An investor establishes foreign business operations or acquires foreign business assets, including establishing ownership or controlling interest in a foreign company. There are various investment vehicles established in India that have attracted FDI in India over years such an Indian company, LLP, other investment vehicles, etc.
Let’s have a squint on it with respect to the most popular investment recipient entity i.e. a private limited company:
Foreign investments in most of the sectors (more than 90 %) is under 100 % automatic route. Once a company is incorporated in India, including a wholly owned subsidiary of a foreign Company, all are treated at par with domestic companies. All foreign investments are repatriable (net of applicable taxes).
Let’s discuss and understand the FDI related compliances and reporting in case a private limited company receives FDI from a Non- Resident (“NR”) [be it individual or an entity incorporated outside India] on account of:
A private limited company has to acquire the below stated registrations in order to report about receipt of FDI to the watch dog and regulatory body for FDI i.e. the Reserved Bank of India(RBI). These registrations are one-time registrations and are to be obtained at the time of first receipt of FDI which could be on account of subscription to Memorandum/ further allotment to NR. These registrations are to be attained in two phases on the FIRMS (Foreign Investment Reporting and Management System) portal by such company (in receipt of FDI) which are discussed below:
With introduction of FIRMS (Foreign Investment Reporting and Management System) platform, providing an online interface for integrated reporting to RBI, the EMF was the phase one for registering the company as a ‘New Entity User’. This involves providing primary details of a newly incorporated Company such as particulars of the Company, business activity details, foreign holding percentage, etc. The EMF registration is a PREREQUISITE to the next discussed registration i.e. SMF.
SMF was introduced as phase two to the FIRMS platform to integrate reporting of foreign investments. For SMF registration, a company is registered as a ‘Business User’. At the time of registration, the company has to select the IFSC code of the bank which would be the *Authorised Dealer (AD Bank) for the company. All eKYC would be verified by the AD banks before any reporting can be made in the SMF. Further, SMF provides for the reporting of 9 forms for foreign investment viz., FC-GPR, FC-TRS, LLP-I, LLP-II, CN, DRR, ESOP, DI, InVi. As the name suggests, these different forms are for reporting issue of shares, transfer of shares, investments in LLP, etc.
The reporting requirement for any Foreign Investment in India by a person resident outside India shall be as follows:
Form Foreign Currency-Gross Provisional Return (FC-GPR):
An Indian company issuing equity instruments whether on account of subscription of shares at the time of incorporation or on account of further allotment of shares to a person resident outside India pursuant to receipt of FDI, shall report such issue in Form FC-GPR, not later than 30 days from the date of issue of equity instruments. This is to be reported for each transaction. Such reporting shall be done on the FIRMS portal with SMF registration details.
While all these compliances sound like simple steps but the professionals familiar with the working would know that there arise a few challenges which comes in the way of timely reporting of these disclosures. This can be gauged by the fact that most of the cases which comes for compounding before RBI relates to the contraventions of the provisions relating to these disclosures or reporting. Most of the contraventions which are resorted to compounding arise out of delay in allotment of shares to a person resident outside India, delay in submission of form FC-GPR (now taken care of through LSF), issue of share certificates before receipt of subscription or share application money, etc. After the notification of Late Submission Fees (LSF), delayed filing of disclosures like FC-GPR is taken care of by payment of LSF rather than having to resort to compounding mechanism. Many non-compliances arise out of negligence and inadvertence. However, there may be genuine situations where contraventions arise because of involvement of intermediary bank in the transaction or remitting bank has not followed swift protocol of international money transfers which results in delay in issuing necessary documents supporting inward remittance (FIRC) and KYC. We have explained a typical contravention on FEMA compliances w.r.t issue of shares at the time of incorporation, those interested in the subject will like it.
*Authorised Dealer (AD Bank) is the bank which is authorised by RBI for dealing in foreign currency in India. The RBI approves the various registrations and reportings by the company in synchronization with the concerned AD Bank, thus, extensive coordination with the concerned Authorized Dealer bank (AD Bank) is necessary for ensuring successful and timely processing of registrations and reportings.