Brief Compliances under FEMA 1999 - Foreign Direct Investment and Overseas Investment

Foreign Exchange Management Act, 1999 is the regulatory statute that governs the foreign exchange in India. It replaced the erstwhile Foreign Exchange Regulatory Act (FERA) as FERA was more regulatory in nature and wasn’t sustainable in the post-liberalization regime. The redundance of FERA necessitated the implementation of the FEMA act 1999 that eased and provided liberty for foreign exchange transactions while also converting criminal offenses under FERA to civil offenses under FEMA. Here’s a complete guide to obtaining a profound understanding of FEMA 1999 and its implications in the Indian Foreign Exchange Market.

Objectives of FEMA 1999

FEMA 1999 was enacted to encourage foreign trade and payments and assist in the development of the Indian Foreign Exchange Market. It advocates a balance of payment as the true record of dealings in goods, services, and assets between citizens of two countries. It has streamlined the procedural and legal aspects of foreign exchange management in line with liberalization and globalization.

Compliances Under FEMA

Foreign investments have become an important part of corporate strategies. These are multi-disciplinary regulated transactions and FEMA lays explicit regulations and compliance requirements to deal with the same. Here’s a guide to FEMA compliances that shall be adhered to when attracting as well as undertaking foreign investments.

A.    Foreign Direct Investment (FDI)

Foreign Direct Investments is the investment in one entity by an investor located in another country or territory. FDIs have been an important source of generating investments by the corporates. However, as it involves changes in ownership interest, the government, by laying down regulations, has put certain checks to ensure that the provisions are in line with the national interest. FDIs involves two routes for investments:

• Automatic Route: Under this route, the foreign investor or the Indian Company is not required to take prior approval of the RBI or the government before making investments. Textiles & Garments, Agriculture, E-commerce, healthcare, manufacturing are some of the industries covered under the automatic route.
• Approval / Government Route: Here, prior approval of the Government of India, Foreign Investment Promotion Board (FIPB), or the Ministry of Finance is mandatory. Consideration by the respective ministry or department is taken into account in the approval route. Key industries include banking, public sector, core investment companies, etc.

FDI Compliances: FDI involves the following major compliances – 

• Form FC-GPR: Known as Foreign Currency – Gross Provisional Return, this form is issued when a company receives foreign investment against allotment of shares to the foreign investor. All the necessary details shall be furnished to the RBI within 30 days.
• Form FC-TRS: Known as Foreign Currency Transfer, it is used when share transfer is undertaken by shareholders residing outside India, whether being an Indian Resident or otherwise. Form is submitted to the AD bank which then further submits it to the RBI.
• ECB: All External Commercial Borrowing (ECB) transactions shall be reported by the borrowers to the RBI through an ADI Category-I Bank.

B.    Overseas Direct Investments (ODI)

Meaning: ODI means direct investment outside India by way of contribution to the capital, subscription to the Memorandum of Association of a foreign entity or by way of purchase of existing shares either by market purchase or private placement or through the stock exchange, signifying a long-term interest in such foreign entity (JV or WOS) but does not include portfolio investment.

Like FDI, ODI also involves automatic route and approval route. While the meaning is the same, industries covered under the automatic and approval routes are different than those under the FDI. The companies shall adhere to the following compliances while engaging in ODI transactions:

• Compliance at the time of Investment: This includes filing at the time of investments. 
• Post-Investment Compliances: This includes a series of compliances encompassing the following:
  • Submission of Annual Performance Report (APR): Form APR w.r.t. each Joint venture (JV) and Wholly Owned Subsidiary (WOS) outside India shall be filed with RBI by 30th of June every year
  • Reporting of SDS: Also known as Step Down Subsidiary, these are further investments made by JV/WOS that shall be reported to RBI through AD Bank.
  • Disinvestment reporting: In case of disinvestment by way of winding up, closure, amalgamation, merger, or voluntary liquidation, such disinvestment shall be reported to the RBI in Form ODI-III through AD bank within 30 days of such disinvestment.

Foreign Liabilities and Assets Return (FLA)

Annual return on Foreign Liabilities and Assets (FLA Return) is mandatory for all the companies who have received foreign investments, including ECB and/or made any overseas investment in the current or previous years. The return is required to be filed on the 15th of July each year to the RBI giving details of outstanding assets and liabilities. Partnership firms are also required to file FLA return in case of FDI or ODI transactions. Upon request, RBI issues a dummy CIN to facilitate the filing of FLA return by partnership firms. 

Penal Provisions

Non-compliance with the regulations attracts adverse consequences, triggering the penal provisions. Section 13 of FEMA, 1999 provides the following consequences for not complying with FDI and ODI regulations:

Any contravention or non-adherence to the requirements, conditions, rules, regulations, orders, etc. attracts the penalty up to thrice the amount of sum involved where the non-compliance or non-adherence is quantifiable. However, in the case where the sum cannot be determined or quantified, then the penalty of up to Rs. 2 lakhs is leviable.

Where the offense is of continuing nature, then a further penalty that may extend up to Rs. 5000 per day may be levied.

Bottom Line

FEMA 1999 has its own provisions for determining the residential status for the purpose of this act. Apart from that, various regulations form part of this enactment to cover and regulate transactions involving foreign exchange. Compliances and procedural aspects need to be adhered to while dealing in foreign exchange to avoid violation of FEMA provisions and its regulations that attracts penalties.

In case of any assistance feel free to contact ASC Group.
 

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