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Inward Remittance and Related Compliances w.r.t. Shares Subscribed by Non-Residents at the Time of Company Incorporation

August 18, 2014     by CS Samrish Bhanja

ADDITIONAL STEPS IN CASE SHARES ARE BEING SUBSCRIBED BY A NON-RESIDENT PROMOTER / INVESTOR 

This Article was earlier part of Post Incorporation Compliances. We have now split the same into two parts. This is the second part covering Subscription of Shares by NR post Company Incorporation. Through this blog, we have tried to cover the post incorporation procedure and compliances under Foreign Exchange Management Act (FEMA) in case of non-resident investment.

In case of non-resident investors, the following procedure is involved w.r.t. foreign remittance of subscription amount. 

FDI Norms:

As per reporting of FDI norms, chronology of event should be:

    • Receipt of Foreign money.
    • Reporting of receipt of amount of consideration to RBI for issue of shares through an AD Category – I bank, together with a copy/ies of the FIRC/s evidencing the receipt of the remittance along with the KYC report on the non-resident investor from the overseas bank remitting the amount.
    • UIN (Unique identification Number) shall be allotted by RBI.
    • The equity instruments should be issued within 180 days from the date of receipt of the inward remittance. In case, the equity instruments are not issued within 180 days from the date of receipt of the inward remittance or date of debit to the NRE/FCNR (B) account, the amount of consideration so received should be refunded immediately to the non-resident investor by outward remittance through normal banking channels or by credit to the NRE/FCNR (B) account, as the case may be
    • However, please note that the above FDI norms pertaining to 180 days is redundant for all practical purpose for the fact that the Companies Act, 2013 requires the shares to be allotted within 60 days from the date of inward remittance.
    • After issue of shares you have to file Form FCGPR, not later than 30 days from the date of issue of shares. UIN is to be mentioned in the form FCGPR.

Confusion in compliance with FDI norms

It is practically impossible to comply with the FDI norms in case of subscription of shares of a newly incorporated Company by a Non-Resident. The reason being, a Non-Resident will remit money towards shares subscribed only after the Company has opened Current Account while the date of allotment of shares is deemed to be the Date of Incorporation of the Company. That means shares are being issued without having received the Inward Remittance while the 1st step in case of FDI compliance is receipt of Inward Remittance (please see point 1 of FDI Norms above).

Therefore there are two types of practice prevalent in India for complying with the requirement of FDI Norms, which are being elaborated below. Of course, needless to say that none of the practice is foolproof and has its own merits and demerits.

Practice 1:

    • Company Incorporation
    • PAN and Bank Account opened
    • Inward Remittance received into the Current Account opened
    • Reporting of Inward Remittance to RBI through AD Bank within 30 days of Inward Remittance
    • UIN allotted by RBI
    • Board Meeting held to take note of Inward Remittance and for issue of Share Certificates.
    • Share Certificates issued with date of Incorporation as the date of Issue of Shares.
    • FCGPR filed immediately thereafter but not later than 30 days from the date of Board Meeting. Here, the date of Incorporation is mentioned as date of Issue of Shares and therefore, it is put in the records that there has been a delay in filing of FCGPR.

Form FCGPR can be accompanied with a forwarding letter to RBI that since the shares are issued to Non-resident for subscribing to the Memorandum and Articles of Association, there has been delay in filing of FCGPR.

Note: Here, in this case there is clear communication of facts, albeit, there has been violation of FDI Norms. It has been observed that RBI do not question the above non-compliance unless there has been inordinate delay in receiving Inward Remittances and related compliances thereafter .

Practice 2:

  • Company Incorporation
  • PAN and Bank Account opened
  • Inward Remittance received into the Current Account opened
  • Reporting of Inward Remittance to RBI through AD Bank within 30 days of Inward Remittance
  • UIN allotted by RBI
  • Board Meeting held for issue of Shares (here, this Board Meeting date is taken as date of Issue of Shares and not the actual issue of Shares i.e. date of Incorporation).
  • Share Certificates issued with date of Board Meeting as the date of Issue of Shares.
  • FCGPR filed within 30 days of issue of shares with date of the Board Meeting mentioned as date of Issue of Shares.

Note: It is needless to say that the date of Board Meeting being taken as date of Issue of Shares w.r.t shares subscribed at the time of incorporation is contrary to the provisions of Company Law and therefore, to that extent, it is misstatement of facts.

For more information on subscriber sheet of MOA & AOA, kindly visit link Rules relating to subscription of Memorandum and Articles of Association at the time of Company Incorporation.


47 thoughts on “Inward Remittance and Related Compliances w.r.t. Shares Subscribed by Non-Residents at the Time of Company Incorporation

  1. Dear sir,
    company got remittance on non repatriation basis.But we filed Advance Remittance Form through EBIZ.Now we have to cancel that ARF.Can you please provide letter format for cancellation of ARF.We filed in October month still we didnt get allotted UIN.

    1. You are advised to visit the RBI Regional Office. Also, as the investment does not attract any FDI regulations, you can always write to RBI that the remittance was on non-repatriation basis and the ARF filed may not be taken on record.

    2. We have received amount in 2 trenches and through two different AD Banks. The allotment was made in one date. Now we have file FCGPR, in FCGPR we have mentioned details of AD Bank. How we have file FCGPR.

      1. In case, the remittance receiving AD Category – I bank (AD bank) is different from the AD bank through which FCGPR is filed, the KYC check should be carried out by the remittance receiving bank and the KYC report be submitted by the investee to the AD bank carrying out the transaction along with the Form FC-GPR

  2. Our company received FDI in 2010 through ABC bank and ABC bank has remitted the amount to our AD Bank and issued FIRC and asked the AD bank to comply with the RBI Guidelines. But the AD Bank did not comply with the guidelines and UIN was not alloted, hence FC-GPR forms are also not filed by the company. Now the company wants UIN no. and AD bank is not complying, what is the next course of action?

  3. sir,
    what are the provisions in relation to the non receipt of Inward Remittances by foreign shareholder within a reasonable time….under fema1999

    1. As per Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 Capital instruments shall be issued to the person resident outside India making such investment within 60 days from the date of receipt of the consideration.
      In the given instance ,where foreign shareholder has not remitted funds then company is not bound to allot shares to the shareholders and as far as concerned, there is no such provisions under FEMA regulating non-receipt of inward remittance within reasonable time.
      Moreover, post incorporation of the company, subscribers are to pay funds for subscribing shares but neither in provisions of FEMA,1999 nor in Companies Act,2013, any time limit is specified for receipt of such funds in the bank account of the company.

  4. Dear Sir,
    Actually we have incorporated company on 11.07.2017 and we have received subscription money from foreign subscriber on 20.09.2017 and from Indian company on 27.09.2017. As company act says that Share certificate must be issued within 2 months from the date of incorporation, but we have received money after the expiry of 2 months so how could we issue share certificate within 2 months??
    2. What is the date of Issue of shares? If it is 11.07.2017 in that case we have not filed FC-GPR within 30 days.
    3. Is CA certificate required in this case?

    1. Issue of Share Certificate: In accordance to Section 56(4) of Companies Act 2013 “A company shall issue share certificate within a period of two months from the date of incorporation, in the case of subscribers to the memorandum”. Therefore we can conclude that a share certificate is required to be issued within 2 months of date of incorporation. It does not matter if the subscription money has not been received by the company. Please read section 10(2), amount payable towards shares subscribed is a debt due from the subscriber.

      Filing of FC-GPR: Subscribers of MOA are deemed shareholders of the company. As soon as they subscribe the MOA & file it with ROC along with other incorporation documents they become the members as well as shareholders of the company. Hence, the date of allotment of shares shall be 11.07.2017. Obviously, timelines prescribed for filing of FC-GPR within 30 days of allotment can’t be met. Need not worry, a simple explanation in the forwarding / covering letter will suffice. Only care be taken is there should not be inordinate delays.

      CA Certificate: In terms of sub-regulation (1) of Regulation 5 of the Notification ibid, a person resident outside India or an entity incorporated outside India may purchase shares or convertible debentures of an Indian company under Foreign Direct Investment Scheme, subject to compliance with the issue price specified in para 5 of Schedule 1 of the Notification ibid. It has been decided that in cases, where non-residents (including NRIs) make investment in an Indian company in compliance with the provisions of the Companies Act, 1956 (Now Companies Act 2013), by way of subscription to Memorandum of Association, such investments may be made at face value subject to their eligibility to invest under the FDI scheme. As CA certificate is required for filling of a FC-GPR form, it is a mandatory attachment you may attach a letter describing this as a case of subscription of shares at the time of incorporation and therefore, being done at face value.

  5. Dear Sir
    a private limited company received money from NRI from his NRE account in indian rupees for allotment of shares. Now the company required to file ARF with RBI?. What is the reporting procedure for allotment in this case.

    1. Apologies for the delayed response. Please find below the reply to your query:
      As per Notification No FEMA.361/2016-RB dated 15th Feb 2016 advance reporting is required to be made with RBI for an investment is on repatriation basis.
      Such receipt shall be reported in form ARF to the Regional Office concerned of the Reserve Bank, not later than 30 days from the date of receipt.
      Allocation of Shares against the investment should be completed within 60 days of receipt of amount of consideration.
      The company should file the FC-GPR form within 30 days of allotment of capital instruments.
      However, if the investment has been made by the NRI on non-repatriation basis, it is taken as domestic investment. And therefore, there would not be any requirement to report.

  6. A company has received money is two tranches i.e. 1st call money and final call money. we have filed form FCGPR for funds received from 1st call.. now we have received final call money. what amount should we mention in FCGPR form – in point 5 “Total investment received in company as on date?’.. both 1st and final call money received or
    Final call money received
    or amount received from that particular investor for whom we are filing form FGGPR?

    1. Apologies for the delayed response. Please find below the reply to your queries:
      As far as we are concerned point 5 is “post issue pattern of shareholding ” which means shareholding pattern of the investors as on date after allotment of shares for which the FC-GPR form is to be filed. Hence in this case it should be total number of shares and total amount received as on date ,from that particular investor for whom form is to file.
      Further please note that rationale of FC-GPR form is to report RBI for number shares issued , it is nowhere concerned reporting after receipt of funds on call money.

  7. Dear Sir,
    A private Limited company incorporated in India in 2016 with two share holders (one of them is foreign share holder) and both of them are the Directors of the company.

    Now that foreign director shareholder came to India on visit and brought foreign currency with him.Now the company proposes to issue shares to Foreign share holder by accepting foreign currency from foreign share holder.

    Sir, would you please explain ,whether the above proposal is acceptable under FEMA and Companies Act.

    Thanks & Regards,
    Narendra

    1. As per FEMA an Indian company issuing shares under FDI scheme can accept foreign currency through :-

      1. normal banking channels; or
      2. debit to NRE / FCNR account/ non-interest bearing Escrow account;
      3. Conversion of royalty/ lump sum/ technical know-how fee due for payment or Conversion of ECB;
      4. Conversion of import payables / pre incorporation expenses/ share swap with approval of FIPB.

      Any person residing outside India cannot subscribe the shares other than the above mentioned banking channels. Moreover, to invest in a business one should have a business visa, he cannot invest while holding a tourist visa.

  8. Respected Sir,
    An inward remittance is received for application of shares but the amount is expended and now the amount is to be refunded from personal sources so what is the process for inward and outward remittance compliances and since inward remittance 180 days is yet to be passed.
    Thanks in advance

    1. Foreign Direct Investments (FDI) – Issue of shares under FDI and refund of advance remittances RBI/2007-08/213 A. P. (DIR Series) Circular No.20. states that-
      In case, the equity instruments are not issued within 180 days from the date of receipt of the inward remittance or date of debit to the NRE/FCNR (B) account, the amount of consideration so received should be refunded immediately to the non-resident investor by outward remittance through normal banking channels or by credit to the NRE/FCNR (B) account, as the case may be.
      In all cases where, as on November 28, 2007, 180 days have elapsed since receipt of funds and the equity instruments have not been issued, the companies are required to approach the Foreign Exchange Department of the Regional Office concerned of the Reserve Bank through their AD Category – I bank with a definite action plan either for allotment of equity instruments or for refund of the advance, with full details, for specific approval.
      It is to be noted that such a refund must come from defaulting company and not from personal account, since it is the responsibility of company to make such a refund.

  9. sir
    if private company received the money from indian account ( in INR) of NRI.
    is it cover under fdi ?
    what are the required compliances ?

    1. Yes, receiving money from NRI will be covered under FDI if the money is received on repatriation basis whereas if the money is received on non repatriation the same is not covered under FDI.
      Required compliances for FDI are as follows:
      1. File form ARF within 30 days of receiving funds.
      2. After that, file FC-GPR within 30 days from the date of allotment of shares / convertible securities.
      3. File FLA return, by 15th July of every year.

  10. What are the compliances and provisions applicable in case of loan by a foreign holding company to an Indian wholly owned subsidiary

    1. Compliances under Companies Act 2013:
      A resolution u/s 179(3) (d) needs to be passed in a Board meeting to exercise borrowing powers of the Board. There are no other compliances under Companies Act 2013 as Section188 talks about specified contracts & arrangements w.r.t Related Party Transactions. But this loan is not falling under those specified contracts. Section 186 talks about loan and investment by the company but in this case Company is receiving loan not making loan. Section 185 relates to loan to Directors by the Company and therefore, not applicable here.
      Compliances under FEMA 1999:
      As far as compliances in connection with Loan by Foreign Holding to Indian Subsidiary is concerned, Indian companies are allowed to access funds from abroad through External Commercial Borrowings (ECB). For details, refer Master Direction – External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers issued by RBI.(https://rbidocs.rbi.org.in/rdocs/notification/PDFs/15MDC8CEB9A7BDE64745B9BE1DCEC3293CA1.PDF)

    1. As per Clause 8E(ii) of the Master Direction issued by RBI on Foreign Investment in India, general permission is available for issue of shares against lump-sum technical know-how fee, royalty due for payment/repayment.

  11. Company A received funds from its sole promoter company B (offshore company) under FDI route in September 2016. Share were allotted after 60 days from the date of receipt of the funds but before 180 days as provided under FEMA.

    Section 2(1) c (ii) of Companies (Acceptance of Deposits) Rules, 2014 provides an exception to the application of deposit rules for money received from foreign body corporates.

    Will this inflow received as share capital still be considered as deposit?

    1. Rule 2(1)(c)(ii) of the Companies (Acceptance of Deposits) Rules, 2014, any amount received from foreign bodies corporate subject to the provisions of FEMA, 1999 shall not be included in public deposits. Thus, the inflow received as share capital from foreign body corporate shall not be considered as deposit provided the company complies with the provisions of FEMA, 1999.

  12. Query:

    I have received inward remittance two times in two currency (USD & GBP) and i want to allotment in one board meeting ….can i do so ?

    1. Yes, allotment of shares can be made in one board meeting, although for two different remittance separate advance reporting forms will be filed with RBI as per Notification No. FEMA 20 /2000-RB dated May 3, 2000, but single board meeting/board resolution is enough to show the allotment.

  13. Dear sir if a company is getting money from different countries via their holdings and ultimate holdings to Indian subsi on monthly basis through proper banking channel route. Is there is any other compliance that we need to ensure under RBI etc.

    1. Can you please tell us on what account this money is being received as? Is it towards share capital or loan or as sale proceeds? Each leg has its own set of documentation and related compliances.

  14. Dear Sir,
    A Pvt. Ltd Co. incorporated in India in Oct 2016 with one non-resident & one resident subscriber to MOA could get bank a/c opened in Dec 2016 i.e after 2 months from DOI.

    Share Application money from Non-Resident & Resident Subscriber recd now after 2 months of DOI.

    What will be date of allotment of shares under Co Act & FEMA – Current Board meeting date for allotment now after receipt of money or DOI?

    1. Under the Companies Act, 2013, shares can be allotted at any time after the receipt of money but within maximum 60 days. However, in case of incorporation of company, as a general practice, shares are deemed to be allotted to the subscribers to MOA on the date of incorporation of the company and as per Section 10 of the Companies Act, 2013, money payable towards subscription becomes a debt due from the subscribers to MOA. Thus, the company shall issue share certificates within 2 months of the date of incorporation in compliance with Section 56 of the Companies Act, 2013 and can receive the money at anytime thereafter. It shall be shown as a debt due from subscribers till its receipt.
      As per FEMA, 1999, shares shall be allotted within maximum 180 days from the receipt of money.

    1. Every company which deals with foreign exchange regarding allotment of share need to file FCGPR with in 30 days from the date of allotment. If company do not file FC-GPR with in such period, it will amount to contravention attract penalty given under section 13 i.e any person contravenes any provision of this Act, or contravenes any rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or contravenes any condition subject to which an authorisation is issued by the Reserve Bank,
      (a) he shall, upon adjudication, be liable to a penalty up to thrice the sum involved in such contravention where such amount is quantifiable,
      (b) or up to two lakh rupees where the amount is not quantifiable, and where such contravention is a continuing one,
      (c) further penalty which may extend to five thousand rupees for every day after the first day during which the contravention continues

      However, it is advised that you may file suitable application for compounding with the Authority.

  15. This article is very useful. I had a query, as you say the 1st step is to receive foreign money, but in how many days that money shall be received by the Company.

  16. Can you Suggest me what to do on these Query

    Dear Sir,
    Please refer to the FCGPR submitted by you for issue of shares on 13/12/14
    In this connection it is observed that the first issue of shares to non resident is on RIGHTS basis.You are requested to clarify the same.

    You are also requested to submit CS compliance certificate to Reg.6 of FEMA 20 for issue of shares on rights basis.

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