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Master reporting, simplification of foreign investments reporting in India

Moneycontrol |
Nitesh Mehta, Partner
M&A Tax and Regulatory

26 June 2018

The current scenario requires Indian investee Companies, Limited Liability Partnerships (‘LLP’) and Investment Vehicles such as AIFs/REITs/InvITs to file an array of different forms to report foreign investments.

The Reserve Bank of India (RBI) in its Monetary Policy Review held in April 2018 discussed their intention to unify the reporting structure for foreign investments in India. There was indeed a need to integrate the various reporting forms, a few of which were still filed in the offline mode with the Authorised Dealer Banks e.g. forms to be filed in relation to FDI in LLP. Needless to say, a reporting structure which would enable online reporting in a single, simple and comprehensive form was very much desired.

The current scenario requires Indian investee Companies, Limited Liability Partnerships (‘LLP’) and Investment Vehicles such as AIFs/REITs/InvITs to file an array of different forms to report foreign investments. They have all now been integrated in a ‘Single Master Form’ (‘SMF’). Even transfer of shares/interest in Indian entities between non-residents and residents have been clubbed in SMF.

Apart from above, what is more, interesting is RBI’s move necessitating all entities having any foreign investment to report the same on an online portal which shall be facilitated by RBI on its official website (‘Entity Master Reporting’). The window provided by the RBI for this filing has been kept short – a period of 15 days only (from 28th June 2018 to 12th July 2018). However, the RBI has given time to Indian entities to start preparing for this filing, by informing about the data that is required for this ‘Entity Master Reporting.

The RBI is serious about the deadline of 12th July since entities not complying with this requirement, shall not be allowed to receive any direct or indirect foreign investments. Furthermore, missing the deadline will result in the entity being non-compliant with FEMA requirements, thereby subject to penalties and compounding requirements.

Perhaps the RBI wants the various entities who have not yet reported their foreign investments to come clean. It is a good time for those investee companies who got their foreign investments earlier (some 10-15 years ago), from our NRI junta, to finally come clean this time around. This was a time when the AD banks did not have their regulatory teams ready to educate their constituents about the reporting requirements under FEMA.

This begs another question – would the Entity Master reporting absolve an entity, of the years of delay in reporting the foreign investment? The answer seems to be negative. The Indian investee entities will still have to report their unreported foreign investments (now through the SMF) and yes, there will still be a need to compound the delay in reporting and pay the penalties that the RBI would direct. The RBI has nowhere suggested that this Entity Master reporting is an amnesty scheme for defaulters.

One may wonder about how the RBI is going to use this combined digital data and intelligence. Maybe it will help it in framing the FDI Policy – the sectors that require impetus. But above all, this exercise will make all the foreign investment data available in a digital format, which otherwise for the RBI to compile could have been a painstaking process e.g. if an Indian company had got FDI in initial years of opening of Indian economy, the same would have to be reported now in Entity Master Reporting once again but this time reporting would be in digital form. The idea of creating a digital database of the foreign investment in a country as large and varied as India, by simply creating an online portal is a novel idea.

It remains to be seen how the entire process will pan out. Historically, most government online portals in India have had their own teething issues initially, which with time have been streamlined by the regulators, but with RBI giving a window of only 15 days for the Entity Master, there does not seem to be much room for error available with the RBI.

As India tries to digitise its reporting requirements, for the regulators to understand trends and take decisions based on real data and information, the introduction of both the SMF and the Entity Master, seems to be aimed at gathering accurate foreign investment data and facilitate consistent and simple reporting requirements.

Authors are Nitesh Mehta, Partner, Transaction Tax, BDO India and Kunal Janshali, Manager, Transaction Tax, BDO India