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.

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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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7 responses to “Annual Compliances under Foreign Exchange Management Act, 1999 – An Insight”

  1. Apoorva says:

    Hi,
    A company has a Chinese WOS which is under liquidation. As per the local laws, the accounts do not need to be audited anymore.

    In this case, can we apply for an exemption from filing the APR altogether or we need to file along with unaudited accounts??

    In case the APR needs to be filed based on the unaudited accounts, do we specifically need to apply to the RBI to be allowed to file the unaudited accounts or straightaway need to file the APR?

    Please help as this is urgent.

    Thanks,
    Apoorva

  2. Smruti kini says:

    Hi Sir,
    My Company has a WOS out of india. Do we need to file APR along with FLA? we have been filling only FLA till date.

  3. DILIP KUMAR SWARNKAR says:

    Good Work sir…
    very nice and simple presentation of facts

  4. hemenparekh says:

    FDI : By any other name ?

    Many years ago , Shakespeare wrote :
    ” A Rose by any other name , would smell as sweet ”
    English-speaking Americans have turned this around to say :
    ” FDI by any other means , would work as well ”
    They are calling their FDI , ” Invest in US and get Green Card ” scheme
    Officially called , ” The EB-5 Immigrant Investor Program ” , it invites foreigners to invest in USA , through following routes :
    # ” Direct Investment Route ” , which requires,
    * Starting a new Business and creating at least 10 full time local jobs by bringing in $ 1 million
    But this process is very cumbersome
    # ” Central Investment Program ” , which requires,
    * Bringing in and investing $ 500,000 in a Government approved EB – 5 project in America
    * Get your full money back after 5 years
    * If you are lucky , you may earn 0.5 % – 1 % return every year
    In 2015 , 18,000 foreign citizens invested ( approx ) $ 9 Billion in US under these programs – peanuts compared to a total of over $ 231 billion worth of FDI in USA in 2014 . Among these were 111 Indians
    Now , I admit that no foreigner is dying to get a ” Green Card ” in India – and therefore unlikely to take advantage of a similar scheme , if we were to launch one !
    But , we can come up with a scheme that will motivate 111,000 Indians to bring in and invest $ 500 billion within ONE YEAR ! ( remember that amount siphoned out of India illegally and stashed abroad by Indians , between 2005-2015 ? )

    MY SUGGESTION :

    # NAME OF THE SCHEME :
    EB-3 Scheme ( Earn by Bring Back Black )

    # WHO CAN INVEST ? :
    Any Indian citizen who has stashed away undisclosed / illegal assets abroad

    # WHERE CAN THEY INVEST ? :
    Scheme A > Repay those loans taken from Indian Banks forming Rs 7 lakh*crore of NPA
    Willful Defaulters repaying bad loans will be spared prosecution
    No need for Govt money ( er , Tax-Payer Money ) , to bail out those banks !
    Scheme B > Invest in State-wise Infrastructure SPVs ( not Central SPVs ) , managed by Private Sector
    These will be approved by each state for implementation of the following projects within the state:
    * Roads / Bridges / Ports / Airports / Smart Cities / Dams / Lakes-Ponds for water conservation / Forestation
    * Healthcare / Education / Skills Development / Swatchh Bharat / Methane from Garbage / Digital India
    * Renewable Energy / Manufacture of Electric Vehicles / Setting up of Electric Charging Stations etc
    All such State SPVs will need to be approved by the Central Government , for which the State will need to agree
    for full cooperation in implementation of the Central River Interlinking Project

    # HOW MUCH MUST THEY INVEST ?
    No upper limit but a minimum of Rs 10 crores

    # WHAT PROTECTION FOR INVESTORS ?
    No questions asked as to the source of funds , whether brought in from abroad using official channels or
    deposits made in CASH from local lockers ! No penalty , nor any civil / criminal action against investors

    # WHAT INCENTIVE FOR INVESTORS ?
    All interest / dividends paid out by the SPV , will be tax-free for 10 years if re-invested in any other similarly
    approved SPV

    # HOW LONG CAN THEY AVAIL OF THIS SCHEME ?
    This scheme will open on 01 April 2017 and close on 31 March 2018

    # HOW CAN INDIA BENEFIT FROM THIS SCHEME ?
    * Inflow of $ 500 Billion ( Rs 34 lakh*crore ) within ONE YEAR
    * Generate 50 million jobs by 2020
    * State Governments will go all out to
    > Motivate private sector to set-up Infrastructure SPVs within their State
    > Vastly simplify government approval process
    > Eliminate / Reduce , rules , procedures and permissions
    > Introduce ” State level Incentives ” to attract those BLACK MONIES into SPVs

    I believe , with introduction of EB-3 Scheme , there will be such fierce competition between the States that India’s rank in ” Ease of Doing Business ” will jump from current 130 to within TOP FIVE !
    And all of this without having to pass any law in the Parliament – and with least dependence on beaurocrats !
    Dear Policy Makers :
    With two years already gone without making much of a dent , I urge you to stop tinkering with INCREEMENTAL IMPROVEMENTS
    Promising freebies before State Elections , won’t take you beyond 2019 !
    ———————————————————————————————————————-
    02 July 2016

  5. Nitin says:

    this post is dated 24 June 2015.. is there any update for June 2016??

  6. Bhai says:

    what is the penalty if the company has not filed Annual return for more than 5 years.

  7. Ravinder says:

    1) We are having investment in a company in Nepal
    2) Nepal accounting period is ending in July
    3) APR filing due date is 30th June every year
    4) Kindly advise whether in present case the APR filing will be 30th june following
    closing of accounting period in nepal

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