Is your fund house considered a FOCC (Foreign Owned and Controlled Company)?
A fund house is classified as an FOCC (Foreign-Owned and Controlled Company) if it operates as an investment vehicle in which the sponsor, manager, or investment manager is either owned or controlled by individuals residing outside India or not owned and controlled by resident Indian citizens. This classification affects the downstream investment treatment and determines whether investments made by the fund are considered foreign investments under Indian FDI regulations.
What if my Sponsor/ Manager/ Investment Manager is an LLP? How do I determine that?
If your Sponsor, Manager, or Investment Manager is structured as an LLP, you must assess who ultimately controls the LLP by examining its partners. If control rests with individuals or entities based outside India, the fund may be classified as a FOCC (Foreign-Owned and Controlled Company), even if the LLP is Indian-registered. Control typically means having the authority to appoint most of the designated partners, provided those partners, to the exclusion of others, have full authority over the LLP’s policies.
What types of investments need regulatory filings?
Investments made in listed and unlisted Indian companies or LLPs by entities that are classified as FOCC or by foreign entities themselves require filings under FEMA. This includes equity, compulsorily convertible instruments, capital contribution, and sometimes debt instruments. The investment can be in the form of-
- Primary Investment: Issuance of equity instruments by the Indian company or capital contribution to a Limited Liability Partnership (LLP).
- Secondary Investment: Purchase/ Acquisition from a recognized stock exchange or a Resident Person in India.
What filings are required, and what are the timelines?
The key filings for foreign investment in India include:
- FC-GPR: In case equity instruments of an Indian Company are issued to a foreign investor.
Timeline:Within 30 days of share allotment for foreign inflows.
- LLP 1: In case of allotment of capital of the LLP to foreign persons.
Timeline: within 30 days of contributing.
- DI (Downstream Investment): In the case of equity instruments of an Indian Company acquired by a FOCC entity
Timeline:Within 30 days of investment or issuance.
- FC-TRS: In the case of transferring equity instruments of an Indian company between a resident person and a foreign person, or vice versa.
Timeline: Within 60 days of the share transfer or receipt of funds, whichever comes first.
- Annual Return on Foreign Liabilities and Assets (FLA): To be filed by every entity that has received foreign investment or has made investment overseas, or both
Timeline: Due by July 15 each year.
We have made investments but did not file DI. What are the consequences?
Non-filing is a violation of FEMA regulations. The Indian person responsible for filing the filings would be liable to pay a Late Submission Fee (LSF) or go through the compounding process, depending on the period of delay.
Our delays are over 3 years old. Do we still file with a Late Submission Fee?
LSF applies only to delays whose period of delay is within a 3-year window. Delays exceeding three years must go through compounding by the Reserve Bank of India (RBI).
Is compounding compulsory for delayed filings beyond 3 years?
Yes. Once the delay exceeds the permissible period for LSF, which is generally 3 years, compounding becomes mandatory to regularize the non-compliance under FEMA.
How long does the compounding petition process take?
The RBI has 180 days from the date of receipt of the application to complete the compounding process, depending on the complexity and documentation.
Are compounding hearings conducted in person or online?
Compounding hearings are usually conducted online, though the RBI may request an in-person appearance in specific cases.
What is the correct date for these filings – Trade Date or Settlement Date?
The RBI is ambiguous in regards to which date is to be considered as the date of investment. Every AD bank has a different interpretation of the same. However, it is usually considered that the Settlement Date is to be considered for compliance timelines and LSF/compounding computation purposes.
When calculating the Late Submission Fee, do we use the Trade Date or Settlement Date?
Depending on the date considered as the date of allotment by the AD bank (i.e., Settlement Date or Trade Date), the date of allotment is used for LSF calculations as per RBI norms.
When investing in a financial services company, should the investee be regulated?
Yes. Foreign investment in financial services generally requires the investee to be regulated by a relevant financial sector regulator (e.g., SEBI, RBI, IRDAI). Unregulated financial services may require prior government approval.
What are the complications of investing in unlisted companies?
Investments in unlisted companies bring additional challenges such as:
- Valuation compliance (per RBI pricing guidelines).
- Sectoral caps.
- Reporting requirements.
- Obtaining certain documents like Board Resolution, KYC documents, and prescribed declarations from the Investee Company.
- Possible restrictions or prior approval required under sector-specific FDI policy.
Can we receive investments from individuals residing in or entities incorporated in Hong Kong?
Yes, but such transactions may be subject to additional scrutiny. Investments from countries sharing land borders with India, including Hong Kong (as a SAR of China), require prior government approval under the Press Note 3 regime before undertaking investment.
When an Indian fund receives foreign investment, what filings are required?
The Indian fund receiving foreign investment must file:
- Form INVIfor investment received by the funds against which units are to be allotted.
- Maintain KYC and UBO records of foreign investors.
- DI filings for any downstream investments made using foreign capital.
What are sectoral cap restrictions?
FDI is subject to sector-specific limits (e.g., 100% in manufacturing, and 74% in telecom). These caps are detailed in India’s FDI Policy and the Non-Debt Instruments Rules, 2019, and must be strictly followed.
Can your FOCC fund make investments under the automatic route, or is government approval needed?
It depends on the sector in which the downstream investment is being made. FOCCs can invest under the automatic route in most sectors, except those where:
- FDI policy mandates government approval.
- The sector is sensitive (e.g., defense, telecom, media, financial services, not regulated).
Disclaimer:
The above note is subject to further study and clarification. This note does not form an opinion from our end and before taking any decision based on the above, it is recommended to consult our experts on the subject. Kamdar, Desai & Patel will not be liable for any damages (including, without limitation, damages for loss of business projects, or loss of profits) arising in contract, tort, or otherwise from the use of or inability to use this article or any of its contents, or from any action taken (or refrained from being taken) as a result of using this article or any such contents.
