FC-GPR Compliance for Non-Resident Investments

Varun Hariharan

26 Mar, 2021

Foreign Investment in India is allowed for Wholly Owned Subsidiaries, Joint Ventures, and entities. The investment can be in securities of an Indian Company. The company can either be a listed entity or an unlisted entity. The Reserve Bank of India (RBI) is the central regulatory authority that makes rules for the regulation of foreign exchange in the country. This article describes FC-GPR Compliance for Non-Resident Investments.

Read our article:Foreign Investment in India and its Regulatory Framework

The RBI and the Government of India (GOI) have enacted the foreign exchange management act (FEMA 1999). This law regulates and governs foreign exchange transactions within the country. When a foreign entity or an NRI invests in the Indian company, then compliance has to be followed. One such compliance carried out by the Indian company is called as FC-GPR Compliance. FC-GPR compliance is mandatory for all transactions involving foreign direct investment from a foreign company or non-resident individual.

FC-GPR compliance must be under the rules of Foreign Exchange Management (Transfer or Issue of Security by a person resident outside India), 2000.

Reporting of FDI to the RBI

When a foreign company or a non-resident wants to invest in an Indian company, then FDI compliance must be maintained and reported by the Indian Company. One of the crucial compliance which has to be followed is FC-GPR compliance.

Apart from the FC-GPR compliance, the Indian company also has to adhere to the following conditions:

• Foreign Investment in India must be compliant with the foreign direct investment policy.
• The compliances have to be met as per the relevant foreign exchange regulations that apply to the security.
• The FDI policy would only apply to equity instruments and securities such as Equity Shares, Compulsory Convertible Preference Shares, and Convertible Debentures.

An Indian company receiving foreign investment in any other form would be categorized as External Commercial Borrowings. There is a separate framework for ECB under the RBI.

Read our article:What are External Commercial Borrowing Regulations?

What is FC-GPR Compliance?

FC-GPR compliance is the abbreviation for Foreign Currency Gross Provisional Return. FC-GPR Compliance is one of the mandatory compliances introduced by the RBI. This was introduced due to the complexities of maintaining different investments made by foreign companies, wholly-owned subsidiaries, and non-resident Indians. FC-GPR compliance was introduced in the year 2007 by the RBI^[1]. Due to discussions between interested parties and market participants, the FC-GPR compliance was amended in 2008. An Indian company has to compulsorily follow compliance under this system.

Format of FC-GPR Compliance

There is a standard format for FC-GPR compliance. However, the forms used by a foreign company investing in an Indian company are different from the Non-resident FC-GPR Compliance form. Therefore an Indian company receiving foreign investment must make sure the proper form is used for reporting compliances under foreign direct investment.

In 2018, the RBI came up with a consultation paper on the user manual for the Single Master Form (SMF). All compliances on foreign exchange have to be reported under the SMF. This replaces the previous system of separate compliance carried out on different forms.

An Indian company that receives foreign direct investment for shares or securities to a foreign investor or non-resident Indian has to report FC-GPR compliance under the SMF through the FIRMS website.

When is FC-GPR Compliance required?

FC-GPR compliance is required when an Indian company issues securities to a foreign wholly-owned subsidiary, joint venture, or non-resident Indian. This compliance is compulsory for all companies receiving foreign direct investment. FC-GPR form is required when an Indian company issues securities to a Non-resident investor.

Apart from filing the FC-GPR form, the company has to also follow compliance under the Companies Act, 2013.

Non-Resident Indian – FC-GPR Compliance

A non-resident Indian like a company is allowed to invest in companies in India. However, the investment must be according to the rules prescribed by the RBI. A Non-resident Indian is allowed to open a bank account in India. A Non-resident Indian can open the following bank accounts:

The above accounts can be used for transactions that happen locally within the country. An individual is allowed to open the above accounts. The transactions in the NRO account must be conducted in Indian rupees. Inward remittances are allowed through this account.

Apart from this, the NRI can use this account to carry out legitimate transfers. Usually, the NRO account is used for this purpose. Any form of payment can also occur through this account. Any form of remittance of current income can take place through this account.

The balances present in this account can only be repatriated to the home country if the NRI or the Persons of Indian Origin control the account. The amount which can be repatriated is limited up to USD 1 million.

Read our article:What is an NRI Bank Account?

Acquiring Shares in the Indian Company for FC-GPR Compliance

An NRI cannot utilize funds in the NRO account for investing in the Indian company, as these funds are used for local investments. Moreover, if funds from the NRO bank account are used for investing in an Indian company, then the sole purpose of foreign direct investment would be defeated.

Therefore, NRO accounts can only be used for making payments. However, the RBI has provided specific methods for carrying out investment by a Non-resident Indian. The Non-resident Indian has to use the prescribed methods for subscribing to shares in an Indian company.

The following are the methods used for subscribing to shares in an Indian company:             

• Any form of inward remittance carried out through normal banking channels. This is carried out when the remittance is sent from a foreign bank to the Indian bank.
• The relevant NRE/ FCNR account maintained by the Authorised Bank (Category-I) is debited for subscribing to the shares of the company.
• Conversion of External Commercial Borrowings can be taken as consideration for the issue of shares.
• Royalty/ Capital Fee/ Lump sum or Technical Knowhow for capital goods imported into the country is the consideration for the shares.
• Any form of pre-incorporation expenses/share swap can be treated as consideration for the issue of shares with the relevant authority.
• The debit can be carried for the non-interest bearing escrow account in India, which is opened and maintained by the concerned authorized bank (Category-I). The authorized bank maintains this account for residents and non-residents as consideration for the transfer of money.

The above modes of payment for consideration of shares from an Indian company are repatriable.

Investment by an NRI under FDI

An NRI investment made through the above modes would come under the purview of foreign direct investment. Foreign direct investment is considered as an inbound investment under FEMA. An investment that is made in the equity instruments of a company for the exchange of shares is considered as FDI. Any investment which is made by a Foreign Portfolio Investor is considered as FDI if the investment is more than 10% of the equity portfolio of the company.

A non-resident Indian can invest in the following securities to come under the definition of foreign direct investment:

• Shares and Equity Shares;
• Compulsory Convertible Preference Shares (CCPS);
• Convertible Debentures;
• Convertible Notes in Start-ups; and
• Share Warrants in a Company.

A non-resident investor would have to use the following routes for investment. The routes for foreign direct investment are as follows:

• Automatic Route- In the Automatic Route, no prior approval is required from the Government of India. Therefore an investor can invest 100% of the FDI through the automatic route. A non-resident investor, going through the automatic route does not require any form of prior approval from the government for carrying out an investment.
  
• Approval Route/ Government Route- The approval route is also called the government route. Under the government route, prior approval is required from the Government of India.

As the sectors under the government route are sensitive, they require prior approval from the government and the concerned regulatory authority in the country. Therefore a Non-resident investor would have to take prior permission from the relevant regulatory authority before investing under an automatic or approval route.

Beneficial Ownership Principle

A non-resident Indian is allowed to invest in shares and securities in the Indian company. If the individual is a citizen of a country that shares land borders with India, then approval is required from the government of India.
This would also be applicable to a company registered in the country that shares land borders with India.

The following countries share borders with India:

The principal of the beneficial owner is crucial for understanding whether the investment from the above countries falls under the purview of foreign direct investment. A non-resident can invest in an Indian company. However, certain compliances have to be followed by the Indian company after issuing the securities.

FC-GPR reporting has to be carried out by the Indian company that receives foreign direct investment for shares to the non-resident Indian. The RBI issues the FC-GPR form for filing foreign exchange received for the issue of shares. The company must report the details of the foreign investment issued within the prescribed period.

Period of Reporting

When a listed or unlisted Indian entity issues shares to the Non-resident Investor, the company must issue FC-GPR to the RBI within 30 days of allotment of the shares to the NRI. The form FC-GPR is used for this purpose.

The form is submitted to the RBI in the Form FC-GPR through the SMF in the FIRMS website maintained by the RBI. The Firms website is a website used by the RBI for monitoring compliance with foreign direct investment.

The following information has to be obtained by the applicant before submitting any report to the RBI:

• Unique Identification Number (UIN) – A number that is allotted for foreign remittance. This number must be quoted every time while making a remittance.
• Certificate from a Company Secretary- This document has to be under the format provided by the RBI.
• Know Your Client details of the parties in the transaction.
• Memorandum of Association and Articles of Association.
• Valuation certificate from a SEBI registered merchant banker or a chartered accountant.
• Certificate of Disclaimer regarding the subject matter of the shares.
• Loan Registration Number (if required).
• Information related to the transfer of shares from the transferor to the transferee.
• Foreign Investment Letter stating reasons for making the foreign investment in the Indian company.
• No Objection Certificate from the concerned parties in the transaction.

Details of Submission of the FC-TRS

• First, the user has to provide the registration details on the FIRMS website.
• Once the registration details are set up the individual has to log in the website.
• Logging into the SMF for compliance.
• The individual has to select the type of return under this system.
• After this step, the individual has to fill the investment details.
• Then the individual has to provide information about the issue details and foreign investor details.
• Information on the issue of shares must be provided after this.
•  Shareholding pattern for the issue must be provided.
• Finally, the form must be submitted to the RBI.

The above process must be followed by an Indian company receiving foreign direct investment from a Non-resident Indian. For FC-TRS compliance, the company must submit the form and relevant documentation to the RBI within 30 days of transferring the shares.

Conclusion

Also, read: Inbound and Outbound Investments: A Detailed Guide