FEMA

FLA Returns – How to navigate practical issues?

The necessity of the Foreign Exchange Management Act (FEMA) and their compliance becomes a vital component of the operations of the organisations as more businesses engage in international investments. Corporations that engage in FDI (Foreign Direct Investments) or companies that invest in foreign companies via joint ventures or wholly owned subsidiaries, also known as Overseas Direct Investment (ODI), must comply with a number of regulations, including FLA yearly returns. The company must immediately submit the FLA annual return to the Reserve Bank of India. It should include all foreign investments made by the company. Let us discuss the FLA return and the practical issues faced during the filing.

What is an FLA Return?

An Indian company that has received FDI or made ODI abroad, or an LLP that has received investment by way of capital contribution in the prior year(s), including the current year, should submit form FLA Return to the Reserve Bank on or before the due date specified in the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017, is required to file an Annual Return on Foreign Liabilities and Assets (FLA).

Purpose

All India-resident companies/LLPs/Others [(include SEBI registered Alternative Investment Funds (AIFs), Partnership Firms, Public-Private Partnerships (PPP)] that have received FDI and made overseas investments in any of the previous year(s), including the current year are required to submit a yearly return on foreign liabilities and assets (FLA) under the terms of FEMA 1999.

The Reserve Bank takes part in the International Monetary Fund’s (IMF) Co-ordinated Direct Investment Survey (CDIS) and Co-ordinated Portfolio Investment Survey (CPIS). Here, consolidated data gathered from FLA returns relevant to these entities’ positions in foreign financial liabilities and assets are reported as of the end of the preceding financial year (FY) and the latest FY. Additionally, the Balance of Payments (BoP) and International Investment Position (IIP) of India are compiled using this data.

Applicability

All Indian entities that have either drawn FDI or made ODI must submit an FLA report. That applies independently of the transaction’s size or percentage, so compliance is required for even a small amount of foreign investment. This obligation applies to listed and unlisted companies, making it a widely accepted regulatory standard.

Who is required to file FLA return?

An FLA Return must be filed by any company that had foreign assets or liabilities as of the end of March, as well as any LLP that had received capital contributions and was still in operation.

The Indian company is not needed to file the FLA Return if it has no outstanding FDI or ODI investments as of March 31 of the reporting year. Similar to the above, if an Indian firm has outstanding FDI and ODI but has not received any new FDI or ODI in the current year, the company is still required to file the FLA Return by July 15 of each year.

Filing of FLA return

An Excel spreadsheet is the required format for submitting the FLA yearly return. All businesses meeting the aforementioned conditions are required to file it. The FLA annual return must be filed before July 15 of the relevant year. It must include information regarding FDI or ODI received or made by the company, as applicable, for the current year as well as any previous year(s).

Any authorised employee of the organisation may email the form to fla@rbi.org.in, the official RBI email address. The Company Secretary, Chief Financial Officer, and Directors are the members of the company permitted to submit the FLA return. The information submitted must include the necessary financial and other information based on the company’s audited accounts.

If the business does not get its finances audited by the deadline of July 15, it must file its FLA return using the unaudited accounts and then have its accounts audited. Suppose there are any changes to the information provided after the audit. In that case, the company must submit a new form with the amended information before the end of September of the same year. The RBI will send an acknowledgement email to the authorised person’s email address upon filing the FLA return. 

Important points to be kept in mind for filing an FLA return

• The company will be required to pay a penalty equal to three times the amount involved in the violation if the FLA return is not filed by the deadline. If it cannot be quantified, the company will be required to pay a fine of Rs. 2,000,000. The company will be required to pay a fine of Rs 5,000 each day if the violation persists.
• The FLA return must be filed no later than July 15 of that year. If the FLA return is based on unaudited accounts, a new form must be filed before the end of September of the same year based on audited accounts.
• The RBI regional offices have the authority to compound contraventions. However, the regional offices in Panaji and Kochi are exempt from this.

Companies exempted from filing FLA return

• Companies are excluded from filing FLA returns if they have solely issued shares to non-residents of India on a non-repatriable basis.
• Companies are excluded from filing FLA returns if they have no outstanding FDI or ODI balances at the end of the financial year.
• Companies are excluded from filing FLA returns if they have only received share application money and have not received any FDI or made any ODI.

Details to be reported 

The FLA return must fully disclose the company’s foreign assets and liabilities. It comprises:

FDI in the Company: In this case, the company is required to make public information regarding equity investments, other capital assets, and reinvested company earnings owned by non-resident companies. It aids in determining the extent of foreign influence and ownership within the business. 

The Company’s ODI: Information on the company’s investments in overseas entities is needed for this section. It consists of inter-company borrowings, various capital instruments, and equity capital. These specifics aid in tracking the volume and type of foreign investments made by Indian businesses. 

Other Assets and Liabilities: Detailed information about trade credits, loans, borrowings, guarantees, trade payables, trade receivables, and other financial liabilities and assets are included under “Other Liabilities and Assets.” Beyond equity interests, this offers a comprehensive insight into the company’s global financial condition.

Penalties for Non-Compliance: 

Violations of the FLA reporting obligation are subject to FEMA 1999 penalties. If a business misses the deadline for submitting the FLA return¹, it may be subject to sanctions, which could include fines or other punitive actions at the RBI’s discretion. 

Indian businesses that are involved in FDI or ODI must strictly adhere to the FLA reporting requirements. Companies should carefully follow the most recent notification, circulars, and recommendations given by the RBI in order to ensure accurate and prompt filing of the FLA return.

Practical Issues in Filing

Several practical issues may arise when filing the Foreign Liabilities, and Assets return in India. The following are some typical issues that people and organisations may experience when submitting their FLA returns: 

Data Collection – collecting accurate and thorough data on foreign assets and liabilities is one of the main issues. Acquire the necessary information from diverse sources. It could be necessary for various departments.

The complexity of Reporting – A variety of financial and non-financial assets and liabilities, including loans, trade credits, guarantees, and more, must be reported on the FLA return.

Currency Conversion – FLA returns must be submitted in Indian Rupees (INR), so amounts reported in foreign currencies must be converted.

Standardised Data Format – Ensure that the data is prepared in accordance with the RBI’s prescribed format for FLA returns.

Verify Data Accuracy – Implement thorough validation procedures to ensure accurate and comprehensive data.

Timely Submission – The FLA return must be submitted within a certain deadline, which is normally on or before July 15 of each year. 

Compliance and Penalties – Failure to meet the deadlines may result in fines and other legal consequences. It is crucial to make sure that all required information is accurately documented and presented on time.

Technical Issues – There may be compatibility problems with specific browsers or operating systems with the online platforms for FLA returns. Dealing with such technical issues may cause extra delays in the filing process.

Conclusion

Establishing a clear data collection and reporting method, allocating enough time for data validation and conversion, and utilising suitable tools or software to help streamline the FLA return filing process are all advised to address these practical challenges. By taking these actions, you can more successfully handle the practical challenges involved with filing the FLA return and guarantee compliance with RBI laws.

FAQs: –

Read Our Article: Compounding of Contraventions under FEMA

1. https://www.rbi.org.in/commonperson/English/Scripts/FAQs.aspx?Id=1171