Introduction
With the continued globalization of Indian businesses and increasing cross-border investments, regulatory compliance under the Foreign Exchange Management Act, 1999 (FEMA) has become a focal point for corporates and individuals engaging in international transactions. Recognizing the need for a facilitative compliance framework, the Reserve Bank of India (RBI) introduced the concept of Late Submission Fees (LSF) a move aimed at simplifying the process of regularizing procedural defaults without resorting to the more formal and time-consuming compounding route.
Initially introduced via RBI’s notification dated 7 November 2017 for foreign investment reporting defaults, this mechanism was later extended to cover External Commercial Borrowings (ECBs) from 16 January 2019, and subsequently to Overseas Investments (OI) from 22 August 2022.
Late Submission Fees Framework
On September 30, 2022, the RBI released a consolidated circular, introducing a uniform structure for imposing LSF across various reporting categories including foreign investments, ECBs, and overseas investments. This move sought to harmonize the compliance ecosystem and provide clarity on penalties associated with delayed filings.
Standard LSF Charges
The LSF is structured as follows:
- Base Fee: ₹7,500 for procedural delays.
- Variable Component: An additional amount calculated as 0.025% × A × n, where:
- A = Amount involved in the delayed reporting
- n = Number of years of delay (rounded upward to the nearest month and expressed up to two decimal places)
This structure applies to a wide range of forms including Form FC-GPR, FCTRS, APR, OPI, ECB returns, and several others under the FDI and OI regulations. This facility can be availed within a maximum period of three years from the due date of submission or filing,
Regularising Past OI defaults – A Sunset deadline
Effective August 22, 2022, a facility was introduced under the Foreign Exchange Management (Overseas Investment) Regulations, 2022, to regularize defaults under the Overseas Investment regime. The regulations also provide an option to avail the Late Submission Fee (LSF) mechanism for past defaults under the erstwhile Overseas Direct Investment (ODI) framework. This window for regularizing past defaults will remain open for a period of three years from the date of notification, i.e., until August 22, 2025 (the sunset date). As per the Overseas Investment Regulations, the following types of defaults can be regularized under this facility:
- Delay in filing Form FC (Foreign Currency Form) for overseas investment
- Failure to submit proof of investment (e.g., share certificates) within the prescribed timeline.
- Non-filing of the Annual Performance Report (APR) as required under the regulations.
- Non-filing of the Foreign Liabilities and Assets (FLA) return within the stipulated due date. Non-reporting or delayed reporting of disinvestment/divestment from a foreign entity.
- Failure to report changes in the structure of foreign entity (e.g., change in name, business activity, etc.).
- Failure to report financial commitments made by way of guarantees, loans, or performance commitments.
- Failure to repatriate disinvestment proceeds or dividends within the prescribed timelines.
- Delay in intimating closure of foreign JV/WO
- Delay in reporting reinvested earnings in the foreign entity
These defaults are eligible to be rectified under the LSF mechanism or other regularization routes provided under the new regime, up to the sunset date of August 22, 2025.
Missed the LSF Deadline? Prepare for FEMA Compounding Procedures
The LSF mechanism is an optional and expedited alternative to the formal compounding process. It allows applicants to address eligible reporting delays without undergoing the more rigorous compounding proceedings, thereby facilitating quicker compliance. However, compounding remains a parallel and permanent remedy under FEMA. Applicants may choose to proceed directly with compounding at any time. Importantly, after the sunset date of August 22, 2025, the LSF option will no longer be available, and compounding will be the sole mechanism for regularizing outstanding contraventions.
When Compounding Is the Only Option
The following contraventions cannot be regularized through the LSF mechanism and must be addressed through the compounding process:
- Procedural delays eligible under LSF but not regularized before the sunset date
- Incorporation of a foreign entity without remitting funds through authorized banking channels
- Capital infusion through cash, informal channels, or third-party remittances (e.g., friends/relatives)
- Book-entry based capital contributions without actual fund transfer
- Making investments without requisite RBI or government approvals
- Investments in prohibited sectors or jurisdictions
- Round-tripping (indirect reinvestment into India)
- Violation of the one-layer rule for overseas investment structures
- Acquisition of shares without actual remittance, relying on book entries
- Exceeding financial commitment limits without prior approval
- Issuing corporate guarantees without board approval or reporting
- Making remittances without obtaining a Unique Identification Number (UIN)
- Maintaining investments in defunct foreign entities without formal closure or intimation
- Failure to repatriate disinvestment proceeds or earnings within prescribed timelines
Compounding Process Overview
For contraventions requiring compounding, the following procedural steps apply:
1.Application Submission: Submit a compounding application to the Reserve Bank of India (RBI) along with all required documentation and a non-refundable fee of ₹11,000. Applications must be submitted digitally via the PRAVAAH Portal.
2. Review and Examination: The RBI reviews the application to assess the nature, seriousness, and context of the contravention, while considering any mitigating factors or justifications presented by the applicant.
3. Hearing (If required): In certain cases, the Compounding Authority may request a personal or virtual hearing to clarify specific aspects of the case.
4. Issuance of Compounding Order: If the contravention is deemed compoundable, the RBI issues an official order specifying the penalty amount to be paid.
5. Penalty Payment and Closure: The applicant must remit the penalty on receiving the order. Upon payment, the contravention is considered regularized, bringing the matter to a legal close.
Impact of non-compliance with OI Regulations
Under the Overseas Investment (OI) framework, a person resident in India who has made a financial commitment to a foreign entity must comply with all reporting obligations. Any delay or failure in reporting restricts the individual from making further fund-based or non-fund-based commitments to that entity until the non-compliance is regularized. Additionally, transferring such investments is also prohibited during this period. This highlights the critical need for timely and accurate reporting, as non-compliance can hinder future overseas investments and expansion plans.
Conclusion: A Call to Action Before the Sunset
The RBI’s LSF framework offers a cost-effective, simplified, and time-bound route for resolving procedural lapses under the OI regime. With the sunset date of August 22, 2025, drawing closer, stakeholders must act swiftly to assess their compliance status and avail of the LSF facility where eligible. Beyond that deadline, the compounding process remains the only pathway for rectification, often involving more time, documentation, and regulatory scrutiny.
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Niranjan Shah – Chartered Accountant | S N S S & Co | 📧 niranjan@snssindia.in | 📞 +91 982 586 0488
Disclaimer: This blog is intended for educational purposes only and should not be interpreted as advice. It is recommended to seek guidance from a qualified professional for advice relevant to your circumstances. For any feedback, inquiries, or suggestions, please feel free to reach out to the author at niranjan@snssindia.in / Contact No +91 982 586 0488.
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