A Complete Overview of Foreign Direct Investment Compliance under FEMA

Deepti Shikha

27 May, 2020

Foreign Direct Investment (FDI) has been an essential source of funds for countries where capital is not readily available. Through Foreign Direct Investment, an individual or entity can invest overseas money in an Indian Company. The Foreign Direct Investment policy in India is regulated under the Foreign Exchange Management Act (FEMA), 1999, and governed by the Reserve Bank of India (RBI). As per the data provided by the Organization for Economic Co-operation and Development (OECD), an investment of more than 10% or 10% from overseas is considered as FDI.

FEMA acts as an essential source for the growth and development of various sectors in India. The primary aim of FEMA is to facilitate external trade, promote orderly development, and balance payments and also to maintain foreign exchange in India. Below is the list of important provisions for foreign investment compliance under FEMA:

• Annual Return and Foreign Assets and Liabilities.
• External Commercial Borrowings.
• Annual Performance Report.
• Advance Reporting Form.
• Single Master Form
• Form FC-GPR
• Form FC-TRS
• Form ODI

Important FEMA Guidelines and Features for Foreign Direct Investment

As per FEMA, all the forex-related offenses are civil offences, whereas FERA regarded them as criminal offences. Additionally, there are other guidelines, too, that must be followed. They are as follows:

• FEMA is not applicable to Indian citizens residing outside India. This criterion is calculated by the number of days a person resided in India during the previous financial year i.e., 182 days or more to be a resident. It was also noted that even a branch, an office, or an agency can be referred to as a ‘person’ for the purpose of checking residency.
• The Central Government authorized FEMA to impose restrictions and also to supervise three things, i.e., any payment made to a person outside India, or receipts from them, Forex and foreign security deals.
• It also specifies the areas around acquisition or holding of Forex that need definite permission from the Reserve Bank of India (RBI) or the Government.
• FEMA distributes and puts the foreign exchange transactions into two categories-Capital Account and Current Account. A Capital Account Transaction alters the assets and liabilities outside India. Hence, any transactions that change the overseas assets and liabilities for an Indian resident in a foreign country or vice versa are classified as Capital Account Transaction. Any other type of transaction falls into the current account category.

How can an Indian company Receive Foreign Direct Investment?

Foreign Direct Investment or FDI can be made through two routes. They are:

Automatic Route

As per Regulation 16 of FEMA 20 (R), foreign investment is permitted through the automatic route without receiving any prior approval of the Government or the Reserve Bank of India, in all the activities or sectors.

Government Route

Activities that are not covered in FDI under automatic route needs prior approval of the Government. The Government has provided proper guidelines regarding the same.

Capital Instruments Allowed for Receiving Foreign Direct Investment in an Indian Company

Capital Instruments can be referred to as equity shares, preference shares, debentures, and share warrants issued by an Indian Company.

Equity Shares: The shares issued in accordance with the provisions of Companies Act, 2013, are known as equity shares. It includes partly paid equity shares issued on or after 8^th July, 2014.

Share warrants: Share warrants that have been issued on or after 8^th July, 2014 is considered as capital instruments.

Debentures: ‘Debentures’ here means fully, mandatorily, and compulsorily convertible debentures.

Preference shares: ‘Preference’ shares for this purpose means fully, compulsorily and mandatorily convertible preference shares.

• Non-convertible or optionally convertible preference shares or partially convertible preference shares that had been issued on and up to 30^th April 2007, including optionally convertible or partially convertible debentures that have been issued up to 7^th June 2007 till their original maturity are considered as Foreign Direct Investment compliant capital instruments.
• Non-convertible or optionally convertible shares or partially convertible preference shares that have been issued after 30^th April 2007, including optionally convertible or partially convertible debentures issued after 7^th June 7, shall be treated as debt. It shall require conforming to the  External Commercial Borrowings (ECM) guidelines regulated under the Foreign Exchange Management (Borrowing and Lending in Foreign Exchange Regulations), 2000, which is amended from time to time.

Can a Person Resident Outside India Acquire Capital Instruments on Stock Exchange via FDI?

For the purpose of Foreign Direct Investment, the persons who can acquire Capital Instruments on the stock exchanges are as follows:

• FPI or Foreign Portfolio Investment registered with SEBI.
• Non-Resident Indian’s or NRI’S.
• If the investors who is a resident outside India already acquired and also continues to hold the control of such Company in accordance with the regulations prescribed by SEBI.

What are the Guidelines for Reporting of Transfer of Shares in Foreign Direct Investment?

A person resident outside India needs to file form FC-TRS for the purpose of transfer of capital instruments by way of sale in accordance with FEMA 20 R, from:

• A resident outside India is holding the capital instruments in an Indian Company on a repatriable basis to any person who is a resident outside India holding capital instruments on a non-repatriable basis.
• A resident outside India holding the capital instruments in an Indian company on a non-repatriable basis to a resident outside India holding the capital instruments on repatriable basis;
• A person who is a  resident in India holding capital instruments in an Indian company to any person resident outside India holding  the capital instruments on repatriable basis
• Any sale of capital instruments on a recognized stock exchange by a person who is a resident outside India as per Regulation 10(3) of FEMA 20R has to be reported by such person in Form FC-TRS.

One does not need to file the form FC-TRS for the following:

• For the purpose of transfer of shares of an Indian Company from a non- resident holding the shares on a non-repatriable basis to a resident and vice versa.
• For transferring shares from an outside resident holding capital instruments in an Indian company on a repatriable basis to a person who is a resident outside India on a repatriable basis.
• Transfer of shares made as a gift.

What are the compliance set up by FEMA for Foreign Direct Investment?

The compliances prescribed by FEMA for Foreign Direct Investment are as follows:

Annual Return on Foreign Liabilities and Assets

An Annual Return must be mandatorily filed by all the Indian resident companies which have received FDI or made ODI in any of the previous financial years, including the current year. This annual return is made for foreign assets and liabilities, also known as FLA Return.

If in case the Indian Company does not have any outstanding investment with respect to Foreign Direct Investment or ODI as at the end of the reporting year, the Company is not bounded to submit FLA Return.

Also, if the Indian Company has not received any fresh Foreign Direct Investment or Overseas Direct Investment (ODI), then that Company still needs to submit an FLA Return every year by 15^th July.

Annual Performance Report (APR)

Any resident individual or an Indian party or entity who has made any Overseas direct Investment needs to submit an Annual Performance Report (APR) IN Form ODI Part II to the AD bank. This report is filed with respect to Joint Venture (JV), Wholly Owned Subsidiaries (WOS) outside India. This must be done on or before 31^st December every year.

External Commercial Borrowings

The borrowers need to report all the external commercial borrowings or ECB transactions to the RBI on a monthly basis through an AD Category-I bank. The form prescribed to complete the same is ECB2 Return to be filed on a monthly basis.

Single Master Form

Form FC-GPR, LLP-I, LLP-II, FC-TRS, CN, ESOP, DI, DRR, InVi needs to be filed and submitted under the head Single Master form. The Reserve Bank of India has also released a user manual to bring clarity regarding the procedure for filing a single master form, which was introduced on 7^th June, 2018. This form was introduced for the purpose of integrating the existing reporting norms for foreign investment in India.

Advance Reporting Form (ARF)

If an Indian Company receives investment from outside India for the issue of shares or any other eligible securities as per the FDI Scheme, the same must be reported to the Regional Office concerned of the Reserve Bank. The details of the amount must be provided through the AD category bank within 30 days from the date of issue of shares.

Form FC-GPR

This form is issued by RBI as per the Foreign Exchange Management Act, 1999. This form is furnished when the Company receives the foreign investment and against such investment made the Company allots shares to the foreign investor. It is the duty of the Company to file all the required details regarding such allotment of shares with the RBI. Then the RBI within a time span of 30 days has to use the form FC-GPR or Foreign Currency-Gross Provisional Return for submitting details with the RBI. 

Form FC-TRS

The FC-TRS is also known as Foreign Currency Transfer. It is a form that is used by a shareholder resident outside India, whether it be an Indian resident or vice versa, when they transfer their shares. The form FC-TRS must be filed along with Form FC-GPR, which needs to be submitted to its authorized dealer bank, who will further submit the same document to RBI.

Form ODI

A resident individual and an Indian party is required to submit form ODI while making an overseas investment. The concerned party must submit the share certificates or any other documentary evidence of investment made in foreign JVs or WOS. The certificate must be submitted to the designated AD within 30 days.

Is it possible for a resident Outside India Invest in Securities as per FDI?

 Foreign Portfolio Investors (FPIs), Overseas Citizens of India (OCIs), Non-Resident Indians (NRIs), Multilateral Development Bank, Foreign Central Banks, Long term investors like the Sovereign Wealth Funds, Multilateral Agencies/ Endowment Funds, Insurance Funds and Pension Funds having done registration with SEBI  as a Long Term Investor can invest in other securities as mentioned in Schedule 5 to Notification No FEMA 20.

Who is an FVCI as per FEMA?

Foreign Venture Capital Investor’ (FVCI) refers to an investor that is incorporated and established outside India. It must also complete its registration process with the Securities and Exchange Board of India under the Securities and Exchange Board of India (Foreign Venture Capital Investors) Regulations, 2000.

Can a Foreign Investor make Investment in Rights shares issued by an Indian company?

 There are no restrictions under the FEMA for making investment in the Rights shares, which is issued at a discount by an Indian company according to the provisions of the Companies Act, 2013. The actual offer on rights basis made to the persons resident outside India is as follows:

• In shares of a listed company on a recognized stock exchange at a price as fixed by the Company and
• In the case of non-listed Companies at a price, this is not less than the price offered to the resident shareholders.

Conclusion

One can invest in India via Automatic Route which does not require approval from RBI or as per the Government Route, which requires prior approval from the concerned Ministries or Departments via a single-window – Foreign Investment Facilitation Portal (FIFB) administered by the Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce and Industry, Government of India. All proposals are shared with the Ministry of External Affairs (MEA) and the Department of Revenue (DoR) for the record. Any advice or comments from the above-mentioned departments are directly shared with the concerned Administrative Ministry or Department assigned to decide on the proposal. Proposals are scrutinized within one week, and additional information or clarifications, if required, are asked for. On getting all the required information, the Competent Authority needs to give out its decision.