in the definition of “financial institution” in the Financial Action Task Force Recommendations (as adopted in 2012).
(Ref: Page 44 of CRS and 161 of Commentary)
An investment entity established in India that is a financial institution, will be treated as Non-Reporting Financial Institution (See para 2.5), if it only
(i) renders investment advice to, and acts on behalf of; or
(ii) manages portfolios for, and acts on behalf of; or
(iii) executes trades on behalf of,
a customer for the purposes of investing, managing, or administering funds or securities deposited in the name of the customer with a financial institution other than a non-participating financial institution.
3.4. Specified Insurance Company
Specified Insurance Company is defined in Explanation (d) to Rule 1 14F(3) to mean any entity that is an insurance company (or the holding company of an insurance company) that issues, or is obligated to make payments with respect to, a Cash Value Insurance Contract or an Annuity Contract.
A “cash value insurance contract”is defined in Explanation (f) of Rule 114F(1) and it means an insurance contract (other than an indemnity reinsurance contract between two insurance companies) that has a cash value. For US Reportable account, a threshold of USD 50,000 has been provided.
Similarly, annuity contract has been defined in Explanation (e) of Rule 1 14F(1).
A single premium life insurance contract which does not permit an amount to be paid on surrender or termination of the contract and which does not allow amounts to be borrowed under or with regard to the contract, shall not constitute a cash value insurance contract.
Insurance companies that only provide General Insurance or term Life Insurance should not be Financial Institutions and neither will reinsurance companies that only provide indemnity reinsurance contracts.
(Ref: Page 44 of CRS and 165 of Commentary)
3.5. Institutions which are involved in more than one category of activity
If a reporting entity qualifies for more than one category of financial institutions [eg. (i) Depository Institution (ii) Custodial Institution] then the reporting entity should get registered for all different categories and submit different form 61B for different type of financial institutions.
There may be a situation in which one FI maintains more than one type of accounts [for example both Depository as well as Custodial account], however, the FI may qualify as only one type of financial institution. In this case, FI shall register only as one type of financial institution but will report both types of accounts.
For example, there may be one financial institution X which qualifies only as Depository Institution and maintains both depository as well as custodial accounts. . X will get registered only as Depository Institution but will report both types of accounts – depository as well as custodial accounts.
4. Step 3: Is the Financial Institution in India?
The Financial Institutions resident in India, their branches located in India and branches of Foreign Financial Institutions that are located in India are the Reporting Financial Institutions (RFIs) while Foreign Financial Institutions, their foreign branches and foreign branches of Indian Financial Institutions are not treated as RFI. A “branch”is a unit, business, or office of a Financial Institution that is treated as a branch under the regulatory regime of a jurisdiction or that is otherwise regulated under the laws of a jurisdiction as separate from other offices, units, or branches of the Financial Institution. A branch includes a unit, business, or office of a Financial Institution located in a jurisdiction in which the Financial Institution is resident, and a unit, business, or office of a Financial Institution located in the jurisdiction in which the Financial Institution is created or organised. All units, businesses, or offices of a Reporting Financial Institution in a single jurisdiction shall be treated as a single branch.
In the case of Trusts, the reporting requirement is on the Trustees resident in India, unless the required information is being reported elsewhere because the trust is treated as resident there.
(Ref: Page 44 of CRS and 158 of Commentary)
ABC Ltd. is located in India. It is having a foreign branch (S) located in a country outside India
Under the terms of the agreement:
PQR Bank incorporated in London, has a branch (T) in India.
Under the terms of the agreement, branch T is a RFI in India.
5. Step 4: Is the Financial Institution a Non-Reporting Financial Institution?
There are certain FIs which are not required to maintain or report the information. These FIs are called non-reporting financial institutions (NRFIs) and defined in Rule 1 14F(5).
The NRFI defined in the Rule are as under:
(a) a Governmental entity, International Organisation or Central Bank;
(b) a Treaty Qualified Retirement Fund; a Broad Participation Retirement Fund; a Narrow Participation Retirement Fund; or a Pension Fund of a Governmental entity, International Organization or Central Bank;
(c) a non-public fund of the armed forces Employees’ State Insurance Fund, a gratuity fund or a provident fund;
(d) an entity that is an Indian financial institution only because it is an investment entity, provided that each direct holder of an equity interest in the entity is a financial institution referred to in sub-clauses (a) to (c);
(e) a qualified credit card issuer;
(f) an investment entity established in India that is a financial institution only because it (i) renders investment advice to, and acts on behalf of; or (ii) manages portfolios for, and acts on behalf of; or (iii) executes trades on behalf of, a customer for the purposes of investing, managing, or administering funds or securities deposited in the name of the customer with a financial institution other than a non-participating financial institution;
(g) an exempt collective investment vehicle;
(h) a trust established under any law for the time being in force to the extent that the trustee of the trust is a reporting financial institution and reports all information required to be reported under Rule 1 14G with respect to all reportable accounts of the trust;
(i) a financial institution with a local client base;
(j) a local bank;
(k) a financial institution with only low-value accounts;
(l) sponsored investment entity and controlled foreign corporation, in case of any U.S. reportable account;
(m)sponsored closely held investment vehicle, in case of any U.S. reportable account.
Explanation to Rule 1 14F(5) provides further explanation of the above categories of NRFI. The definitions of the terms used such as a Governmental entity, International Organisation, Central Bank, Treaty Qualified Retirement Fund, Broad Participation Retirement Fund etc. are defined in the Rule 1 14F(5).
(Ref: Page 45 of CRS and 166 of Commentary)
6. NPS Trust as RFI
National Pension System Trust (NPS Trust) is the nodal point for co-ordination of the operations of all intermediaries and is responsible for monitoring and evaluation of all operational and service level activities of all intermediaries in accordance with the provisions of the PFRDA Act, 2013 or the regulations made or guidelines or circulars issued by the Authority. The Board of Trustees is also responsible with regard to taking of action on reports submitted by the intermediaries in order to ensure compliance with the regulations applicable to them under the National Pension System. Accordingly, the NPS Trust is the RFI and would report the information for the relevant NPS Investors.