Your India based Startup has just secured funding from investors based outside of India. Congratulations! However make sure that you comply with the provisions of Companies Act 2013 and Foreign Exchange Management Act (FEMA).
In this article we will focus on the FEMA compliance that a startup must do.
First and foremost, open a separate bank account and not use your existing operations bank account to receive FDI money. Until shares have been allotted against FDI money, the money cannot be used by the Company. The money cannot be parked in Fixed Deposit as well. Hence it makes sense to open a separate bank account. Do note, certain provisions of Companies Act 2013 also mandate that share application money be received in a separate bank account. When opening a bank account, inform the bank that you will be using the account for FDI transaction. Ask them for the list of charges for FDI transactions and do negotiate with the bank because otherwise these charges can be significant (Approx Rs 30000/- + Taxes).
Get your company’s share valuation done by a practicing Chartered Accountant using the DCF method. Make sure the valuation certificate date is earlier than the FDI transaction date. If you don’t already have a Digital Signature, you need to procure one to report the FDI transaction to RBI.
Shares can be allotted to the foreign investor under Private Placement or Rights Issue under the Companies Act 2013. Get in touch with your company secretary to see what route you propose to take. Make sure to comply with provisions of the Companies Act accordingly.
Once the money is wired into your account, inform the bank that the purpose of remittance is FDI. Your bank will ask you to submit some paper work including FEMA declaration, Sectoral Cap declaration etc before they will issue you a FIRC (Foreign Inward Remittance Certificate). You will need Original FIRC in order to report the transaction to RBI.
At this point, you will have to inform your bank to initiate a 6 pointer KYC of your investor via Swift. Once the KYC is received, your bank will issue you a KYC certificate of your investor. Depending on the bank’s policy, this certificate has a validity between 6 to 12 months. Banks may not credit the money to your account until investor KYC is complete. Also when converting the money into INR, make sure to discuss with your bank about your share price so that they credit the exact INR amount for which you are allotting the shares. Any excess money credited to the account will be required to be remitted back to the investor.
Once you have obtained Original FIRC and Investor KYC certificate from your bank, you can proceed to file the Form ARF (Advance Remittance Form) with RBI. In order to file this form, you will have to register for an account on ebiz.gov.in portal. Once you have created your individual account, you will need to add your business / organisation’s details. You can obtain the ARF form PDF from the ebiz portal. After you have filled up the form and attached the copy of FIRC and Investor KYC, you can affix your digital signature and upload the form on the ebiz portal. Do note the transaction reference number and inform your bank about the same. If everything is in order, your bank will forward the ARF form to RBI via the portal. In few days, you will receive an email alert about the processing of the form. You can login into the ebiz portal and download the UIN allotment letter. You will need UIN number later when you file the FC-GPR form. ARF must be submitted within 30 days of money being credited to your account. This date can be different from the date on which remittance is received.
You will have to allot the shares to the investors within 180 days from the receipt of money. Do check Companies Act provisions as well on how long share application money can be held without allotting shares. Usually its 60 days after which the money is treated as Deposits under Companies Act. Hence it is recommended to allot the shares within 60 days of receiving the money in your bank account.
After the shares have been allotted to the Investors, you will need to file Form FC-GPR with RBI via the ebiz portal. This form has to be filled within 30 days of share allotment. The PDF form can be downloaded from eBiz portal. You will need to attach the Share valuation report (obtained earlier), a company secretary certificate (format provided in FC-GPR), in case of Rights Issue, Company secretary will also need to issue additional certificate stating that “The offer on right basis to the persons resident outside India is at a price which is not lower than that at which the offer is made to resident shareholders”, Board resolution regarding share allotment, share certificate issue, conversion price, ratio and date (in case of Preference shares). Any other attachments which may be relevant (eg, in case of delay in filing FC-GPR, a letter stating the reasons for delay). Affix your digital signature on the form and upload the same via ebiz portal. The form will then be forwarded to the bank. If everything is in order, the bank will forward the form to RBI who will process the same and issue you a registration number and a letter taking the shares on record.
Every year, you will have to file a FLA (Foreign Liabilities and Assets) return with RBI before July 15. This return has to be e-filed so long as you have the foreign investor as one of the shareholders.