Introduction
The growing presence of Foreign Investments, whether in the form of Foreign Direct Investment (FDI) or Overseas Direct Investment (ODI), necessitates significant attention to the Foreign Exchange Management Act, 1999 (FEMA 1999) Regulations and their adherence. Compliance with these regulations has become an integral aspect of business operations for entities involved in such investments.
The submission of the Annual Return on Foreign Liabilities and Assets (FLA Return) is mandated under FEMA 1999, as per A.P. (DIR Series) Circular No. 45 dated March 15, 2011. This return must be filed by all entities that have received Foreign Direct Investment (FDI) and/or engaged in Overseas Direct Investment (ODI) in any of the preceding year(s), including the current year.
The submission of FLA Return is an example of such compliance and is mandatory for entities that have received Foreign Direct Investment (FDI) and/or Overseas Direct Investment (ODI) in any of the preceding year(s), including the current year.
Purpose
The main purpose of the FLA Return is to gather data on foreign assets and liabilities, which aids in the compilation of India’s balance of payments statistics. The information obtained through this return is instrumental for the Reserve Bank of India (RBI) and the Indian government in formulating and monitoring policies pertaining to foreign investments and managing the external sector.
Applicability
The FLA Return is mandatory for all Indian entities that have received Foreign Direct Investment (FDI) and/or engaged in Overseas Direct Investment (ODI) in any form, such as equity, debt, and guarantees. This requirement applies to a wide range of entities, including listed and unlisted companies, private and public sector companies, limited liability partnerships (LLPs), and other entities incorporated in India. The FLA return is also applicable on SEBI registered entities including Alternative Investment Funds (AIFs), Public Private Partnerships (PPP)]
Exemptions
- Companies with no outstanding investments in inward or outward Foreign Investment as of March 31 are exempted.
- In cases where a company has only received share application money and has no outstanding Foreign Direct Investment (FDI) or Overseas Direct Investment (ODI) as of March 31, they are exempted from the FLA Return requirement.
- If all non-resident shareholders of a company have transferred their shares to residents during the reporting period, and the company has no outstanding investments related to inward or outward Foreign Direct Investment (FDI) as of March 31, they are exempted from filing the FLA Return.
Reporting Frequency
Indian entities are obligated to submit the FLA Return annually. The reporting period for this return spans from April to March, aligning with the financial year. Typically, the deadline for submission falls on July 15 of the subsequent financial year.
FLA Return Components
The FLA Return captures information related to foreign assets and liabilities held by the reporting entity. Some of the key components covered in the return include:
- Foreign Assets: This section requires details of investments made abroad by the reporting entity, including equity holdings in foreign companies, debt securities, other financial assets, and other investments.
- Foreign Liabilities: Here, the reporting entity needs to provide information on the liabilities it owes to foreign entities, such as external commercial borrowings (ECBs), trade credits, loans, guarantees, and other liabilities.
- Other Information: The FLA Return also collects additional data like the industry classification, country-wise details of investments, sectoral details, and financial details like income and expenses related to foreign assets and liabilities.
Non-Compliance
Failure to comply with the FLA reporting requirement may result in a late submission fee of INR 7,500 and other unfavourable consequences. The Reserve Bank of India (RBI) has the authority to take suitable action against entities that do not submit the FLA Return or provide inaccurate or incomplete information.
FAQs on FLA Return
Is it mandatory to file FLA Return if there is no FDI/ODI in the current year?
If an entity has not received any new Foreign Direct Investment (FDI) or Overseas Direct Investment (ODI) in the current year but holds outstanding FDI and/or ODI as of the end of March in that financial year, it is obligated to submit its outstanding position as of March 31 in the FLA Return annually by July 15. However, if the Indian entity does not have any outstanding investment related to FDI and/or ODI as of the end of March in the reporting year, they are not required to file the FLA Return.
If we do not file the FLA Return by July 15, what are the consequences? Our accounts are not yet audited, and we prefer not to submit unaudited figures. Will RBI or FEMA impose penalties or initiate prosecution against the entity?
Failure to submit the FLA Return by the due date (i.e., July 15 of each year) will be regarded as a violation of the Foreign Exchange Management Act (FEMA), and penalties may be imposed accordingly. The entity responsible for filing the FLA Return will be subject to a Late Submission Fee (LSF) of INR 7500, as determined by the Reserve Bank in consultation with the Central Government, for any delays in reporting. This information is outlined in Notification No. FEMA. 395/2019-RB dated October 17, 2019, and A.P. (DIR Series) Circular No. 16 dated September 30, 2022.
If a person, who is obligated to make a submission or filing under the provisions of FEMA, fails to do so within the specified time and also fails to make the submission or filing along with the Late Submission Fee (LSF), they will be subject to penal action under the provisions of FEMA, 1999.
Can compounding be done for contravention in the filing of FLA Return?
Yes, compounding is applicable for contraventions related to the filing of the FLA Return. The Regional Office of the Reserve Bank of India (RBI) has the authority to compound such contraventions without any limit. However, it is important to note that this authority does not extend to the Regional Offices of Kochi and Panaji.
Can the company file the previous year’s FLA Return or delete/modify the FLA Return?
Yes, if a company needs to file the FLA Return for a previous year, they can do so through the online FLA portal by obtaining approval from the Reserve Bank of India (RBI). To seek approval, the company must send an email to surveyfla@rbi.org.in. Once approval is obtained, the company can proceed to delete or modify the FLA Return as necessary.
Is it necessary for a company to submit the FLA Return if non-resident shareholders have transferred their shares to residents during the reporting period?
If all non-resident shareholders of a company have transferred their shares to residents during the reporting period, and the company does not have any outstanding investment related to Foreign Direct Investment (FDI) or Overseas Direct Investment (ODI) as of the end of March in the reporting year, then the company is not obligated to submit the FLA Return.
What treatment should be given to share application money received from non-resident investor?
If the share application money is received from the existing non-resident shareholder, then the outstanding share application money should be reported at item 2.1 of 1.b FDI and 2.b DI in Section III, depending upon per cent of equity plus participating preference share holding by non-resident investor.
Where should we report Fully/Partially/Non-convertible debentures issued to the non-residents in FLA Return?
Fully/Partially/Non-convertible debentures are treated as debt securities. (a) If the debentures (of any type) are held by foreign investor, the amount should be reported at item 2.1 of 1.b FDI and 2.b DI in Section III (depending upon the % equity plus participating preference share held by foreign investor) at nominal value.
Where should we report the non-participating preference share issued to non-resident?
Non-participating preference shares are treated as debt securities. (a) If the Non-participating preference shares are held by foreign investor who is also holding equity shares of Indian reporting company, then Non-participating preference share should be reported at item 2.1 of 1.b FDI and 2.b DI in Section III (depending upon the % equity & participating preference share held by foreign investor) at nominal value.
How will we do the valuation of the equity capital for listed Direct Investment Enterprise?
If the overseas company is listed then closing share price as on reference period, i.e., end-March of previous and latest year should be used for valuation of equity investment.
In case where account closing period of the company is different from reference period (end-March), can we report the information as per account closing period?
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.
Conclusion
Compliance with the RBI guidelines and timely submission of the FLA Return is crucial for Indian entities that are subject to the FLA reporting requirement. This practice promotes transparency and facilitates the maintenance of accurate records pertaining to foreign assets and liabilities. Such records play a vital role in analysing India’s external sector and are instrumental in formulating effective economic policies. By adhering to these requirements, entities contribute to a robust and well-informed understanding of India’s economic landscape.
Disclaimer: The information in this article is provided for general informational purposes only and should not be construed as legal advice. The author and publisher do not guarantee the accuracy, completeness, or reliability of the information. Readers should consult a qualified legal professional for advice regarding their specific situation. The author and publisher are not responsible for any actions taken based on the information provided in this article.
