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RBI Rationalized Reporting Process for Foreign Direct Investment (FDI)

iSPIRT is pursuing the Stay-in-India Checklist 2.0 with Department for Promotion of Industry and Internal Trade (DPIIT), Government of India, targeted to bring Ease of Doing Business for start-ups.

Our efforts gained momentum with DPIIT’s Regulatory Roundtables since August 2022. Reserve Bank of India has further eased the reporting of FDI on the FIRMS portal.  The item was on the list of issues that were taken up with RBI through DPIIT.

The new announcement called “Foreign Investment in India – Rationalisation of Reporting” has been announced vide circular no. RBI/2022-23/160 A.P. (DIR Series) Circular No. 22 Dated January 04, 2023. Please visit the RBI site on linked here.

The announcement is expected to further ease the reporting of the foreign direct investment received.

Details of the Reform Measure

In its effort to tout India as an attractive investment destination, the Reserve Bank of India (RBI) has released the RBI/2022-23/160 A.P. (DIR Series) Circular No. 22 on 4 January 2023, which brings about certain reforms in the reporting process in the Single Master Form (SMF) on the FIRMS portal. The SMF is a form which integrates the reporting structure of various types of foreign investment in India. It has implemented the following changes with respect to reporting in the SMF on the FIRMS portal:

  • The forms submitted on the portal will now be auto-acknowledged with a time stamp and an auto-generated email will be sent to the applicant. The AD banks will have to verify the same within 5 (five) working days based on the documents uploaded.
  • The system would automatically identify a delay in reporting if any.
  • For forms filed with a delay of less than or equal to 3 (three) years, the AD bank will approve the same, subject to the payment of LSF.
  • The LSF will be computed by the system, and an e-mail will be sent to the applicant and the concerned Regional Office (RO) of the RBI, specifying the amount and the timeline within which the LSF is to be paid to the concerned RO.
  • Once the LSF amount is realised, the concerned RO will update the status in the FIRMS portal, and the updated status will be communicated to the applicant through a system-generated e-mail, which can also be viewed in the FIRMS portal.
  • The AD bank will approve the forms filed with a delay greater than three years, subject to the compounding of the contravention. The applicant may thereafter approach the RBI with their application for compounding.
  • The remarks of the AD Bank for rejection of forms, if any, will be communicated to the applicant through a system-generated e-mail and the same can also be viewed in the FIRMS portal.

The resulting effects of the RBI circular

1.   Auto acknowledgement of SMF

While the rationalisation of the reporting process is a welcome move, and the auto acknowledgement of forms will bring comfort to the applicants after filing the form, we are receiving mixed reactions from stakeholders with regard to the verification of the forms submitted by the applicants within the 5 (five) working day window. Given that there are no overarching guidelines on the format of documents required for filing Form FC-GPR and Form FC-TRS, and the format differs from bank to bank, it may be helpful if banks were to consider offering pre-vetting services in relation to reporting for cross-border transactions.

The likely result of an AD bank not approving the form within 5 days will be auto-approval of the form.

The circular is silent on what happens in the event an authorised dealer (Bank) isn’t satisfied with the details. It seems, in such an event, what could have been approved with a few follow-up queries will have to be rejected within the 5-day window, if the queries remain unanswered.

Separately, we also believe that a 5-day window is very short given the complexity that can arise with some filings. Banks and their regulatory teams also usually work only till 5:00 PM (and cannot, in any case, be expected to work 24×7), so if a form is submitted close to or after 5:00 PM, an applicant may already have lost close to a day.

2.   Online calculation of late submission fee.

Auto-identification of a delay in reporting and calculation of the late submission fee (LSF) by the system will likely be greatly appreciated by stakeholders. Prior to this reform, if an applicant received an email from the RBI regarding the LSF, the applicant would have to draw a demand draft in favour of the RBI, which would have to be acknowledged by the RBI through email. While the process was efficient and hasn’t changed post the amendment, there have been multiple instances of applicants not having a record of the acknowledgement with them after a few years, either due to: (a) IT policies of the organisation which delete older emails; or (b) due to a change in employees. Now that the concerned RO of the RBI will update the status on the FIRM’s portal (along with the standard email process), the amount will be reconciled and the LSF can be viewed on the portal.

Disclaimer: This blog post is co-written by Tanuvi Thakur of iSPIRT and Sanjay Khan of Khaitan & Co and is meant to inform about a new announcement by the regulator. It should not be considered as advice.

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Convertible Notes

In this session we take up another announcement by ministry of corporate affairs on convertible notes. This is a step forward to solving the problem of receiving funds as loan from foreign investors as convertible notes.

Sanjay Khan Nagra talks about the issue in the video embedded below.

What is a convertible note?

Convertible notes are debt instruments that converts in to equity, at a later date. The lender initially gives a loan with an understanding that he can convert these in to equity. In most cases, this later date is the date of next valuation of the company. If there is no next round of valuation, the company should return the debt back to lender in a fixed time interval.

Convertible notes are quite popular in startup ecosystems like Silicon Valley in USA. In India, there are other forms of convertible instruments. Such as CCDS/CCPS (compulsorily convertible debenture or preference share). These are not exactly akin to convertible notes prevalent in valley.

Ministry of corporate affairs has announced acceptance of the convertible note as a concept for startups through a circular no. G.S.R. 639(E) New Delhi, dated 29th June, 2016.

What is the new in the recent announcement?

In existing CCD/CCP instruments, company receiving funds upfront enters into an agreement defining the value or a formula at which these will convert in to equity. This value, at which they will convert cannot be lower than the present fair market value. The CCD or CCP are compulsorily convertible if there is a next round of valuation in a specified period. If there is no valuation in that period, then the money raised remains as a simple loan to be repaid.

The convertible note practice in valley is better placed. There also, a convertible note is also a loan given by investor to company. The difference being, the lender gets an advantage to convert debt to equity at a later date at a discounted rate.

So if a Rs.10 share value at later date is Rs. 50, the lender may get a conversion at Rs. 40. Next valuation round may also happen at lower than present fair market value.

So, this seems more of less like similar, what is the problem then?

The anomaly is that the Indian company can raise funds using convertible notes from Indian lenders only, and not from foreign investors.

RBI does not allow valuation linked convertibles notes. iSPIRT approached RBI with this stay-in-India check list item. RBI felt that there has to be an acceptance in company law for the convertible note concept, as akin to the practice in developed world.

iSPIRT approached ministry of corporate affairs (MCA), and the new announcement is a step forward in this direction. We soon expect RBI to follow suit and permit convertible notes from foreign investors.

Are there any conditions in MCA announcement?

MCA has announced a definition for “convertible notes” under G.S.R. 639(E) by amending the Companies (Acceptance of Deposits) Rules, 2014. You can read the complete circular here.

The limitations are:

a) The provision of Convertible note applies only to Startups
b) The amount has to be 25 lakhs or more

As per circular the definition of convertible note is added as follows:
“convertible note” means an instrument evidencing receipt of money initially as a debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of the start-up company upon occurrence of specified events and as per the other terms and conditions agreed to and indicated in the instrument.

iSPIRT stand

iSPIRT will actively pursue this further with RBI.

DIPP and MCA have taken an appreciable step forward, in getting the regulation relaxed for DIPP registered Startups.

However, in order to bring the Indian startup ecosystem at par with developed world, the limitation to DIPP registered Startups should not exist. These measures are to be adopted for all startups/companies across country.