The Reserve Bank of India (“RBI”) on Tuesday 14 September, 2010 issued a circular1 informing banks to enforce, with greater rigor, reporting requirements in connection with the issue of Foreign Direct Investment instrument (equity shares, fully and mandatorily convertible preference shares and debentures under the FDI Scheme) and the receipt of consideration for such issue.

Under prevailing foreign exchange laws, an Indian company receiving investment from outside India for issuing FDI instruments, must report the details of the amount of consideration, through a bank authorised by law (“AD Category - I bank”) to receive such remittances along with certain other documents (inward remittance receipt and KYC report) within 30 days from the date of receipt of the amount of consideration.

Further, the Indian company on issuing the FDI instruments to the non-resident investor was required to report the same in Form FC-GPR to the Regional Office concerned of the Reserve Bank within 30 days from the date of issue of shares.

Prior to December 14, 2007, a general permission was available for Indian companies to refund amounts received towards purchase of shares at any point of time after receiving remittances for the FDI instrument. Hence , it was a practice among many companies to receive funds as share consideration in advance and to refund the same, say two or three years later, without issuing shares – in effect, an external commercial borrowing.

In order to curb this practice, in December 2007, the RBI directed that FDI instruments should be issued within 180 days (i.e. approximately six months) of the receipt of the inward remittance. The RBI also directed that in the event a company failed to issue the FDI instrument within that period, the amount of consideration had to be mandatorily refunded to the non-resident investor without interest.

The RBI has now clarified that FDI being an important component of the Balance of Payment (“BoP”) statistics, which RBI compiles and publishes on a quarterly basis, any delay in submission of the FDI data results in under-reporting of FDI in the BoP statistics. RBI has advised AD Category - I banks to sensitise and impress upon their clients the importance of strict adherence to the FDI reporting requirements including KYC report and has suggested that banks monitor the reported inward remittances and the subsequent issue of shares or refund of share application money by the companies.

Therefore, non-compliance with the above provision would be reckoned as a contravention under FEMA, 1999. As a consequence of this direction, Indian companies are likely to face stricter monitoring of their share transactions from their authorized dealer banks.