FEMA

Are only Companies obliged to file Foreign Liabilities and Assets (FLA) returns?

With the ongoing involvement of companies with foreign investments, the FEMA regulations have become significant for the operation of the companies. FLA becomes important for companies that engage themselves in wholly owned subsidiaries or ventures or businesses committed to Foreign Direct Investments or FDIs.

Requirement for the filing of FLA returns

The Companies that have received Foreign Direct Investments or made overseas FDIs in any financial year should file the Foreign Liabilities and Assets returns with the Reserve Bank of India. The financial statement of the companies for the same fiscal year can clearly show the status of inward or outward FDI.

Do companies need to file FLA, or do other entities need to file it too?

Are companies the sole entities who are required to file the FLA, or can other entities file it, too? No, there are other entities too who are obligated to file FLA as mentioned below-

1. Companies– All the companies which are registered under the Companies Act are mandated with the filing of FLA returns. It also includes the corporate entities which operate with a limited liability status.
2. LLPs or Limited Liability Partnerships- The LLPs registered under the LLP Act are also required to file FLA returns.
3. Others- The entities that fall under this category are AIFs or the Alternative Investment Funds registered with the SEBI. It also involves investment funds which operate far from the traditional investment vehicles. Partnership Firms (PF) that have partnerships with foreign entities, also fall in this category. Public Private Partnerships (PPP): The collaborations between private and public entities involving foreign investments are also covered under Foreign Liabilities and Assets returns filing.

Exceptions to FLA filing

The exception to the rule is that the shares which are issued by the reporting entity on a non-repatriable basis to the NRs will not be covered under foreign investments. So, the entities issuing such shares are exempted from filing FLA returns.

Difference between Companies, Partnership firms and LLPs

Basis	Companies	Partnership firms	LLPs
Creation	It is created by law.	Contract creates it.	It is created by law.
Governance	Companies Act of 2013	Partnership firm of 1932	Limited Liability Partnership Act of 2008
Registration	Registration with ROC	Registration is optional for these firms	They need to be registered with the Registrar of LLP
Time of the Registration	Generally, a week to ten days	Five to seven days	A week to ten days
Common Seal	Every company shall have their own signature	Not required for them	They may or may not have a common seal or signature
Distinct entity	A separate entity under the Companies Act of 2013	These are not separate entities	Under the LLP Act of 2008, these are also separate entities
Legal proceedings	Companies can be sued or sue in their own name	A partnership firm can sue only if it is registered	It can sue and be sued
No. of Members	If the company is Pvt. Ltd., it shall have 2-200 members	2-50	2- No limit
Transferability	By transferring the shares, ownership can be transferred	Non- transferable	It can also be transferred
Foreign ownership	The foreigners can also be members of the Company	Foreigners are not allowed	Foreigners are allowed to be partners
Assets ownership	The company has ownership of the assets	Partners have joint ownership	They have independent ownership
Perpetual Succession	Members can come and go, but it has a perpetual succession	It is dependent on partners, so no perpetual succession is there	It has independent ownership
Liability of Members	It is limited to the extent of the amount which is to be paid upon each share.	Their liability is not limited	Limited liability
Relationship of the Principal or Agent	Directors act as the agent of the Company	Partners are the firm’s agents	Partners act as Agents
Annual Filing	The returns are to be filed every year	No need for return filing	Annual returns to be filed
Dissolution	By the order of the NCLT or voluntary	Through insolvency, mutual consent or insolvency	By NCLT order or voluntary

Filing procedure of FLAs

The previous system for FLA returns was email-based. So, to enhance the security in data submission and improve the data quality, the web-based reporting portal replaced the email system. The Reserve Bank of India, by the notification dated 28 June 2019, introduced the FLAIR system, which is the Foreign Liabilities and Assets Information Reporting.

Features of the FLAIR

The change was applicable from the year 2018-19. The Reporting entities must register through the web portal and provide the login credentials generated by the RBI to file FLA returns. The form seeks direct investment and financial details on the basis of the fiscal year, where the reporting entities have to provide information on variables relating to the foreign affiliate trade statistics, also known as FATS, which was earlier mandatory for subsidiary companies only. The new form also seeks information about the first-year ODI FDI or disinvestment receipt. The reporting entities can also amend the data they have entered in the FLAIR and view or download the information they have submitted. 

Audited or Unaudited financials

If the company’s financials are not finalized or audited until the deadline arrives, the return must be filed using the unaudited financials. After the financials have been audited, the company must file the revised FLA returns on the Reserve Bank of India portal. It will be considered a violation of the FEMA regulations if the returns are not filed before maturity; hence, a penalty clause can also be invoked.

Securities transfer by a non-resident investor to a resident- -investor

If the non-resident shareholders have transferred the shares to the resident members during the reporting period and hence the company doesn’t have an outstanding investment with respect to the outward or inward FDI as of March end, in that case, the corporation need not file the FLA return. The details should contain the financials. If the corporation did not audit their accounts before 15 July, they have to file the FLA returns, which are consistent with the unaudited accounts, and they can audit their accounts later.

Penalties

If there is no filing of the FLA returns, it shall be considered a breach of the FEMA provisions, and so the penalty clause shall be enforced. If the false information is filed under the FEMA Act, it will be 300% of the amount which is involved in the violation, and if the offence is non-quantifiable, then a rupees 2 lacs fine will be imposed. If the offence is continuing, then rupees 5000 shall be fined for every day after the first day of that violation. The compounding power for these violations is delegated to all the regional offices of the Reserve Bank of India.

For the filing of FLA returns, the maturity is on 15 July of that year. If, on the unaudited accounts, the filed return is predicated, then a revised form needs to be filed before the month of September. The regional offices of the Reserve Bank of India have the facility for compounding contraventions with no limit.

Conclusion

As we have seen above, the FLA filing obligations are extremely important for entities which are engaged in financial transactions (overseas) or foreign investments within the country. The FLA obligations are in line for tracking the financial transactions of the companies, and it also helps in building the nation’s economy. However, the exceptions to the same also clarify whether the FLA filing is important for certain sectors.

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