FEMA Compliance which Must be Followed

Narendra Kumar

22 Jun, 2019

FEMA Compliance which Must be Followed by the Indian Entities Making Foreign Investment

For the purpose of promoting the development and maintenance of foreign exchange market in India, key legislation brought into force named Foreign Exchange Management Act, 1999 with an object to facilitate external trade and payments. FEMA compliance and the regulations made thereunder are governed by the apex bank of India named as “Reserve Bank of India (RBI)”. It has been witnessed that Foreign Direct Investment (‘FDI’) inflows increase every year. Recently, Indian companies are globally investing. These companies have to abide by the FEMA provisions. There are penalty provisions in case of non-compliance of provisions defined under FEMA.

Here we are discussing the annual compliances of FEMA which are required to be fulfilled by the Indian companies having FDI and such Indian entities making an investment in overseas Joint Venture (JV) and Wholly Owned Subsidiary (WOS) (collectively referred as ODI).

The FEMA Compliances are defined below:

A. Annual Return on Foreign Liabilities and Assets

1. In order to obtain the information regarding FDI and ODI, RBI has introduced the requirement of filing Annual Return on or before 15 July every year. Annual Return will be filed on Foreign Liabilities and Assets (‘FLA Return’).
2. It is mandatory for all the Indian resident companies to file FLA Return which has received FDI and/ or they have made ODI in any previous year including current year i.e. which hold foreign assets or liabilities as on 31 March in their financial statements.
3. To file FLA return with the RBI by the Indian company for which it is obligatory to file needs to download Excel based utility from the website of the RBI. The next step after downloading the excel utility is to fill the requisite details in the excel form. FLA return can be filed by the Indian entity through email e-mail the same to the RBI at fla@rbi.org.in.
4. The following things must be considered while filing of FLA Return.
   • On the basis of audited financial statements of an Indian entity, FLA Return is filed. However, if there is a case that accounts of the Indian company is not audited before 15^th July then FLA return shall be filed on the basis of the unaudited accounts or we can say provisional accounts. After the accounts get audited of the Indian company and there are any revisions in comparison to provisional information submitted by the Indian Company, then it is required to file the revised FLA return by the Indian Company on the basis of the audited accounts by the end of September.
   • As per the schedule 4 of the FDI Regulations, the investment made by Non-Resident Indians (NRI) on the non-repatriation basis is not considered as FDI and in the FLA Return, it is considered as a domestic
   • The company is not required to submit the FLA return in case there is no outstanding investment of Indian company in respect of FDI and/or ODI as on the date of the reporting year. However, the company is required to submit the FLA return on 15^th July every year if the company has not received any fresh FDI and/or ODI in the current year but the company has outstanding FDI and/or ODI.
   • Entities such as Partnership firms, LLPs, or Branch offices which are having ODI at the end of the reporting year are required to file FLA Return with the RBI. To get a dummy CIN, they have to send request mail which will help them in filing FLA Return. Same CIN shall be used in the subsequent years if the entity has already a dummy CIN from the previous year.

B. Annual Performance Report

It has been introduced with a view to providing greater capability to AD banks by tracking the submission of APRs and it also helps in complying with the provisions in the matter related to APR submission by the Indian Parties/ Resident Individuals.

1. In respect of each Joint Venture (JV) or Wholly Owned Subsidiary (WOS) outside India, Annual Performance Report (APR) has to be submitted by an Indian company who has made an Overseas Direct Investment (ODI) in Form ODI Part II with the AD bank every year by 31 December.
2. Every year, the due date of APR filing has been extended from 30 June to 31 December. And this APR is required to be certified by the statutory auditor of the Indian Company. Certification of APRs by the Statutory Auditor or Chartered Accountant shall not be insisted upon in the case of Resident Individuals and self-certification can be accepted in such case.
3. Along with the APR, a copy of audited financial statements of the overseas Joint Venture (JV) / Wholly Owned Subsidiary (WOS) (on a standalone basis) in relation to which this APR is filed can be sent. However, where it is not required to audit the books of accounts of Joint Venture (JV) / Wholly Owned Subsidiary (WOS) then, the APR may be submitted on the basis of the un-audited annual accounts of the Joint Venture (JV) / Wholly Owned Subsidiary (WOS) by the Indian company provided:
   • That it is certified by the Statutory Auditor of the Indian Company that ‘Un-audited annual accounts reflect the true and fair picture of the affairs of the Joint Venture (JV) / Wholly Owned Subsidiary (WOS) and
   • Board of the Indian company has adopted and ratified the un-audited annual accounts of the Joint Venture (JV) / Wholly Owned Subsidiary (WOS).
   • Except for the circumstances as mentioned above, APR cannot be submitted on the basis of the unaudited financial statements of the overseas Joint Venture (JV)/ Wholly Owned Subsidiary (WOS).
   • If there are multiple parties invested in the same overseas Joint Venture (JV) / Wholly Owned Subsidiary (WOS), then the obligation of submission of APR shall lie with that party who is having a maximum stake in the Joint Venture (JV) / Wholly Owned Subsidiary (WOS). Otherwise, such Indian parties who are carrying stake in Joint Venture (JV)/ Wholly Owned Subsidiary (WOS) may mutually assign the responsibility of filing APR to a designated entity who will have to submit the APR by furnishing an appropriate undertaking to the AD Bank.