RBI Crackdown on Foreign Investments: Demands Complete Disclosure

In a Circular of the Reserve Bank of India (RBI), numbered RBI/2017-18/194 A.P (DIR Series) Circular No.30, dated, 07^th June 2018, it announces to enquire into foreign funding received by Companies. Read the notice here.

RBI will keep a sterner watch on Foreign Investments

The present compliance announced in the First Bi-monthly Monetary Policy Review of April 5^th 2018. It introduced is an elaborate two-step method which supersedes any other foreign investment reporting orders issued from RBI. As per the circular RBI is looking at integrating and introducing transparency to the procedure of reporting and has introduced a Single Master Form (SMF), to be filled by companies online. India is ranked 100 on World Bank’s Ease of Doing Business Index. The latest revamp of reporting requirements under FEMA is expected to have a positive impact on India’s ranking on the index and improve its Distance to Frontier which is currently measured at 60.76.

RBI’s latest initiative is expected to be a source of much relief for foreign investors. Investors can now expect greater uniformity and transparency in the Indian market.

The RBI had addressed this Circular to all Category I authorized dealer Banks, who as per RBI designation are allowed to deal in foreign exchange. The category includes Commercial Banks, Urban Co-op Banks, and State Co-op Banks. They were asked to inform their client constituents of the changes in reporting compliance.

The first step would be the submission of initial data by companies as to the foreign investment they have received so far. It has to be submitted by the 20^th of July 2018, which is the deadline. Salient features of the SMF. Online filing subsumes 8 of the existing 12 forms into one single master form:

Features of the Single Master Form (SMF)

• The format of the SMF can be divided into three parts. Whilst the first and third part is common for all reporting, the second part (consisting of forms) would vary depending upon the mode of investment.
• The third part of the SMF contains certain requirements such as a certificate from a company secretary (only required for Form FC-GPR currently), a declaration by a non-resident transferor/transferee (only required for Form FC-TRS currently) etc. which have now been made common to all reporting.
• The format SMF also provides for an additional reporting of investment by a non-resident in an investment vehicle in Form InVi, which is currently not required under FEMA 20.
• Whilst the draft format of SMF has been released, it may be subject to further revision. The final form will be available on the RBI website in the RBI Master Direction on Reporting under FEMA shortly.

It is important to note that SMF is not a one-stop form, and subsumes only 8 out of the existing 12 forms prescribed under FEMA 20. Indian entities will still need to separately file certain other forms such as ARF, FLA, Form LEC (FII) and Form LEC (NRI), irrespective of SMF coming into effect.

Entity Master Form

Prior to implementation of SMF, the RBI had provided an interface to all Indian entities (companies, LLPs and start-ups) which have foreign investment in them, to provide data in respect of the total foreign investment they have received in a specified format. The preliminary information would consist of details about the types of foreign investments and investors, types of instruments issued to the investors, a declaration by the investor, modes of payment of investment amount. Reportedly, the issue of this Circular seems to have created chaos and confusion amongst companies as they would have to submit a whole range of information pertaining to the foreign investments they have been receiving over the years, by 20th of July 2018. Also, many companies are reluctant to disclose such information to RBI, as they might not have kept a record of the same and fear that they may be held liable for incorrect reporting or non-compliance of the said RBI directions. This may be difficult for Indian companies controlled by foreign entities, indirect foreign investment and those who had sidestepped disclosures by entering into complicated structures offshore.

As per the Circular, prior to the implementation of the SMF, the Indian entities would now have to submit data on total foreign investment they have received so far to the RBI on its website on or before 20th of July 2018. Further, the Indian entities would have to declare that the foreign investment received was within the sectoral cap and in accordance with the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2017. This disclosure must be submitted along with a signed undertaking of a declaration stating “foreign investment received and reported now will be utilized in compliance with the provision of Prevention of Money Laundering Act 2002 (PMLA) and Unlawful Activities (Prevention) Act, 1967 (UAPA)”. The statement must be signed by a company secretary or one who overlooks the compliance departments of the organization. But they must be authorized by the executive or managing director. According to the regulatory directive that was issued in June, the price at which companies placed shares with foreign investors would have to be justified by a merchant banker or chartered accountant. Under FEMA, borrowers are required to report all External Commercial Borrowings (ECB) transactions to the RBI on a monthly basis through an AD Category – I Bank in the form of ‘ECB 2 Return’. The erstwhile ECB 2 Return required borrowers to furnish complete details of financial hedge contracted by them with regard to principal and coupon including specific information regarding currency swap, forward, options, interest rate swap etc. RBI via a circular dated June 7th, 2018, has simplified the format of Part E of Form ECB 2 Return. The revised ECB 2 Return simplifies disclosure of hedging details into two baskets – financial and natural and requires disclosure of only the following:

Outstanding principal ECB amount and the currency thereof;

Notional value and percentage of outstanding ECB amount of financial hedge(s) as well as a natural hedge; and

• Annualized percentage cost of the financial hedge(s) for ECB.
• There is a further requirement to disclose annual Earnings before Interest and Depreciation in the disclosures with regard to foreign exchange earnings and expenditure for the last 3 financial years.

From the end of June 2018, monthly reporting of ECBs will need to be made in the revised format of Form ECB 2 Return. Any lapse with regard to the following would tantamount to a contravention of FEMA provisions:

• The time of reporting through this return; and/or
• Failure to adhere to the timeline of its submission; and/or
• The time of reporting through Form 83 (reporting of loan agreement details under FEMA). A keen eye would be kept by the regulators upon the quantum and frequency of receipt of foreign investments.

Other Disclosures

Apart from this, the Circular also spells out directions on companies or limited liability partnerships that have received foreign investment to come clean on whether it is being investigated by Enforcement Directorate, Central Bureau of Investigation or any other agency for violation of Foreign Exchange Management Act, 1999 (FEMA). Here, they face the dilemma whether any notice from an agency would be construed as ‘investigation’. The directions of the circular are within the ambit of sections 10(4) and 11(1) of the FEMA Act. The mandate includes disclosing, investments received from alternative investment funds (AIFs). A fund’s capital infusion in a company would be considered as a foreign investment if the manager or sponsor of the AIF is a foreign entity. The repercussions of non-compliance or incorrect reporting are severe. RBI has warned that Indian entities not complying with these instructions will not be able to receive foreign investment (including indirect foreign investment) and will be treated as non-compliant with Foreign Exchange Management Act, 1999 (FEMA).