Reiteration on FEMA Regulations. - Capital Account Transactions

 

As you would be aware that Foreign Exchange Transactions in India, are governed by Foreign Exchange Management Act, 1999 (FEMA, 1999) and Rules & Regulations, Notifications, Circulars and Directions (FEMA Regulations) issued thereunder by Reserve Bank of India in consultation with Government of India.

 

We wish to draw your attention to FEMA 1999 which states that any person undertaking any Foreign Exchange Transaction, is required to comply with the provisions as laid down under the extant FEMA Regulations.

 

Section 13 of FEMA, 1999:, if any person contravenes any provision of this Act, or contravenes any Rule, Regulation, notification, direction or order issued under this Act, such person shall be liable to prescribed penalties and fines.

 

Hence, we would like to reiterate and request you to ensure that all provisions as laid down by extant FEMA guidelines are complied with for all your Foreign Exchange transactions [Current Account Transaction or Capital Account Transactions] including Reporting requirements as prescribed. Failure to comply attracts Penalty and Compounding Provisions as provided in extant FEMA Regulations.

 

We would like to share with you a few illustrations on the Regulatory requirements, in relation to Capital Account Transactions. These illustrations are not exhaustive. We advise you to go through FEMA provisions before undertaking any cross border transactions.

 

Please ignore this email if you do not transact with Citibank for Foreign Direct Investment and Overseas Direct Investment

 

Foreign Direct Investments (FDI)

 

All FDI transactions have to comply with the Entry Route, Sectoral cap and all other conditions of extant FDI Policy issued by Government of India. The reporting of FDI transactions have to be completed online through the ‘Single Master Form’ (SMF) within the timelines prescribed following the procedure and documentation as mentioned in the SMF User Manual released by RBI. Contravention for non-issue/ late issue of capital instruments or non-transfer/ late transfer of capital instruments and other contraventions of the provisions FEMA 20(R) will be proceeded against as per the procedure laid down in sections 13 and 15 of FEMA, 1999.

 

[Regulatory reference : Extant FDI Policy read with RBI Master Direction on Foreign investment into India and RBI Master Direction on Reporting Requirements under FEMA 1999 and User Manual on SMF]

 

The Reserve Bank of India has amended RBI User Manual for FDI Reporting's. We request you to go through RBI User Manual (link as below) before filing the new forms/ reporting's in FIMRS portal, with immediate effect. RBI has changed standard format with respect to Company Secretary declaration, Company declaration, Non-Resident declaration etc. based on filing applicable.

The above changes are effective from the date of issue of RBI Circular A.P. (DIR) Circular No. 22 dated January 4, 2023.

https://firms.rbi.org.in

 

Key Points to Note:

 

 

1. All issue, transfer of capital instruments by person resident outside India, Indian Entity or Investment Vehicle or Venture Capital Fund etc receiving foreign investment have to comply with provisions of extant Non Debt Regulation including pricing, sector cap, downstream investment guideline, Schedules etc.

2. Delay in submission of Reporting requirement like (FCGPR, FCTRS, LLP-I, LLP-II, Investment Vehicle Reporting, Downstream Investment Reporting etc.) attracts late submission fee as prescribed by RBI.

 

3. In case of overseas investor being different from the remitter of funds, KYC of both the remitter and Investor is required in the format prescribed by RBI from the overseas remitting bank. The fact that the investor does not have a bank account is not a valid premise for non-receipt of KYC of the investor. Wherein the remitter and investor are different, a No objection certificate will need to be furnished from the remitter, conveying that the remitter has no objection in the shares being allotted to the investor. In case of FDI into LLP, the remitter and investor cannot be different. [Ref. RBI Master Direction on FEMA-Reporting requirement]

 

3. In case of Funds received from overseas investor towards proceeds of Rights issue floated by the investee entity, copy of the RBI letter allotting FDI Registration number for the initial allotment to such investor, must be in place prior to receipt of funds. . In case instruments are CCPS/CCD, valuation certificate of equity shares is mandatory

 

4. In case of transfer of Capital Instruments from Non-resident to Resident, the FDI Registration number allotted by RBI for FDI by Existing Non-Resident Shareholder is must. In case existing Non-Resident shareholder earlier acquired the Capital Instruments from other Resident shareholder, then copy of the AD certified FCTRS Reporting is a pre-requisite, without which current transaction of FCTRS (Remittance and reporting) is not permitted. [Press note clarification issued by RBI to all AD Banks].

 

5. The date of submission of the report complete in all respects with the prescribed documentation to the AD on SMF shall be deemed to be the date of reporting of the transaction to RBI. In case the reporting form (whether in physical or electronic form) is incomplete then the delay will continue till such time the form is received complete in all respects [Ref. RBI Master Direction on FEMA-Reporting requirement]

 

6. In case of conversion (CCPS/CCD to equity). Conversion ratio should be in format as “CCD/CCPS : Equity”. Number of Equity shares post conversion, should be disclosed in documents.

 

7. In case you have received any FDI, please check whether you registered in the entity master and if not the same may be completed on immediate basis. Further it is advised to ensure the correctness of the data as provided in the entity master.

 

 

Overseas Direct Investments (ODI)

 

All ODI transactions have to comply with the investment routes, ceiling, sectoral restrictions and all other conditions for Overseas Direct Investments from India as prescribed under extant FEMA Regulations.

 

[Regulatory Reference: Foreign Exchange Management (Overseas Investment) Rules, Regulation 2022 and Foreign Exchange Management (Overseas Investment) Directions, 2022]

 

Please refer regulation 12 of Foreign Exchange Management (Overseas Investment) Regulations vide No. FEMA 400/2022-RB August 22, 2022 2022, "A person resident in India who has made a financial commitment in a foreign entity in accordance with the Act or rules or regulations made thereunder, shall not make any further financial commitment, whether fund-based or non-fund-based, directly or indirectly, towards such foreign entity or transfer such investment till any delay in reporting is regularized"

 

We request you to pay LSF or compound the contravention, if any for delayed reporting/submissions made under Overseas Direct Investment guideline, before submitting any new request at bank counter

 

 

Key Points to Note:

 

1. All the ODI documents are to be submitted with the AD bank prior to executing any transaction (including SBLC/corporate guarantee).

 

 

2. Annual performance report (APR) for each of overseas JV/WOS for every financial year (Mar-Apr) / Calendar year (Jan-Dec) is required to be submitted ever year by December 31/December 31 of next year respectively as the case may be to the AD bank for onward reporting to RBI, failing which no further ODI transactions are permitted for any UIN of same Indian Party.

APR filing guideline:

•APR in new format only-Refer page no.105 https://rbidocs.rbi.org.in/rdocs/content/pdfs/13MDR291215.pdf

• Statutory auditor certificate should be strictly in RBI prescribed format along with UDIN number

• Not applicable points to be strike-off from Indian Entity certificate & Statutory auditor certificate. Addition, deletion or rephrasing of RBI format is not acceptable.

• Latest Audited Financial of JV/WOS and Holding to be submitted along with APR and the data in APR should match with the Financials.

• If Any Investment / Disinvestment of SDS has happened in the period for which APR is being filed, the same needs to be captured in Part XII of form APR – In case any change in previous reporting, a clarification letter can be attached.

• Please use empty space at bottom of each page for affixing Sign, Stamp & Date as this is a mandatory requirement.

• Please submit reason for delay and acceptance of LSF application to RBI (in case delay in final

submission of reporting) 

3. Post investment changes including investment in Step down subsidiary (SDS), Capital Structure changes etc, are required to be reported to AD bank along with APR.

 

- In case Indian party acquires an Overseas subsidiary and such subsidiary in turn has multiple layers of step down subsidiaries – all such step down subsidiaries are required to be reported in Form ODI itself while initiating first remittance.

4. The Indian Party is required to submit details of such disinvestment through its designated AD category-I bank within 30 days from the date of receipt of disinvestment funds . Sale proceeds of shares / securities shall be repatriated to India immediately on receipt thereof and in any case not later than 90 days from the date of sale of the shares / securities.

5. An IP/ RI which has made direct investment abroad is under obligation to,

(i) submit share certificates or any other document as evidence of investment in the foreign entity to the satisfaction of the Reserve Bank within six months, or such further period as Reserve Bank may permit, from the date of effecting remittance or the date on which the amount to be capitalised became due to the Indian Party or the date on which the amount due was allowed to be capitalized;

(ii) repatriate to India, all dues receivable from the foreign entity, like dividend, royalty, technical fees etc., within 90 days of its falling due, or such further period as the Reserve Bank may permit:

6.  The financial commitment by a person resident in India in a foreign entity that has invested or invests into India at the time of making such financial commitment or at any time thereafter, either directly or indirectly, resulting in a structure with more than two layers of subsidiaries is not permitted i.

 

7. Overseas Direct JV/WOS (whether operating or an SPV) of an Indian Party is not permitted to set up / make any investment into or acquire another SPV i.e. all Step Down Subsidiaries must be operating entities only. SPV below SPV/other operating entities is not envisaged in the ODI guidelines and the same is also not construed as bona-fide business activities in terms of ODI Regulation.

 

8. The diversification of the activities through SDS should be for Overseas Direct Investment (ODI) and not for portfolio investment. Portfolio investment directly or indirectly through Direct JV/ WOS / Step down subsidiary is a contravention as the definition of the term ‘Oversea Direction Investment’ excludes Portfolio investment.].

 

9. In terms of ODI Regulation, Indian party is not allowed to extend loan to JV/WOS without having prior equity stake and control. The same provision is extended to Overseas JV/WOS as well as transactions which are not allowed directly, cannot be undertaken indirectly (through overseas JV/WOS) as well.

 

Accordingly Overseas JV/WOS of the Indian Entities are not permitted to extend loan to other entities (whether or not group entities or related entities), without having Equity stake. Resident Individuals may make overseas direct investment only in equity shares/ compulsorily convertible preference shares of a JV or WOS outside India. Resident individuals are not permitted to extend loan to overseas JV/WOS

 

10. Resident Individuals are not permitted to invest into/set up a Direct JV/WOS which has / will have Step Down Subsidiary(s).

 

11. In the case of corporate guarantees, all guarantees (including performance guarantees and Bank Guarantees / SBLC) are required to be reported to the Reserve Bank in Form FC through designated AD, at the time of issuance of such guarantees. Seek Prior approval from bank before issuance of corporate guarantees

12. Indian parties/ Indian Residents are required to submit Forms and documents to bank for reporting of investments/ financial commitments before executing the transaction

 

 

14. Each page of the Form FC should be duly signed and stamped with date, by the RI / authorized person of the IP

 

 

External Commercial Borrowing (ECB)

 

Transactions on account of External Commercial Borrowings (ECB) and Trade Credits (TC) are governed by clause (d) of sub-section 3 of section 6 of the Foreign Exchange Management Act, 1999 (FEMA). Various provisions in respect of these two types of borrowings are included in the following Regulations framed under FEMA:

i.    Foreign Exchange Management (Borrowing and Lending) Regulations, 2018, notified vide Notification No. FEMA 3R/2018-RB dated December 17, 2018, as amended from time to time; and

ii    Foreign Exchange Management (Guarantees) Regulations, 2000, notified vide Notification No. FEMA 8/2000-RB dated May 03, 2000, as amended from time to time.

External Commercial Borrowings are commercial loans raised by eligible resident entities from recognized non-resident entities and should conform to parameters such as currency of borrowing, eligible borrowers, recognized lenders, minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc.

 

Trade Credits (TC) refer to the credits extended by the overseas supplier, bank, financial institution and other permitted recognized lenders for maturity, as prescribed in this framework, for imports of capital/non-capital goods permissible under the Foreign Trade Policy of the Government of India. Depending on the source of finance, such TCs include suppliers’ credit and buyers’ credit from recognized lenders.

 

[Regulatory Reference: RBI Master Direction on External Commercial Borrowing, FEMA 3R dated December 17, 2018, FEMA Notification no. 8 dated May 3, 2000]

Key Points to Note:

 

1. ECB2 Returns are required to be submitted to RBI by 7^th of every month through designated AD Bank.

2. Revised FORM ECB is to be submitted within 7 days from the date of signing loan agreement between borrower and lender/for any change in terms of underlying parameters of ECB.

3. Submission of both forms beyond due date attracts Late Submission Fee - LSF

 

 

Please refer below reporting timeline for capital account transaction which should be adhered, failing to this, may impact on your future transactions along with late submission fee, penalty , compounding. Reporting documents should be submitted to bank at least 7 to 10 days prior to the due date, giving sufficient time for AD Bank to scrutinize the documents before reporting to RBI.

 

 

#	Product	Type	Reporting Timelines
1	ODI	APR (Annual Performance Reporting)	Annually before 31 December
2	ODI	Disinvestment Reporting- Part III	Date of receipt of disinvestment proceed + 30 days
3	ODI	Reporting of SBLC/Corporate Guarantee	Immediately on issuance of Guarantee (client to submit form FC to AD bank prior to issuance of guarantee)
4	ODI	Post investment changes eg. Change in capital structure, investment in SDS etc)	Along with APR.
5	FDI	DI (Downstream Investment)	Within 30 days from the date of allotment of equity instruments
6	FDI	DPIIT Reporting under downstream investment.	Within 30 days of Downstream Investment (even if equity instruments have not been allotted) to Secretariat for Industrial Assistance, DPIIT
7	ODI	Share certificates	Within 180 days from the date of equity remittance
8	ODI	ESOP & OPI (Overseas Portfolio Investment)	Half yearly reporting -Within sixty days from the end of the half-year in which such investment or transfer is made as of September or March-end. I.e. for the period 1 April to 30 September the reporting should be done on or before 29 November and for the period 1 October to 31 March, the reporting should be done on or before 30 May.
9	FDI	FCGPR –FDI /LLP-I/ESOP	30 days from date of issuance of capital instruments (60 days to issue capital instruments from receipt of inward remittance)
10	FDI	FCTRS/LLP-II for transfer of Shares	within sixty days of transfer of equity instruments or receipt/remittance of funds whichever is earlier
11	ECB	ECB 2	Within 7 working days of each month.
12	LOBOPO	AAC & Financials, Reporting to DGP, DGIT as applicable (DGP Reporting applies only if LOBOPO Head office is from a specific country.)	30th September Annually (where accounting year ending date is not 31 March, then 6 months form the date of accounting year).

 

Late Submission Fee (LSF) for delay in Reporting’s:

 

 

Sr. no	Type of Reporting delays	LSF amount
1.	Form ODI Part-II/ APR, FCGPR , FLA Returns, Form OPI, evidence of investment or any other return which does not capture flows or any other periodical reporting	7,500/- per return /form
2.	FC-GPR, FCTRS, Form ESOP, Form LLP, Form LLP(II), Form CN, Form DI, Form InVi, Form ODI-Part I, Form ODI-Part III, Form FC, Form ECB, Form ECB-2, Revised Form ECB or any other return which captures flows or returns which capture reporting of non-fund transactions or any other transactional reporting	7500 + (0.025% × A × n)

 

 Notes:

a) “n” is the number of years of delay in submission rounded-upwards to the nearest month and expressed up to 2 decimal points.

b) “A” is the amount involved in the delayed reporting.

c) LSF amount is per return. However, for any number of Form ECB-2 returns, delayed submission for each LRN will be treated as one instance for the fixed component. Further, ‘A’ for any ECB-2 return will be the gross inflow or outflow (including interest and other charges), whichever is more.

d) Maximum LSF amount will be limited to 100 per cent of ‘A’ and will be rounded upwards to the nearest hundred.

e) Where an advice has been issued for payment of LSF and such LSF is not paid within 30 days, such advice shall be considered as null and void and any LSF received beyond this period shall not be accepted. If the applicant subsequently approaches for payment of LSF for the same delayed reporting, the date of receipt of such application shall be treated as the reference date for the purpose of calculation of “n”

 

In light of above, we would like to reiterate here that the failure to comply with extant FEMA Regulations, attracts Penalty provisions and Compounding Procedure as laid down in FEMA 1999. We request you to ensure due adherence to extant FEMA Regulations and ensure that foreign exchange transactions including submission of Reporting requirements are undertaken in compliance thereof.