The past couple of years have seen substantial reforms to further liberalize foreign direct investment (FDI) rules in India, in a bid to attract more foreign investment. While some sectors continue to have restrictions on foreign investments, by and large India has moved towards a more liberalized regime.
The Reserve Bank of India (RBI) has also overhauled the regulations governing issue and transfer of security by a person resident outside India, with the aim of simplifying foreign investment in the country. In a widely hailed step, the cap on dividends on compulsorily convertible preference shares was removed. The RBI has also permitted transfer of capital instruments held by a non-resident Indian, to a non-resident without any approval, subject to compliance with sectoral norms, applicable pricing guidelines, etc. Certain nuances with respect to pricing guidelines and their applicability on downstream investments have also been altered. The new regime eliminates several redundancies and clarifies interpretational issues that plagued the old regime, making India appear as a more attractive and foreign investment-friendly destination. A new concept of foreign portfolio investor in listed companies has also been introduced, although this has led to certain confusion especially with respect to applicable sectoral guidelines and reporting compliances in restricted sectors. However, despite such laudable efforts, the regulators seem to have gone overboard on reporting and disclosure obligations, which have curbed the enthusiasm around “ease of doing business”.
The RBI has recently issued a circular with the ostensible aim of integrating the reporting of various types of foreign investment under a single master form (SMF), as opposed to the current cumbersome mechanism of reporting across multiple platforms. It has also provided an interface for Indian entities to input data on total foreign investment in a specified format under an entity master form (EMF).
While the objective behind having a streamlined process for reporting is laudable, the extent of information sought and the time periods to which such information relates has been a concern for entities, which would have to expend significant resources. The first and major point of concern is the limited time available for the entities to collate vast pieces of information. While the time allowed for compliance was recently extended by a week, this seems to be inadequate given the detailed nature of the information being sought.
Specifically with respect to the SMF, additional reporting has been envisaged which the current requirements did not include, illustratively, reporting of investment by a non-resident in an investment vehicle. Further, the EMF seeks disclosure of detailed and historical information at different levels in a corporate structure. This would be extremely problematic for large groups of companies with multiple downstream investment vehicles.
Until now, generally speaking, foreign investment reporting has been done on an event-specific basis. Thus, the RBI already has data with respect to the quantum and timing of such foreign investments and to expect companies to undertake a cumbersome process to provide similar information to what the RBI already possesses is unacceptable. Adding to this duplication is a recent directive by the Securities and Exchange Board of India and the Ministry of Corporate Affairs, which have sought similar information.
Further, online reporting in India is typically replete with technical glitches, which add to the woe. The EMF is almost like a diligence check to ensure that all entities which have received foreign investment in the past complied with the applicable exchange control regulations. Given that the penalty for not filing the EMF within the prescribed timeline is a prohibition on receiving any form of foreign investment, entities have been grappling to undertake this compliance. Various representations are understood to have been made to the regulators raising such concerns.
Over the past few years, India has taken many measures to improve its ranking on ease of doing business – including liberalization of foreign investment norms and licensing regimes, streamlining of laws and regulations, and single-window clearances – and has continually improved its rank. It now seems that the regulators, in their bid to assess compliance and understand the beneficiaries of foreign investments, have gone overboard with reporting requirements. This would force entities to expend substantial resources and time on compliance. The regulators should rethink their reporting requirements and the manner of implementing them in the context of efforts to improve ease of doing business.
Vaibhav Kakkar is a partner at L&L Partners. Snigdhaneel Satpathy is a managing associate. The views expressed are personal and intended for general information purposes. They are not a substitute for legal advice.
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