FDI and FEMA Compliances

The Foreign Exchange Management Act or FEMA is an act of parliament that guides and regulated the flow of fund from foreign countries into India and vice versa. A corporate body must follow all the guidelines mentioned under FEMA act for smooth business operation. If any business fails to be complaint with the rules and regulations, then heavy penalties can be imposed on the business, therefore, it is important for you to be FEMA complaint. This act helped smooth the functioning of cross-border trade, increased foreign investment, transparency of international financial transactions, and balance of trade payments.

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Annual Compliances for Branch Office

Roc Annual Compliances/filings

Filing of form FC-3 (Financials):  Every foreign company have to file form within six months of the close of the financial year to ROC along with below documents:

  • Copy of financial statements duly authenticated along with list of all places of business in India established by the foreign company as on the balance sheet date.
  • Copy of latest consolidated financial statement of parent company (where such documents are not in English language, there shall be annexed a certified translation in the English language).
  • Statement of Repatriation of profits
  • Statement of Related party transaction
  • Statement of transfer of funds in relation to fund transfer between place of business of foreign company in India and related party of the foreign company outside India including its holding, subsidiary and associate company
  • RBI Approval letter obtained for every establishment in India by a foreign company./li>

Filing of form FC-4 (Annual Return):  Every foreign company shall file within sixty days from the last day of its financial year, to the ROC annual return in Form FC-4 along with below documents

  • Details of Promoters, Directors and KMP with changes therein during the financial year.
  • Details of remuneration of directors and key managerial personnel
  • Details of the meeting of the members or board and its various committees along with attendance details.
  • Particulars of members and debenture holders along with changes therein during previous financial year.
  • Particulars of Holding, subsidiary and other associated companies and firms.
  • Details of punishment/Penalties/Compounding of offences, if any.

Taxation

A branch office does not have a separate legal entity and is subject to the tax applicable on its parent office. As a result, a branch office is taxed as a foreign company in India and is liable to pay tax at the rate of 40 percent plus applicable surcharge and cess.

Remittance of profit or surplus

Branch office may remit surplus funds outside India after netting of applicable Indian taxes and need to produce the following documents to the satisfaction of the Authorised Dealer Category-I bank through whom the remittance is requested:

  • A certified copy of the audited financial statements for the relevant year.
  • A Chartered Accountant’s certificate certifying
    • 1.  the manner of calculation of the remittable profit;
    • 2.  that the entire remittable amount has been earned by the undertaking by the permitted activities and
    • 3.  that any profit on revaluation of the assets of the branch should not be included.

Annual Activity Certificate (AAC)

The branch office has to submit the Annual Activity Certificate for every financial year along with the audited financial statements and receipt & payment account on or before September 30th following the financial year. In case the annual accounts of the office are finalized for the period ending other than March 31, the AAC along with the audited financial statements may be submitted within six months from the Balance Sheets date to the Authorised Dealer Category-bank and the Director General of Income Tax (International Taxation), Drum Shape Building, I.P. Estate, New Delhi 110002.

Closure of office and remittance of proceeds

Requests to close the branch office may be submitted to the Authorised Dealer Category - I bank along with the following documents:

  • Copy of the Reserve Bank's/Authorised Dealer Category-I bank’s approval for establishing the office.
  • Auditor's certificate:
    • 1.  indicating the calculation of the remittable amount has been arrived at and supported by a statement of assets and liabilities, and the manner of disposal of assets;
    • 2.  confirming that all liabilities in India including gratuity and other benefits to employees, etc. have been either fully paid or adequately provided for;
    • 3.  confirming that all income accruing from sources outside India (including proceeds of exports) are repatriated to India.
  • Confirmation from the applicant/parent company that no legal proceedings are pending against the office in India and there is no legal impediment to the remittance.
  • A report from the ROC regarding compliance with the provisions of the Companies Act, 2013, for winding up of the branch office in India.
  • Any other document/s, stated by the RBI/Authorised Dealer Category-I bank while approving.

Annual Compliances for Project Office

Roc Annual Compliances/filings

Filing of form FC-3 (Financials):  Every foreign company have to file form within six months of the close of the financial year to ROC along with below documents:

  • Copy of financial statements duly authenticated along with list of all places of business in India established by the foreign company as on the balance sheet date.
  • Copy of latest consolidated financial statement of parent company (where such documents are not in English language, there shall be annexed a certified translation in the English language).
  • Statement of Repatriation of profits
  • Statement of Related party transaction
  • Statement of transfer of funds in relation to fund transfer between place of business of foreign company in India and related party of the foreign company outside India including its holding, subsidiary and associate company
  • RBI Approval letter obtained for every establishment in India by a foreign company.

Filing of form FC-4 (Annual Return):  Every foreign company shall file within sixty days from the last day of its financial year, to the ROC annual return in Form FC-4 along with below documents

  • Details of Promoters, Directors and KMP with changes therein during the financial year.
  • Details of remuneration of directors and key managerial personnel
  • Details of the meeting of the members or board and its various committees along with attendance details.
  • Particulars of members and debenture holders along with changes therein during previous financial year.
  • Particulars of Holding, subsidiary and other associated companies and firms.
  • Details of punishment/Penalties/Compounding of offences, if any.

Taxation

A project office does not have a separate legal entity and is subject to the tax applicable on its parent office. As a result, a project office is taxed as a foreign company in India and is liable to pay tax at the rate of 40 percent plus applicable surcharge and cess

Remittance of profit or surplus

Authorised Dealer Category–I bank may allow remittances by project offices pending winding up /completion of the project by submission of the following:

  • Audited project accounts;
  • the statutory auditor’s certificate showing the manner of calculation of the remittable surplus and confirming that sufficient provisions have been made to meet the liabilities in India; and
  • An undertaking from the project office that the remittance will not affect the completion of the project in India and in case of any shortfall of funds, then requirement will be met by inward remittance from abroad.

Annual Activity Certificate (AAC)

AAC from a Chartered Accountant showing the project status and certifying that the project office’s accounts have been audited and the activities are in conformity with the permission given by the RBI may be submitted by the project office to the designated Authorised Dealer Category-I bank.

Annual Compliances for Liaison Office

Roc Annual Compliances/filings

Filing of form FC-3 (Financials):  Every foreign company have to file form within six months of the close of the financial year to ROC along with below documents:

  • Copy of financial statements duly authenticated along with list of all places of business in India established by the foreign company as on the balance sheet date.
  • Copy of latest consolidated financial statement of parent company (where such documents are not in English language, there shall be annexed a certified translation in the English language).
  • Statement of Repatriation of profits
  • Statement of Related party transaction
  • Statement of transfer of funds in relation to fund transfer between place of business of foreign company in India and related party of the foreign company outside India including its holding, subsidiary and associate company
  • RBI Approval letter obtained for every establishment in India by a foreign company.

Filing of form FC-4 (Annual Return):  Every foreign company shall file within sixty days from the last day of its financial year, to the ROC annual return in Form FC-4 along with below documents

  • Details of Promoters, Directors and KMP with changes therein during the financial year.
  • Details of remuneration of directors and key managerial personnel
  • Details of the meeting of the members or board and its various committees along with attendance details.
  • Particulars of members and debenture holders along with changes therein during previous financial year.
  • Particulars of Holding, subsidiary and other associated companies and firms.
  • Details of punishment/Penalties/Compounding of offences, if any.

Annual Activity Certificate (AAC)

The liaison office has to submit the Annual Activity Certificate for every financial year along with the audited financial statements and receipt & payment account on or before September 30th following the financial year. In case the annual accounts of the office are finalized for the period ending other than March 31, the AAC along with the audited financial statements may be submitted within six months from the Balance Sheets date to the Authorised Dealer Category-bank and the Director General of Income Tax (International Taxation), Drum Shape Building, I.P. Estate, New Delhi 110002.

Closure of office and remittance of proceeds

Requests to close the liaison office may be submitted to the Authorised Dealer Category - I bank along with the following documents:

  • Copy of the Reserve Bank's/Authorised Dealer Category-I bank’s approval for establishing the office.
  • Auditor's certificate:
    • 1.  indicating the calculation of the remittable amount has been arrived at and supported by a statement of assets and liabilities, and the manner of disposal of assets;
    • 2.  confirming that all liabilities in India including gratuity and other benefits to employees, etc. have been either fully paid or adequately provided for;
    • 3.  confirming that all income accruing from sources outside India (including proceeds of exports) are repatriated to India.
  • Confirmation from the applicant/parent company that no legal proceedings are pending against the office in India and there is no legal impediment to the remittance.
  • A report from the ROC regarding compliance with the provisions of the Companies Act, 2013, for winding up of the office in India.
  • Any other document/s, stated by the RBI/Authorised Dealer Category-I bank while approving.

Filing of FC-GPR (Foreign Currency Gross Provisional Return)

Applicability

Form FC-GPR is need to file in case of Issue of capital instruments by an Indian Company to a person resident outside India and capital instruments can be Equity shares/Compulsorily Convertible Preference Shares/Compulsorily Convertible Debentures.

Procedure

  • The applicant reporting for the transaction has to register for Entity User first and then for Business User at FIRMS Portal
  • The applicant has to Logged into Single Master Form and has to select the Return Type as FC-GPR.
  • The applicant has to fill the below details and attach the below required documents with the form and must be filed within 30 days from the date of allotment.

Details in FC-GPR

Entity Details:  The Investee Company details like CIN, Company Name, PAN details are pre-filled while some other details like entry route, applicable sectoral cap/statutory ceiling will have to be reported separately.

Issue Details:  Date of Issue, Nature of Issue and Initial FC-GPR Reference No. in case of subsequent filing. Change in the shareholding pattern due to this transaction need to be reported.

Details of the Foreign Investors:  General details such as number of investors, Name, Address, Country of residence, Constitution/nature of the investing entity. Remittance details like Name & Address of AD Bank, Mode of Payment, Date and Amount of remittance, FIRC Number are filled. FIRC Copies, KYC Reports, Debit Statement are attached.

Details relating to the Amount of Issue:  Total Amount of Inflow and Total amount for which capital instruments have been issued.

Particulars of the Issue:  Details like Type of Capital Instruments, Number of Instruments, Conversion Ratio, Number of Equity shares on fully diluted basis, Face Value, Premium, Issue price per instrument, Value of shares allotted are provided in the Form. Fair Value of the issue as per the Valuation Report of the SEBI registered Merchant Banker/Chartered Accountant.

f) Shareholding Pattern:  The applicant shall ensure that the details are correctly filled in the form, so that the shareholding pattern which is auto- calculated is correct. Pre transaction values are auto calculated from the Entity Master. Post-Transaction Values are auto-calculated based on the details provided. Post transaction= Pre transaction value of shares + Value of shares reported in the form.

Documents Required

  • Copy of FIRC (Foreign Inward Remittance Certificate)
  • Copy of KYC (Know Your Customer) report of the remitter.
  • Declaration by authorized representative of the Indian Company as per format provided in SMF- user manual.
  • CS Certificate as per format given in the RBI user manual stating that all requirements have been complied with.
  • Valuation Report by Chartered Accountant/Merchant Banker indicating the manner of arriving at the price of the capital instruments issued to the person resident outside India.
  • Copy of FIPB approval (if required).
  • Board Resolution for the allotment of securities along with the List of Allottees.
  • Memorandum of Association: if applicable
  • For Rights/ Bonus issue: Acknowledgement letter of FC-GPR/FC-TRS, as applicable, of the original investment.
  • Letter of Debit Authorization.
  • Declaration for conversion of CCPS, if applicable
  • Pricing guidelines declaration

Filing of FC-TRS

Applicability

Form FC-TRS is need to file in case of transfer of capital instruments like Equity shares, Compulsorily Convertible Preference Shares or Compulsorily Convertible Debentures of an Indian Company from Resident to a Non-Resident and vice versa.

Procedure

  • The applicant reporting for the transaction has to register for Entity User first and then for Business User at FIRMS Portal
  • The applicant has to Logged into Single Master Form and has to select the Return Type as FC-TRS.
  • The applicant has to fill the below details and attach the below required documents with the form and must be filed within 60 days from the date of transfer of capital instruments or receipt/remittance of funds, whichever is earlier.

Details in FC-TRS

Common investment details:  CIN, Company name, PAN Number etc. while some other details like entry route and applicable sectoral caps have to be filled by the applicant. Other Details such as- Transfer by way of, change in shareholding pattern if any, Transfer is made from and towards whom, Nature of transfer, Type of transfer and The Details of Buyer or Seller in case transfer by sale or Donor or Donee details in case transfer by way of gift is filled in the following tab of Form FC-TRS.

Particulars of Transfer:  The details of transfer are filled like- Type of Capital Instruments, Number of instruments, Conversion ratio, Number of equity shares on a fully diluted basis, Face Value, Transfer Price Per Instrument, Total Amount of Consideration and Fair Value of the capital instrument at the time of transfer.

Remittance details:  (Not applicable in case of transfer by gift): The applicant has filled in Remittance Details like- Mode of Payment, Name of Authorized Dealer Bank, Address of Authorized Dealer Bank, IFSC Code, Amount received/remitted in Rupees, Tranche Number, Whether the transaction for which reporting is done is Last Tranche and Which the remitter is different from foreign investor.

Shareholding Pattern:  Pre-Transaction Values are auto-populated from the Entity Master of the Investee Company. Post-Transaction Values are auto-calculated based on the details provided. Post transaction= Pre-Transaction Value of shares + Value of shares reported in the Form.

Documents Required

  • Transfer by way of gift
  • Consent letter between donor and donee for the transfer.
  • Non-resident declaration
  • Copy of executed Gift Deed.
  • Transfer by way of sale
  • Consent Letter for transfer/receipt of consideration duly signed by the buyer and the seller.
  • If transferor and transferee are Companies, then Board Resolution approving the purchase and sale of securities.
  • Self-certified Copy of Passport of the Non-resident investor.
  • The shareholding pattern of the Investee Company before and after the acquisition of securities by a person resident outside India.
  • Valuation Report/Certificate indicating Fair Value of securities from a SEBI Registered Merchant Banker or Chartered Accountant or a practicing Cost Accountant not older than 3 months.
  • Declaration from the buyer to the effect that he is eligible to acquire capital instruments under FDI policy. (Eligibility Certificate)
  • Securities Transfer Deed in form SH 4.
  • FIRC/KYC received from the AD Bank in case of transfer from Resident to Non-Resident.
  • Remittance Certificate from the AD Bank in case of transfer from Non-resident to Resident.
  • Press Note-3 Declaration as per Consolidated FDI Policy, if applicable

Filing of FLA Return

Applicability

The Foreign Liabilities and Assets (FLA) return is required to be submitted annually by all the Indian companies whom have received FDI (foreign direct investment) and/or made investment abroad (i.e. overseas investment) in the previous year(s) and who carrying foreign Assets or Liabilities in their Balance Sheets as on 31st March.

Not-applicable in below instances:

  • No outstanding investment in respect of inward and outward FDI as on 31st March;
  • If Company has received share application money only and does not carrying any FDI or ODI outstanding in the balance sheet as on 31st March
  • If all non-resident shareholders of Company have transferred all their shares to the residents before 31st March and the Company does not carrying any FDI or ODI outstanding in the balance sheet as on 31st March;
  • Shares are issued by reporting Company to non-residents on non-repatriable basis.

Procedure

Details in FLA Return

  • Basic details of the company and directors
  • Paid-up Capital of the company
  • Details of Profit and Reserve & Surplus of the company
  • Sales and Purchase during the year
  • No. of Employees.
  • Details of the foreign investor
  • No. of shares and amount invested by foreign shareholder
  • Outstanding liabilities with foreign unrelated parties
  • Details of Overseas direct investment
  • Outstanding claims on foreign unrelated parties

Documents Required

  • Certificate of Incorporation
  • Previous FLA Return, if filed
  • MOA of the Company
  • Audited/Unaudited Financial Statements of the FY.

FAQs

What is the FEMA limit?
FEMA's LSR plan allows a resident Indian, NRI, or overseas citizen to transmit funds from India to other countries up to USD 250,000 in a single monetary year without the need for RBI or central government approval.
What is a FEMA violation?
The Foreign Exchange Management Act is an Act of the Parliament of India which was enacted to consolidate and amend the law relating to foreign exchange to facilitate external trade and payments and promote the orderly development and maintenance of foreign exchange market in India."
What is the penalty for violation of FEMA?
Any contradiction, under FEMA, may welcome after sorts of punishments: If the sum against which offense is amounts, at that point punishment will be "THRICE," the total associated with negation. Where the sum can't be measured, the punishment might be forced up to two lakh rupees.
What information should be reported in FLA return, if balance sheet of the company is not audited before the due date of submission?
If the company’s accounts are not audited before the due date of submission, i.e. July 15, then the FLA Return should be submitted based on unaudited (provisional) account. Once the accounts gets audited and there are revisions from the provisional information submitted by the company, they are supposed to submit the revised FLA return based on audited accounts by end - September.
In case where Account Closing Period of the company is different from reference period (end-March), can we report the information as per Account Closing Period?
No. Information should be reported for all the reference period, i.e. Previous March and Latest March. If Account Closing Period of the company is different from the reference period, then information should be given for the reference period on internal assessment.
Is it required to submit Annual Performance Report for ODI, if we have submitted FLA Return?
FLA Return and Annual Performance Report (APR) for ODI are two different returns and monitored by two different departments of RBI. So you are required to submit both the returns if these are applicable for your company.
Where can we find the detailed description of NIC-2008 code (item-6)?
In the FLA Return, industry codes are given as per the National Industrial Classification (NIC) -2008 codes. The details on NIC-2008 codes can be accessed through the following link, http://mospi.nic.in/mospi_new/upload/nic_2008_17apr09.pdf.
What is the definition of related party?
A related party is a person or entity that is related to the entity that is preparing its financial statements (referred to as the ‘reporting entity’).

A person or a close member of that person’s family is related to a reporting entity if that person:

  • has control or joint control over the reporting entity;
  • has significant influence over the reporting entity; or
  • is a member of the key management personnel of the reporting entity or of a parent of the reporting entity.

In the definition of a related party, an associate includes subsidiaries of the associate and a joint venture includes subsidiaries of the joint venture. Therefore, for example, an associate’s subsidiary and the investor that has significant influence over the associate are related to each other.
Where should we report Fully/Partially/Non-convertible debentures issued to the non-residents in FLA Return?
Fully/Partially/Non-convertible debentures are treated as debt securities. (a) If the debentures (of any type) are held by foreign investor, the amount should be reported at item 2.1 of Block 2A or 2B (depending upon the % equity plus participating preference share held by foreign investor) at nominal value.
What is the LRS limit?
The Liberalized Remittance Scheme (LRS) of the Reserve Bank of India (RBI) permits occupant people to transmit a specific cash flow during a budgetary year to another nation for venture and consumption. As per the predominant guidelines, inhabitant people may dispatch up to $250,000 per money-related year.
What is the difference between FPI and FDI?
The genuine distinction between the two is that while FDI intends to assume responsibility for the organization in which venture is made, FPI means to procure benefits by putting resources into offers and obligations of the contributed element without controlling the organization.
How much does LRS cost?
The Municipal Administration and Urban Development (MA&&UD) office reported Layout Regularization Scheme (LRS) for the 68 recently shaped districts and civil organization, with fundamental guideline charges beginning from ₹200 per sq ft for under 100 sq meters plot to ₹750 for plots over 500 sq meters.
If a company has more than one activity during the year then which NIC code should be reported by company (item-6)?
Company will select that activity, from which, they have earned major revenue.
What is the meaning of Technical Foreign Collaboration (item-11)?
Indian company which has entered into an agreement with a foreign entity in terms of technology transfer, know-how transfer, use of patent, brand name etc, then such type of agreements are treated as Foreign Technical Collaboration (FTC). If Indian reporting company has such type of FTC during the reporting period, then they should select ‘Yes’ against the item 11 under Section I of the FLA return.
What are participating and non-participating preference shares?
Participating preference shares are those shares which have one or more of the following rights:

  • To receive dividend, out of surplus profit after paying the dividend to equity shareholders.
  • To have share in surplus assets remaining after the entire capital is paid in case of winding up of the company.

On the other hand Non-participating Preference Shares are those shares which do not have one or more of the above said rights.
Where should we report the premium on issue of Equity Share Capital?
Premium on issue of Equity Share Capital is a part of Reserve, which should be reported under the item 4.1 of Block 1C- Reserves and Surplus, (in Section II).
What constitute in the Equity Securities under portfolio Investment?
Please furnish here the outstanding equity investments (secondary / stock market investment) by non-resident investors, other than those made under Foreign Direct Investment Scheme in India (i.e. other than those reported in Block-2A & Block-2B).
Whether, any assets or liabilities for Indian party (i.e. domestic assets and liabilities) are to be included in the FLA Return?
Any domestic liabilities or assets (even if it is in foreign currency) should not be reported in the FLA return.

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