What startups need to know about FDI reporting

In order to promote ease of reporting under the Government of India’s e-Biz project, the Reserve Bank of India (RBI) has made e-filing mandatory in relation to Foreign Direct Investment (FDI), effective from 8 February 2016. Physical filing has been discontinued.

Crudely put, FDI is the flow of funds from a foreign entity into an Indian entity. The RBI directive impacts procedural aspects for all entities (start-ups or otherwise) seeking foreign capital through the sale of fresh or existing shares (or debentures). Interestingly, while the online platform was introduced almost a year ago, the online filing of FDI reports was made mandatory only this year.

What are these forms?

Given that it involves foreign currency, any FDI transaction must be reported to the RBI in the specified format. There are three basic reporting forms, as follows:

1. Form FC-GPR (or ‘foreign currency gross provisional return’) is filed by an Indian company when it issues fresh shares to a foreign entity;
2. Form FC-TRS (or ‘foreign currency transfer of shares’) is filed when shares are transferred by or to, a foreign entity; and,
3. Form ADR (or ‘advance remittance form’) is filed by an Indian company when it receives money by issuing shares or convertible debentures to a foreign entity.

The information that needs to be shared in these forms includes (but is not limited to) the following:

1. Name of the company and its National Industrial Classification (NIC) code;
2. Whether the FDI was permissible under the “Automatic” or “Government” route;
3. The transfer mechanics: whether the transfer was from a resident to non-resident or vice-versa;
4. Know Your Customer (KYC) document or a foreign inward remittance certificate in the case of filing the advance remittance form;
5. Name and constitution of the buyers and sellers; and
6. Details of the proposed transaction with any earlier approval from RBI or the Foreign Investment Promotion Board (FIPB).

Along with the relevant form, supporting documents in the nature of a valuation certificate from a chartered accountant, extracts of the transaction document, and copies of earlier approvals from the regulatory authorities would need to be submitted. The timeline for filing the FC-GPR is within 30 days from the date of issuing the shares or debentures, whereas the FC-TRS is to be filed within 60 days from the date of receipt or payment of the amount envisaged in the transaction.

What’s new since it went online?

1. The basic first step for an entity to file FDI reports online is to obtain a digital signature and register on the e-Biz website. Obviously, this was not required earlier.
2. The onus of filing the FC-TRS appears to have shifted to the resident (in India) from the non-resident. Earlier, using the physical mode, the FC-TRS required a declaration signed by the non-resident at the end of the form, regardless of whether the resident was the buyer or the seller, thereby making the non-resident responsible for the filing. Presently, in the online method of filing, the onus of filing the forms lies with the resident, while the documents may be prepared by either the transferee or the transferor. While the declaration from the non-resident is still required, this may be submitted as an attachment to the FC-TRS.
3. Where the remitter or entity making the payment is not the same as the entity to whom the shares / debentures are being allotted, the online FC-GPR requests a “no-objection certificate” from the remitter detailing its relationship with the third party entity. Furthermore, the third party is also required to provide a written explanation, along with a copy of the agreement or board resolution for the allotment, among other documents.

These forms have been undergoing revisions since February 2014. First, the form FC-GPR was revised in order “to further capture the granular details of FDI as regards Brownfield/Greenfield investments and the date of incorporation of investee company”. Next, in July of the same year, due to a change in the industrial classification, the forms FC-GPR and FC-TRS provided a column for the company’s NIC code. Last year saw the introduction of the online facility for FDI reporting, although physical filing (offline) had not yet been discontinued.

With the focus turning towards technology through the Digital India initiative, various core services of the central and state governments – including obtaining necessary clearances, licenses and mandatory tax registrations – have moved online. Why the banks had initially shied away and procrastinated the online method of FDI filings could perhaps be blamed on technical glitches, but clearly there is no choice anymore.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)