To dos for Founders wishing to raise Foreign Capital (Part 1 of 2) – FCGPR Compliance and issues around it

Background

A significant quantum of capital fuelling startups is from overseas sources through the Foreign Direct Investment (FDI) route.  When a company obtains capital through the FDI route, several compliances under the Foreign Exchange Management Act, 1999 (FEMA) become critical and failure to do so may lead to heavy penalties.  FEMA consists of Regulations issued by the RBI from time-to-time.  This post (including Part II of this series) is intended to achieve the following:

  1. Give early stage founders a high level overview of FCGPR and related compliances to be carried out post receiving investment by way of FDI in their companies (Part 1 of 2 being covered herein below)
  2. Issues and challenges we (Blume portfolio cos and Blume per se) have faced with possible solutions to avoid problems with the filing process (Part 2 of 2)

FC-GPR Stands for Foreign Collaboration – General Permission Route

Meaning of FDI – Foreign Direct Investment – means investment by a person / entity that is resident outside India in an Indian company.  The instruments which are considered for FDI are as follows:

(a) Equity Shares

(b) Compulsorily Convertible Preference Shares (CCPS)

(c) Compulsorily Convertible Debentures (CCDs).

(d) Warrants and Partly paid-up shares – However, these require the prior permission of the FIPB.

Shares and convertible instruments to incoming investors have to be issued at a price NO lesser than fair value of shares determined by a SEBI registered Merchant Banker or a Practicing Chartered Accountant (“PCA”) as per any Internationally Accepted Pricing Methodology in the case of unlisted companies.  Upon receiving the capital, the Company will need to give a letter of declaration stating the following alongside the Form FC- GPR:

(a)The price/conversion formula of convertible capital instruments should be determined  upfront at the time of issue of the instruments.

(b) The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the FEMA regulations.

Reporting / Advance Reporting

(a) All the FDI reporting need to be done through www.ebiz.gov.in portal.

(b) Company will require to register before the above-mentioned portal for intimating the RBI for receipt of FDI.

(c) On receipt of the funds from the foreign investor, the Company will be required to file Advance Reporting before RBI within 30 days of the receipt.

(d) While filing of an Advance reporting before the RBI, Annexure VI with KYC of remitter and FIRC certificate needs to be filed (Advance Reporting form)

The following are the key stakeholders in the FC-GPR process:

  1. Authorized Dealer (“AD”) (Recipient Bank ):

AD bank is a regular scheduled bank with whom we operate and maintain our regular current and saving account for day to day transactions.

Role of AD:

  • Acts as a liaising entity between the Company and RBI
  • All the forms (i.e. Advance Reporting and Form FC-GPR) will be vetted by AD before forwarding to the RBI for their confirmation.
  • Any communication with RBI needs to be routed through AD only.
  • In exceptional cases, RBI will request the Company to revert directly whilst keeping AD on cc on these email exchanges.
  • To intimate to the Company for receipt of foreign fund in their account and sharing necessary paper work before crediting the amount in to the Company’s account.

(Note: some of the above may defer  fromBank to Bank)

2.     Company Secretary ( For Issuance of CS Certificate) :

Practicing Company Secretary is required to certify the following with form FC-GPR:

  • While doing an Allotment to foreign national / entity the Company has complied with all regulations applicable under the Companies Act, 2013
  • Company is eligible to issue the shares under the FEMA regulations
  • Company has complied with all applicable FEMA regulations.

In nutshell, CS certificate validates that the Company’s allotment is under the compliances of all the applicable laws

3.     SEBI registered Merchant Banker or a Chartered Accountant ( For issuance of Valuation Report)

A valuation report shall be required to be filed before the RBI.  This shares that are to be allotted to the investor shall be at a price that is NOT lower than the valuation accorded by the valuer.  The valuer may choose to adopt any internationally accepted methodology whilst arriving at the valuation and furnish a report.

4.     RBI ( Final Regulatory authority)

Advance Reporting and Form FCGPR – On receipt of Advance reporting form from the AD bank, RBI scans through the application and issue the Unique Identification Number (UIN) to the transaction.

On receipt of form FC-GPR and other supporting documents, RBI scans through all the documents and issues the acknowledgment letter to the Company.

RBI may usually take upto a period of 30 days in issuing the acknowledgment letter to the Company if the application is in order and RBI doesn’t have any objections / concerns on the form filed.

Recommendation and Quick Summary to all the Start –ups Company:

Sr.No Particulars Timeline
a) On receipt of FDI, follow up with AD bank for KYC and FIRC copy and start preparing the documentations for Advance Reporting. T + 30
b) On filing of Advance Reporting before the e-biz portal follow up with AD bank for UIN. After completion of 7 days of filings.
c) On completion of allotment file the form FC-GPR before the e-biz portal

(Company is not required to wait for UIN while filing of Form FC-GPR before the RBI on completion of allotment)

T +30
d) After filing of form FC-GPR do follow up with AD bank for the acknowledgment copy. After completion of 10 days of filings.

In the next piece, will take help of Constellation team and will narrate with a list of key issues that we have faced on FCGPR with their implications and possible ways to avoid these.  Stay tuned 🙂

PS – Jointly written in collaboration with Latesh Shah of Constellation Blu (latesh@contellationblu.com).  Readers interested to learn more about this could reach out to this email id with your questions and Latesh and / or I are happy to organize a concall for all interested on this topic

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