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FEMA compliance for Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) is an organization's transfer of funds from one country to another in order to create 'lasting interest.' According to the OECD (Entity for Economic Co-operation and Development), if the entity acquires at least 10 percent

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What is FDI

Foreign Direct Investment (FDI) is an organization's transfer of funds from one country to another in order to create 'lasting interest.' According to the OECD (Entity for Economic Co-operation and Development), if the entity acquires at least 10 percent of voting power in another organization, a permanent interest is calculated.

FDI's definition isn't limited to international capital movement alone. Its concept also includes the international movement of complementary elements of capital-such as skills, systems, management, technology, etc.

Foreign Direct Investment (FDI) is one of the Indian company's main sources of funds. Under FDI, money from individuals or from foreign companies is invested in Indian startups and existing companies. The FDI Policy is governed by the Reserve Bank of India (RBI) under the Foreign Exchange Management Act (FEMA) 2000.

In India, the Foreign Direct Investment Policy is regulated by the Reserve Bank of India's Foreign Exchange Management Act, 1999. An investment of 10 percent or above from overseas is known as FDI, according to the Organization for Economic Co-operation and Development (OECD).

FDI can be brought through

Foreign investment can be made in India through:

➲ Automated route

Under this route, there is no need for prior government approval for making an investment in the Indian company

➲ Approval route

Under this route, prior approval is need before making the investment in the Indian company


Sectors in which 100% FDI is allowed under automatic route:

➲ Agriculture sector

➲ Animal husbandry

➲ E-commerce activity

➲ Healthcare sector

➲ Textile garment

➲ Capital goods

Sectors where FDI is allowed under approval route

➲ Public sectors and Banks (public bank) – 20%

➲ Core investment company -100%

➲ Retail food product trading- 100%

FDI is not allowed for the following sector (prohibited sector) neither in the automatic route nor in the approval route:

➲ Lottery business including public/ private, online lottery, etc

➲ Betting/ gambling including casinos

➲ Chit fund

➲ Nidhi company

➲ Trading on transferable development rights (TDR)

➲ Real estate business

➲ Manufacturing of cigar, cigarettes, tobacco or tobacco substitutes

➲ Sectors not open to private sector investment- atomic energy, railway operations (other than permitted activities mentioned under the Consolidated FDI policy)

Main compliances under FEMA

FEMA has acted as an important source in India for the growth and development of different sectors. FEMA's main aim is to promote international trade, balance payments, promote orderly growth, and maintain India's international-exchange market. Below is the list of main compliance to be followed under FEMA's provisions:

➲ Annual Return on Foreign Liabilities and Assets

FLA (foreign liabilities and assets) return is required to be submitted mandatory by all Indian resident companies which have received or have outstanding FDI or ODI in any previous year including the current year by 15th July each year.

➲ Annual Performance Report (APR)

An Indian Party, a resident person who has made an Overseas Direct Investment (ODI) must apply to the AD Bank, on or before 31 December of each year, an Annual Performance Report (APR) in the Form ODI Part II in respect of each joint venture, wholly-owned subsidiaries (WOS) outside India.

➲ External Commercial Borrowings

Borrowers need to report to RBI on a monthly basis through AD category-1 bank in form ECB 2 about all the ECB transactions.

➲ Advance Reporting Form (ARF)

An Indian company receiving investment from outside India for the issue of shares or other eligible securities under the FDI Scheme shall report the details of the amount of consideration to the Reserve Bank's Regional Office concerned within 30 days of the date of the issue of the shares through its AD Category I bank.

➲ Form FC-GPR

When the company receives the foreign investment and the company allocates shares to such foreign investor against such investment, then it is the company's duty to file details of such allocation of shares with The RBI within 30 days and for that company to use the FC-GPR (Foreign Currency-Gross Provisional Return) form for submitting information to RBI.

➲ Form FC-TRS

It is a method used by Indian resident shareholders outside India, or vice versa when they transfer their shares. The FC-TRS form will be submitted to its designated dealer bank along with the FC-GPR form, which will send the same to the RBI

➲ Form ODI

An Indian Party and a resident person who makes an investment overseas are required to send an ODI form. When they collect share certificates or some other documentary evidence of investment in the international JV / WOS as proof of the investment and send the same within 30 days to the appointed AD.

Important Compliance as per FEMA

Sl No

Compliance Particulars

Details of compliance

Due Date

Key Points

1

Annual Returns on Foreign Liabilities and Assets (FLA return)

All India-based businesses who received FDI and/or made ODI in the prior year(s), including the current year, are mandated to submit a FLA Return.

Till 15th july every year

The Indian firm is not required to submit the FLA Return if it has no outstanding FDI or ODI investments as at the end of the reporting year. Similar to the above, if an Indian firm has outstanding FDI and/or ODI but has not received any new FDI or ODI in the most recent year, the company is still obligated to submit the FLA Return by 15 July each year.

2

ECB (External Commercial Borrowings

All ECB transactions must be reported by borrowers to the RBI on a monthly basis via an AD Category-I Bank in the form of a "ECB 2 Return."

Every Month

The updated ECB 2 Return divides the disclosure of hedging information into two categories—financial and natural—and only calls for the publication of these items: 1. Annualized percentage cost of financial hedge(s) for ECB. 2. Outstanding primary ECB amount and the currency thereof. 3. Notional value and percentage of outstanding ECB amount of financial hedge(s) as well as natural hedge. 

3

APR (Annual Performance Report)

For each joint venture (JV) or wholly owned subsidiary (WOS) outside of India, an Indian Party (IP) / Resident Individual (RI) that has made an Overseas Direct Investment (ODI) is required to file an Annual Performance Report (APR) in Form ODI Part II to the AD bank.

Before 31st December every year

The statutory auditor of the Indian party must certify the APR. In the case of resident individuals, statutory auditor or chartered accountant certification of APRs is not required; self-certification is acceptable instead.

4

Single Master Form

combines the reporting requirements for FDI in India, regardless of the method used to make the investment.

1. Form FC-GPR reporting for FDI under SMF must be completed within 30 days of allotment. 2. FC-TRS reporting for SMF must be completed within 60 days of the earliest of the following: the transfer of capital instruments or the receipt or remittance of cash. 3. For reporting FDI and transferring capital contributions or profit shares in LLPs, respectively, Form LLP-I & LLP-II must be filled. 4. Within 60 days of the transfer, Form CN must be filled out to report the issuing or transfer of convertible notes.

FC-TRS: Individual Filing: The transferor or transferee corporation that is based in India may report in FC-TRS. After registering as a business user, a resident individual may record a transfer between individuals, but the authority letter must be in the reporting individual's name.

 

FC-GPR

The issuance of bonus or rights shares to individuals residing outside of India must be disclosed in Form FC-GPR, as must the issuance of shares in connection with the conversion of ECBs, royalties, lump-sum technical know-how fees, or the import of capital goods by units in SEZs.

5

ODI form

overseas financial commitments made to wholly owned subsidiaries and joint ventures (JVs) (WOS)

obtain share certificates or any other documentary proof of participation in the overseas JV or WOS and provide it to the designated AD within six months as proof of investment;

When shares or securities are sold in the case of disinvestment, the sale proceeds must be returned to India as soon as they are received and, in any case, no later than 90 days after the date the shares or securities were sold. Documentary proof to this effect must be submitted to the Reserve Bank through the designated Authorized Dealer.

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