It is usually noticed that corporates, especially those who set up shop in India from abroad and those in the MSME sector do not seem to give sufficient importance to the critical requirement of having to comply with the statutory requirements when it comes to filings with the Reserve Bank of India (RBI) and compliances under Foreign Exchange Management Act (FEMA). This might be happening more out of sheer ignorance of consequences of non-compliances or out of their inability to assign the necessary priority to this critical requirement. Either way, the consequences of non-compliance could be extremely costly.
Quite so often, the secretarial aspects of handling a lengthy series of filings with the RBI when it comes to a company’s investments from abroad or those in a company abroad get overlooked. In most cases, this is due to inadequate knowledge about the formalities involved. The RBI on its part is largely supportive of corporates; but off late, they have started cracking down on errant entities.
In order to understand the nature and extent of the RBI compliance requirements, below is a ready reckoner covering various compliance formalities
|Type of Filing||Form||Timeline|
|Foreign Direct Investment (FDI)||Form FCGPR||30 day from issue of equity|
|Form FCTRS||60 days from receipt of funds|
|Allotment of Shares||within 180 days of receipt of funds|
Overseas Direct Investment (ODI)
|Form ODI Part I (Initial Investment – UIN)||Pre-investment stage|
|Form ODI Part I (Subsequent Investments)||within 30 days of investment|
|Form ODI Part II (APR)||by 31st December every year|
|Submission of FLA||by 15th July every year|
|Form ODI Part III (Disinvest- ment)||within 90 days of sale proceed|
|Issue of share certificates||within 180 days from fund transfer|
External Commer- cial Borrowings (ECB)
|Form ECB (LRN Allotment)||Pre-loan stage|
|Form ECB 2 (Changes in ECB Terms)||Within 7 days of changes|
|Form ECB 2 (Monthly report- ing)||Based on month of actual transaction|
|Form FCGPR & Form ECB 2 (ECB to equity)||Timelines as per FCGPR & ECB 2 mentioned above|
|Delay in Import Payments past 12 months||Request Letter to AD Bank with CA certificate||
At the time of delayed payment
|Delay in Export Receivables past 12 months||Either write-off or allowed as per terms outlined by RBI||
Prior to 12 months from date of export
Non-compliance of the above requirements would entail penalties that can be quite heavy. It may also happen that a company may commit a default despite its best efforts. In such an event it is important to know the remedial measures. The RBI allows compounding of certain contraventions with certain conditions.
Compounding of an offence is a process whereby the company committing default would be called upon to file an application to the Reserve Bank of India accepting that it had indeed committed an offence and would permit the defaulting party to deposit a fine/penalty as decided by the RBI on a case-to-case basis. Once the compounding penalty is paid, the company would no longer be treated as a party in default for those offences and the case would be closed permanently.
It is also important to know that each delay in filing or delays in subsequent years of filings for the same investment are all considered as separate offences. For example, a company that has not filed APRs for the past three financial years would be found to have committed three separate offences.
As the RBI does not enjoy the powers to enforce any of its orders, all such cases of default on compounding orders are handed over to the Enforcement Directorate, which has the powers to prosecute and take the case of such parties to its logical conclusion.
The RBI does take cognizance of the fact that the compounding application is a form of self- declaration of a contravention by the company, but it reserves the right to charge the offending company a maximum penalty of 300 % of the amount involved, which amounts to large sums of money. In the past, companies who have
flouted the RBI’s regulations towards statutory filings have even had to pay penalties in crores. Some of the most common errors we routinely find while conducting our RBI/FEMA Compliance audits are:
- A foreign MNC with a subsidiary or JV in India having failed to file Form FCGPR at the time of receipt of funds or fail to inform the RBI regarding changes in shareholding structure;
- An Indian entity failing to inform the RBI regarding equity/loans/corporate guarantees given to foreign subsidiary;
- Failure in informing the RBI regarding change in capital structure of Step Down Subsidiaries;
- One of the most common discrepancies we find are companies failing to file APRs & FLAs with the RBI each year for their investments made
To conclude, the RBI has in the past taken a lenient approach to irregularities in compliance by the corporates. But, with the growth in bilateral international business and trade, the RBI is now very stringent when it comes to compliances and we have seen a slew of cases where many contraventions occurring over the past decade have been brought out by the RBI in the past one year alone. As a matter of corporate hygiene, companies must now look at clearing up all their past compliances before the same is pointed out by the RBI, where the penalties
could be very harsh. A pro-active approach & an audit of your RBI/FEMA compliances could help reduce large losses in the future. Losses that could directly affect your bottom-line. What is more, these losses are entirely avoidable.