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Common Violations observed under Overseas Direct Investments (ODI) Compliance

July 6, 2020     by Krishna Dayma

Reserve Bank of India (RBI) based on reporting being submitted by Resident Individual or Indian Party in Overseas Investments, summarizes and segregate the data monthly into three divisions a) Equity b) Loan and c) Guarantee. Analysis of RBI data on destination and sectoral dispersion, reveals that Singapore, USA and UK were amongst top three ODI destination countriesduring the F.Y. 2018-19, and in case of sectoral dispersion a) Manufacturing b) Financial, Insurance and Business Services and c) Agriculture and Mining were among top three sectors that attracted highest ODI outflows during the given F.Y. Though the sectors ranked here are very generic and loosely grouped, but that’s how it is.

The reporting of Overseas Direct Investments is to be done physically through Authorized Dealer Category – I Bank (AD Bank) and online filing is not an option. Interestingly AD Bank plays an important role in ODI reporting because such AD Bank is under obligation to ensure that the Indian Party / Resident Investor is KYC compliant, guides and evaluates documents received and satisfy itself about the bonafide of the documents. You may also like to read about our some basics like entities allowed to make ODI, limits up to which ODI can be made, Automatic and Approval route, prohibited sectors and reporting and compliances, please go to the link Overseas Direct Investment.

Overseas Investments involves pre and post reporting’s requirements with RBI under ODI guidelines.

Pre-Investment Requirements:

The Resident Investor (RI)/ Indian Party (IP)is required to make an applicationin Form ODI – Part I with RBI through AD Bank. Net Worth certificate is required to be obtained from the Chartered Accountant certifying that the proposed ODI transaction is within the limits under Automatic Route (i.e. not exceeding 400% of its Net Worth of the Indian Party as per latest Audited Balance Sheet).Another important document to be annexed is the copy of Memorandum and Articles of Association of Joint Ventures / Wholly Owned Subsidiariesand if these documents are in a language other than English, then translated copy of the same in English language shall be required.In case of non submission of supporting documents, AD Bank may return the application for ODI.

Common Violations under ODI:

Despite all the requirements being clearly laid down by the RBI, there have been some contraventions by Indian Party in complying with legal provisions associated with such ODI transactions. We have explained some of the common violations herein below.

  • ➤ Delay in submission of Form ODI Part-I

    The Indian Party / Resident Individual while making ODI is required to submit the duly completed Form ODI-Part I along with other required documents to the Designated AD Bank within 30 days of making the remittance. (Para D.1 of Schedule V of Notification No FEMA 120-RB 2004 as amended from time to time). RBI, based on Form ODI- Part I, will generate and allot one Unique Identification Number (UIN) to each JV or WOS abroad.

    Our explanation to the contravention:

    Though the prescribed timeline to submit form ODI – Part I is 30 days from the date of making the remittance, this is practically a pre-requisite as has been stated in pre-investment requirements above. The AD Bank will generally ensure that ODI-I application along with all the details and documents are duly submitted before it allows a remittance. Therefore, contravention here is a rarity. But consider a situation where the applicant is a Resident Individual who remitted the investment amount to another non-resident within the limits prescribed under LRS. The other non-resident made the investment on behalf of the applicant. These transactions happen because of ignorance and improper disclosures.

  • ➤ Delay/ Non-Submission of Form Annual Performance Report (APR)

    The Indian Party / Resident Individual shall submit to the Reserve Bank an annual performance report in form APR in respect of each Joint Venture or Wholly Owned Subsidiary outside India every year, within 60 days from the date of expiry of the statutory period as prescribed by the respective laws of the host country (for finalization of the audited accounts of the Joint Venture/Wholly Owned Subsidiary outside India) or such further period as may be allowed by Reserve Bank(Regulation 15(iii) of Notification No FEMA 120-RB, 2004). We have observed that many Indian Parties miss to file this annual report completely.

  • ➤ Delay in reporting of set-up of step-down subsidiary (SDS)

    As per FEMA regulations on ODI, further investment made by the Joint Venture or the Wholly Owned Subsidiary is termed as Step Down Subsidiary and the same is required to be reported through AD Bank to RBI. Furthermore, an Indian Party, which has undertaken ODI is not permitted to undertake FDI through its overseas entity/step down subsidiary under automatic route (i.e. without seeking prior approval of the Reserve Bank as stated in compounding order in the matter of M/s Vag Edu Services LLP dtd. 22nd October, 2019) (Regulation 5(1) read with 13 of Notification No. 120/2004-RB, dated July 7, 2004).

  • ➤ Remittance of excess amount under the Liberalized Remittance Scheme (LRS)

    This is applicable to ODI made by resident individuals. LRS is a liberalization measure to facilitate resident individuals to remit funds abroad. The maximum limit for remittance was revised from time to time with an initial limit from USD 25,000$ in 2004 to currently USD 2,50,000 revised in May 2016. This limit is to be kept in mind when ODI is made by resident individual.

  • ➤ Non-submission of share certificate or refund of share application money within 6 months of making remittance towards overseas investment

    As per FEMA Regulations on ODI, an Indian Party which has acquired foreign security in terms of the Regulationsis obliged to receive share certificates or any other document as an evidence of investment in the foreign entity to the satisfaction of the Reserve Bank within six months from the date of effecting remittance. (Regulation 15(i) of Notification No FEMA 120-RB, 2004).

  • ➤ Delay in / failure to report disinvestment from the overseas entity to RBI

    Disinvestment of JV or WOS may be by way of closure / winding up / voluntary liquidation / merger/ amalgamation. The Indian Party is required to report such disinvestment in Form ODI Part III to Reserve Bank through AD Bank under the Automatic Route within 30 days from the date of such Dis-Investment. (Regulation 16 of Notification No. FEMA 19/RB-2000).

  • ➤ Failure in filing return on Foreign Liabilities and Assets (FLA)

    In case of ODI by Companies (i.e. Indian Party not being Resident Individual), such investment by Company would fall under Asset side of Balance Sheet. Hence the Company will be under obligation to report such Overseas Assets in FLA (Foreign Liabilities and Asset) return under FEMA by July 15 every year. (Regulation 13.1(3) of Notification No. FEMA 20(R)/2017-RB). This return is not applicable to Resident Individual.

Compounding of ODI Contraventions under FEMA

Compounding means to settle a matter by a money payment, in lieu of other liability. Thus, Compounding is a mechanism that provides the offender an opportunity to avoid prosecution for an offence committed by way of a monitory payment in lieu of it. To compound an offence, the Indian Party / Resident Indian is required to follow the procedure laid down in Foreign Exchange (Compounding Proceedings) Rules, 2000. In terms of provisions of Section 13 of FEMA, any person contravening any provision of the Act shall be liable to pay up to three times the sum involved in the contravention upon adjudication. The amount directed to pay under compounding is much lower though.

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