Analysis of Single Master Form to Report All Foreign Investment Received By CS Harsh Lata

Dear Professional Colleagues,
In alignment with the Indian Government’s continuing efforts to bolster foreign investment and ease of doing business in India, the Reserve Bank of India (RBI) issued an important circular A.P. (DIR Series) Circular No.30 on 7th June 2018 with the aim of simplifying reporting under the Foreign Exchange and Management Act, 1999 (FEMA).
The said circular issued by RBI is for the introduction of a Single Master Form (“SMF”) to report all Foreign Investment received by Indian Entities to integrate the existing reporting norms for various types of foreign investment in India.
The present system of reporting total foreign investment in India made by a person residing outside India through eligible capital instruments in the investee company or capital contribution in a Limited Liability Partnership (LLP) or investments in other investment vehicles, involves the filing of numerous forms via various reporting platforms. This renders it as a disintegrated reporting structure.
Prior to implementing the SMF, the RBI is providing a reporting interface to Indian entities to input data, in a specified format, on the total foreign investment received by them. This interface will be available from June 28, 2018, to July 12, 2018 (the "Interface Window"), on the website of the RBI, Reporting interface called as Entity Master Form (“EMF”) to Indian companies and LLPs that have existing foreign investment including indirect foreign investments, to provide data input on total foreign investment received till date by them.
In the second phase, RBI will introduce SMF that would be made available online w.e.f. 1st August 2018. The SMF will be an integrated reporting form which will be an event-based form aiding in reporting the total foreign investment in India made by a person residing outside India. SMF would provide a facility for reporting total foreign investment in an Indian entity viz. company, LLP and other investment vehicles (Real Estate Investment Trusts (REITs)/Infrastructure Investment Trusts (InvIts)/Alternative Investment Funds (AIFs).
SMF will subsume the existing forms such as:

  • FC-GPR and FC-TRS for Issue and transfer of shares.
  • Form LLP-I & II for foreign direct investment in LLP and disinvestment/transfer of capital contribution.
  • Form ESOP for an issue of employee stock option plan.
  • Form CN for issue or transfer of convertible notes.
  • Form DR for issue or transfer of depository receipts.
The purpose of the SMF appears to be the collation of common details of an Indian entity, such as the name of the entity, its corporate identification number, and details of all foreign investment, including the entry route and sectoral cap applicable to it.
While the format of the form has been provided as Annex II to the circular, RBI is yet to notify the form. Once notified, the form will be available in the master direction on reporting as well as on the website for the entities to file it as and when required.
In this regard, it may be relevant to mention that 'foreign investment' is defined in the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations 2017 (the "TISPRO Regulations"), as an investment made by a person resident outside India, on a repatriable basis, in the capital instruments of an Indian company or to the capital of a limited liability partnership (an "LLP").
The intention of the RBI's Circular, introducing the Entity Master Form along with abridged and relatively simple forms required for reporting under the TISPRO Regulations, appears to be to simplify the process of reporting for Indian entities, but also to crack down on historic round-tripping transactions, potential money laundering and other historic violations of FEMA.
While the formats of the various forms and their attachments provided with the SMF appear to be simpler than the currently subsisting formats of the reporting forms, the Circular clearly has retrospective effect and provides a narrow window of opportunity for compliance. The Interface Window, from June 28, 2018, to July 12, 2018, is just 15 (fifteen) days long.
Not only has the RBI given short notice to all Indian entities to be ready with the requisite information, it has provided an exceptionally short period of time for thousands of Indian entities to file this information.
Further, Indian entities that may have defaulted in filing any of the forms that the SMF intends to replace, will likely face the herculean task of making all relevant filings before the end of the Interface Window.
Further, the likelihood of Indian entities being unaware of the requirements of the Circular is fairly high. The RBI has only given AD Banks the option to inform entities of this crucial change.
Given that any non-compliance with the directions of the Entity Master Form and the Circular will lead to an Indian entity being disqualified from receiving foreign investment in the future, the narrow Interface Window is likely to trigger objections.
Although an extension of the Interface Window is certainly necessary, it is unclear whether the RBI will permit or issue such an extension. It is also unclear if the AD Banks will be penalized for not informing their customers, constituents and stakeholders of this change in time, though it is unlikely, given that they are not mandatorily required to notify their customers.
Further, although the Circular is fairly clear on the implication of non-compliance with the directions, disqualification of all defaulting Indian entities from receiving any foreign investment whatsoever is a disproportionate penalty for minor violations. This is especially confounding, given the Indian government's hitherto liberal stance on foreign investment.
Whether the RBI decides to widen the Interface Window or provide other relaxations, remains to be seen. Until then, it is advisable for all Indian entities and other stakeholders to prepare to make the necessary disclosures within the existing Interface Window.

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