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The Reserve Bank’s Coordinated Direct Investment Survey (CDIS) and Co-ordinated Portfolio Investment Survey(CPIS) are conducted under the auspices of the International Monetary Fund (IMF), wherein information is collected from Indian resident companies/ LLPs / Others [(include SEBI registered Alternative Investment Funds (AIFs), Partnership Firms, Public-Private Partnerships (PPP)] on their foreign financial liabilities and assets position as at end-March of the previous financial year (FY) and end-March of the latest FY. This information is also used in the compilation of India’s Balance of Payments (BoP) and International Investment Position (IIP).
Question 1. Which entities are required to submit the FLA Return?
Answer: The annual return on Foreign Liabilities and Assets (FLA) is required to be submitted by the following entities which have received FDI (foreign direct investment) and/or made FDI abroad (i.e. overseas investment) in the previous year(s) including the current year i.e. who holds foreign assets or/and liabilities in their balance sheets;
• A Company within the meaning of section 1(4) of the Companies Act, 2013.
• A Limited Liability Partnership (LLP) registered under the Limited Liability Partnership Act, 2008
• Others [include SEBI registered Alternative Investment Funds (AIFs), Partnership Firms, Public-Private Partnerships (PPP) etc.]
Question 2. If a company / LLP / Others did not receive FDI or made overseas investment in any of the previous year(s) including the current year, do we need to submit the FLA Return?
Answer: If an Indian company / LLP / Others does not have any outstanding investment in respect of inward and outward FDI as on end-March of the reporting year, the company need not submit the FLA Return.
Question 3. What are the important definition one must understand prior to the filing of FLA return?
Answer: Important Definitions:
a) Residence of Enterprises: An enterprise is said to have a centre of economic interest and to be a resident unit of a country (economic territory) when the enterprise is engaged in a significant amount of production of goods and/or services in that centre or when it owns land or buildings located in that centre. The enterprise must maintain at least one production establishment in the country and must plan to operate the establishment indefinitely or over a long period of time.
b) Direct investment: Direct investment is a category of international investment in which a resident entity in one economy [Direct Investor (DI)] acquires a lasting interest in an enterprise resident in another economy [Direct Investment Enterprise (DIE)]. It consists of two components, viz., Equity Capital and Other Capital.
c) Equity Capital under Direct Investment: It covers (1) foreign equity in branches and all shares (except non-participating preference shares) in subsidiaries and associates; (2) contributions such as the provision of machinery, land & building(s) by a direct investor to a DIE by equity participation; (3) acquisition of shares by a DIE in its direct investor company, termed as a reverse investment (i.e. claims on DI).
d) Other Capital under Direct Investment: The other capital component (receivables and payables, except equity and participating preference shares investment) of direct investment covers the outstanding liabilities or claims arising due to borrowing and lending of funds, investment in debt securities, trade credits, financial leasing, share application money etc., between direct investors and DIEs and between two DIEs that share the same direct Investor. Non-participating preference shares owned by the direct investor are treated as debt securities & should be included in ‘other capital’. Identification of the Indian company (Item 9, Section-I).
e) Foreign Subsidiary: An Indian company is called as a Foreign Subsidiary if a non-resident investor owns more than 50% of the voting power/equity capital OR Where a non-resident investor and it's subsidiary(s) combined own more than 50% of the voting power/equity capital of an Indian enterprise.
f) Foreign Associate: An Indian company is called as Foreign Associate if the non-resident investor owns at least 10% and no more than 50% of the voting power/equity capital OR Where non-resident investor and its subsidiary(s) combined own at least 10% but no more than 50% of the voting power/equity capital of an Indian enterprise.
g) Special Purpose Vehicle: A special-purpose Vehicle (SPV) is a legal entity (usually a limited company of some type or, sometimes, a limited partnership) created to fulfil narrow, specific or temporary objectives. SPV have little or no employment, or operations, or physical presence in the jurisdiction in which they are created by their parent enterprises, which are typically located in other jurisdictions (economies). They are often used as devices to raise capital or to hold assets and liabilities and usually do not undertake significant production.
h) Related Party: A related party is a person or entity that is related to the entity that is preparing its financial statements (referred to as the ‘reporting entity’).
A person or a close member of that person’s family is related to a reporting entity if that person:
(i) has control or joint control over the reporting entity;
(ii) has significant influence over the reporting entity; or
(iii) is a member of the key management personnel of the reporting entity or of a parent of the reporting entity.
In the definition of a related party, an associate includes subsidiaries of the associate and a joint venture includes subsidiaries of the joint venture. Therefore, for example, an associate’s subsidiary and the investor that has significant influence over the associate are related to each other.
(i) Direct Investment abroad by Indian companies: If the reporting Indian company invests in equity and/or participating preference shares of an overseas company, under the Overseas Direct Investment Scheme in India, i.e. investment in Joint venture or wholly-owned subsidiaries abroad, then it should be reported under Section IV of the FLA return. If the Indian company holds 10 per cent or more equity plus participating preference shares together, an overseas company, then it should be reported under 1.b ODI (item 1.1, claims on direct investment enterprise). However, if the Indian company holds less than 10 per cent of the equity plus participating preference shares capital of the overseas company, then it should be reported under 2.b DI (item 1.1, claims on direct investment enterprise). In both cases, the Indian company is called the Direct Investor (DI) while the overseas company is called as Direct Investment Enterprise (DIE).
(j) Participating and non-participating preference shares: Participating preference shares are those shares which have one or more of the following rights:
(a) To receive the dividend, out of surplus profit after paying the dividend to equity shareholders.
(b) To have share in surplus assets remaining after the entire capital is paid in case of winding up of the company.
On the other hand, Non-participating Preference Shares are those shares which do not have any of the above-said rights.
(k) Net Worth: Formula for Net Worth is = Total Equity & Participating Preference Share capital + Reserves and Surplus (this field is automated in FLA form section-II, companies are not required to compute it separately).
Question 4. What is Foreign Direct Investment (FDI) in India?
Answer: a) If the Indian company has issued the shares to non-resident entities under the FDI scheme in India, then it should be reported under the Foreign Direct Investment in India (Liabilities), Section III of the return. If the non-resident entity holds the 10 per cent or more equity plus participating preference shares together, in the reporting Indian company, then it should be reported under 1.b FDI of section III. However, if the non-resident entity holds less than 10 per cent of the equity plus participating preference shares capital of reporting Indian company, then it should be reported under 2.b DI of section III. In both the cases, the non-resident entity is called as the Direct Investor (DI) while the reporting Indian company is called as Direct Investment Enterprise (DIE).
b) If the reporting Indian company also holds the equity shares in its DI company abroad and if its shareholding is less than 10 per cent of equity capital of DI company, then it is called as the reverse investment and same should be reported under item 1.2 (claims on the direct investor) of the respective blocks, i.e. 1.b FDI and 2.b DI of section III.
Question 5. What information should be reported in FLA return, if the balance sheet of the company is not audited before the due date of submission?
Answer: If the company’s accounts are not audited before the due date of submission, i.e. July 15, then the FLA Return should be submitted based on unaudited (provisional) account. Once the accounts get audited and there are revisions from the provisional information submitted by the company, the company can submit the revised FLA return based on audited accounts by the end–September.
Question 6. In case, where the account closing period of the company is different from the reference period (end-March), can we report the information as per the account closing period?
Answer: No, the company cannot report the information as per the account closing period, in case it is different from March closing. Information should be reported for the reference period only, i.e. previous March and latest March, based on the company’s internal assessment.
Question 7. If the old/new company fails to file the FLA form before the due date; can the company submit the FLA form?
Answer: Yes, the company can file the FLA return after the due date by taking approval from RBI.
Question 8. If an old/new company wants to file the previous year FLA form; can the company file the previous year FLA form?
Answer: Yes, the company can file the previous year FLA form (through online FLA portal only) by taking approval from RBI through an e-mail.
Question 9. If an old/new company wants to delete the previous version of FLA form or modify; can the company delete/modify the FLA return?
Answer: Yes, the company can delete/modify the FLA return after taking the approval from RBI (RBI will provide due date on the FLA portal).
Question 10. Whether a company needs to submit the FLA Return if it has received only share application money?
Answer: If a company has received only share application money and does not have any outstanding foreign direct investment or overseas direct investment as on end-March of the reporting year, then the company is not required to fill-up the FLA return
Question 11. If non-resident shareholders of a company have transferred their shares to the residents during the reporting period, then whether that company is required to submit the FLA Return?
Answer: If all non-resident shareholders of a company have transferred their shares to the residents during the reporting period and the company does not have any outstanding investment in respect of inward and/or outward FDI as on end-March of the reporting year, then the company need not submit the FLA return.
Question 12. If the company had issued the shares to non-resident on a non-repatriable basis, whether that company is required to submit the FLA Return?
Answer: Shares issued by reporting company to non-resident on a non-repatriable basis is not considered as foreign investment; therefore, such companies are not required to submit the FLA Return.
Question 13. Whether equity participation includes equity shares as well as compulsorily convertible debentures (CCD)?
Answer: Compulsorily convertible debentures (CCD) issued by the company should not be included in the paid-up capital while furnishing the information in Paid-up capital (in Section II of the FLA Return). However, if the CCDs / Debentures are held by the non-resident direct investor who is holding the equity shares of the Indian reporting company, then CCD / Debentures holding should be reported in ‘other capital’ component of 1.b FDI or 2.b DI (in Section III), depending upon the per cent equity held by the non-resident direct investor. However, if the investor holds only CCD as on end-March, then it should be reported in item 2.2 of 3. Portfolio Investment in India (in Section-III). Similar treatment should be considered while reporting the compulsorily convertible preference shares also.
Question 14. What valuation guidelines are used while reporting foreign equity investment for unlisted companies?
Answer: This field will be automatically calculated in online web-based reporting (item 1.1, Section III). Companies are not required to compute them separately. However, for your information, the calculation of the market value of equity capital for unlisted companies (using the OFBV method) is as follows:
The market value of equity capital held by Non- resident at OFBV for current year/previous year
= (Net worth of the company for the current year/previous year) * (% non-resident equity holding for the current year/previous year)
Where, Net worth of the company
= (Paid-up Equity & Participating Preference share capital of company + Reserves & Surplus - Accumulated losses)
Question 15. What valuation guidelines are used while reporting foreign equity investment for listed companies?
Answer: This field will be automatically calculated in online web-based reporting (item 1.1, Section III). Companies are not required to compute them separately. However, for your information, If the Indian reporting company is listed then closing share price as on reference period, i.e. end-March of the previous and current year should be used for valuation of non-resident equity investment.
Question 16. What constitutes the ‘Other Capital’ component of FDI?
Answer: Other capital is a debt which is to be reported as follows;
(a) Other capital, item 2.1 & 2.2 of Section III (1.b FDI) includes all other liabilities and claims at Nominal value, except equity and participating preference shares, (i.e. trade credit, loan, debentures, Non-participating share capital, other accounts receivable and payables etc.) of Indian reporting company with its direct investors holding more than 10 per cent equity.
(b) Other capital, item 2.1 & 2.2 of Section III (2.b Direct Investment) includes all other liabilities and claims at Nominal value, except equity and participating preference shares, (i.e. trade credit, loan, debentures, Non-participating share capital, other accounts receivable and payables etc.) of Indian reporting company with non-resident investors holding less than 10 per cent equity and indirectly related parties (fellow enterprise or ultimate parent company or group company etc.).
Question 17. In the FLA Return, whether FDI should be reported based on the country of immediate investor or country of the ultimate holding company? Where should we report the receivable/ payables with the non-resident ultimate holding company?
Answer: Above situation is better explained with the following case:
Example: A company incorporated in Mauritius has invested in an Indian company. The parent company of Mauritian company is incorporated in the USA. So, whether the claims and liabilities of an Indian company with parent company incorporated in the USA also need to be disclosed in the FLA Return and if yes, where?
Solution: While filling the FLA return, FDI reporting should be based on the country of the immediate investor. However, if there are any receivables/payables with the non-resident ultimate holding company, then the same should also be reported at ‘Other capital’ component of 2.b DI under Section III.
In respect of the above example, claims and liabilities of an Indian company with the parent USA Company will be reported at ‘Other capital’ component of 2.b DI under Section III.
Question 18. Whether FLA Return is required to be submitted by registered partnership firms (registered under Partnership Registration Act) or branches or trustees, who have made an overseas direct investment, or it is mandatory only for companies (registered under Companies Act, 1956)?
Answer: Yes, FLA return is required to be submitted by registered partnership firms (registered under Partnership Registration Act) or branches or trustees, who have made an overseas direct investment.
Question 19. If the overseas subsidiaries/ joint venture company’s accounting period is different from the reference/reporting period (i.e. April-March) in the Return, then what information should we furnish in Section IV?
Answer: Companies are required to furnish the information on outstanding external liabilities and assets as on end-March of the previous and latest year. In case if the accounting period of overseas subsidiaries/ joint venture of Indian reporting company is different from the reference period, then the information for end-March should be given on internal assessment basis.
Question 20. What will be the consequences in case we do not file the said FLA Return by 15th July, as our accounts are not audited as yet, and we do not wish to file it with unaudited figures? Will there be any imposition of penalty or prosecution initiated against the company by RBI or FEMA?
Answer: Annual Return on Foreign Liabilities and Assets has been notified under FEMA 1999 and it is required to be submitted by all the India-resident companies which have received FDI and/ or made overseas investment in any of the previous year(s), including current year by July 15 every year. Non-filing of the return before the due date will be treated as a violation of FEMA and penalty clause may be invoked for violation of FEMA (A.P. (DIR Series) Circular No. 29, dated February 02, 2017)
Article By: Ms Bhavya Sharma, a Practising Company Secretary from Delhi. In order to know more about FLA Return applicability, filing etc, you can connect with us. You can contact us at legal@bhavyasharmaandassociates.com or for more details you can visit: www.bhavyasharmaandassociates.com
Disclaimer: Although due care and diligence have been taken in the preparation and uploading this Article, Bhavya Sharma & Associate shall not be responsible for any loss or damage, resulting from any action taken on the basis of the contents of this Article. Anyone wishing to act on the basis of the material contained herein should do so after cross-checking with the circulars, notifications, applicable acts, press release issued by the concerned department or seek appropriate counsel for their situation. Source: Guidelines issued by Reserve Bank of India, Department of Statistics and Information Management, Mumbai.
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