An auto component manufacturing company from Korea was on the lookout for a suitable joint venture partner to set up a facility in India that would logistically support supply to the car manufacturer in Chennai. After conducting due diligence, the Korean company identified Anish Southern Group companies as an ideal venture partner, with whom the procedures for incorporation were set in motion. The new joint venture company, comprising both Korean investors and Indian investors, was incorporated with the Registrar of Companies with 49 per cent of equity investment by the Indian investor, and 51 per cent investment from the Korean investor.
The company opened the bank account with a private sector new generation bank, through which the funds were routed from Korea to India, and the branch of the bank is an Authorised Dealer (AD) of RBI. The AD secured KYC documents on receipt of the inward remittance, but didn't follow up on some other FEMA-related requirements for foreign inward remittance. The company allotted shares to all investors, and complied with ROC formalities by filing Form 2. The initial focus was on operations, and meeting its orders and augmenting supply chains and logistics to further strengthen its hold on the market. During the first audit of the books of the company, the auditors sought FEMA compliance papers for verification of the foreign share holding. At this point, the JV Company realised that they had unintentionally missed out on this aspect of the deal.
Whenever any company sets out to receive foreign share capital, certain essentials need to be verified. It needs to know what percentage of investment is allowed in that specific industry under the Government of India's FDI schemes, and one needs to verify that the industry doesn't fall into the list where the Government has set sectoral caps or limits on foreign investment. There are three such categories — where 100 per cent FDI is allowed, where sectoral caps exist, and last but not the least, where FDI is absolutely not allowed. Further, there are industries where investment is allowed via the automatic route — in other words, only information reports need to be filed with the Reserve Bank of India. In certain other cases, prior approval of the government is required, and must be secured from the Foreign Investment Promotion Board (FIPB), Government of India.
The JV Company, having received FDI under the automatic route, should have reported certain details on the Advance Reporting Form to the Regional Office of the Reserve Bank of India, within 30 days from the date of receipt of inward remittances. The report would include details of the receipt of remittance towards issue of equity instrument (viz. shares / fully convertible debentures / fully convertible preference shares), copies of the Foreign Inward Remittance Certificate (FIRC) evidencing the receipt of inward remittances, and Know Your Customer (KYC) report on the non-resident investors from the overseas bank remitting the amount.
The procedure may be classified into two stages. Stage 1 happens on the receipt of share application money, and should be completed within 30 days of receipt of remittance. Stage 2 is due when shares are allotted. At that time, the JV Company needs to file a report on form FC-GPR with the respective regional office of the Reserve Bank of India.
This report must be accompanied by certain certifications from the Company Secretary and Statutory Auditors of the JV Company. Another point to be noted is that all the reporting happens through the AD category 1 branch of the bank where the company has an account, and which receives the remittance of share capital. It is, therefore, imperative that the AD keeps its customers informed of FEMA requirements in such cases.
In this case, failure to report the transaction will invite penal provisions under FEMA. The JV Company would need to apply to RBI for compounding of contravention under FEMA. One can also make an application for compounding, suo moto, on becoming aware of the contravention. It would, of course, be better to follow reporting requirements, rather than invite penal provisions, as these types of irregularities will dominate the horizon when the foreign investor wants to repatriate dividends or capital on a later date.