Downstream Investment reporting and timelines

Downstream Investment

As per Regulation 14 of FEMA 20(R)

(1) For the purpose of this regulation:

(a) ‘Ownership of an Indian company’ shall mean beneficial holding of more than 50 percent of the capital instruments of such company. ‘Ownership of an LLP’ shall mean contribution of more than 50 percent in its capital and having majority profit share.

(b) ‘Company owned by resident Indian citizens’ shall mean an Indian company where ownership is vested in resident Indian citizens and/ or Indian companies, which are ultimately owned and controlled by resident Indian citizens. An ‘LLP owned by resident Indian citizens’ shall mean an LLP where ownership is vested in resident Indian citizens and/ or Indian entities, which are ultimately owned and controlled by resident Indian citizens.

(c) ‘Company owned by persons resident outside India’ shall mean an Indian company that is owned by persons resident outside India. An ‘LLP owned by persons resident outside India’ shall mean an LLP that is owned by persons resident outside India.

(d) ‘Control’ shall mean the right to appoint majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreement or voting agreement. For the purpose of LLP, ‘Control’ shall mean the right to appoint majority of the designated partners, where such designated partners, with specific exclusion to others, have control over all the policies of an LLP.

(e) ‘Company controlled by resident Indian citizens’ means an Indian company, the control of which is vested in resident Indian citizens and/ or Indian companies which are ultimately owned and controlled by resident Indian citizens. An ‘LLP controlled by resident Indian citizens’ shall mean an LLP, the control of which is vested in resident Indian citizens and/ or Indian entities, which are ultimately owned and controlled by resident Indian citizens.

(f) ‘Company controlled by persons resident outside India’ shall mean an Indian company that is controlled by persons resident outside India. An ‘LLP controlled by persons resident outside India’ shall mean an LLP that is controlled by persons resident outside India.

(g) ‘Downstream Investment’ shall mean investment made by an Indian entity or an Investment Vehicle in the capital instruments or the capital, as the case may be, of another Indian entity:

(h) ‘Holding Company’ shall have the same meaning as assigned to it under Companies Act, 2013;

(i) ‘Indirect Foreign Investment’ means downstream investment received by an Indian entity from:

1. another Indian entity (IE) which has received foreign investment and (i) the IE is not owned and not controlled by resident Indian citizens or (ii) is owned or controlled by persons resident outside India; or
2. an investment vehicle whose sponsor or manager or investment manager (i) is not owned and not controlled by resident Indian citizens or (ii) is owned or controlled by persons resident outside India

Provided no person resident in India other than an Indian entity can receive Indirect Foreign Investment.

(j) ‘Total Foreign Investment’ means the total of foreign investment and indirect foreign investment and the same will be reckoned on a fully diluted basis;

(k) ‘Strategic downstream investment’ means investment by banking companies incorporated in India in their subsidiaries, joint ventures and associates.

(2) Indian entity which has received indirect foreign investment shall comply with the entry route, sectoral caps, pricing guidelines and other attendant conditions as applicable for foreign investment.

Explanation: Downstream investment by an LLP not owned and not controlled by resident Indian citizens or owned or controlled by persons resident outside India is allowed in an Indian company operating in sectors where foreign investment up to 100 percent is permitted under automatic route and there are no FDI linked performance conditions.

(3) With effect from 31st day of July, 2012, downstream investment/s made under Corporate Debt Restructuring (CDR), or other loan restructuring mechanism, or in trading book, or for acquisition of shares due to defaults in loans, by a banking company, as defined in clause (c) of section 5 of the Banking Regulation Act, 1949, incorporated in India, which is not owned and not controlled by resident Indian citizens or owned or controlled by persons resident outside India, shall not count towards indirect foreign investment. However, their strategic downstream investment shall be counted towards indirect foreign investment for the company in which such investment is being made.

(4) Guidelines for calculating total foreign investment in Indian companies:

1. Any equity holding by a person resident outside India resulting from conversion of any debt instrument under any arrangement shall be reckoned for total foreign investment;
2. FCCBs and DRs having underlying of instruments in the nature of debt, shall not be reckoned for total foreign investment;
3. The methodology for calculating total foreign investment would apply at every stage of investment in Indian companies and thus in each and every Indian company;
4. For the purpose of downstream investment, the portfolio investment held as on March 31 of the previous financial year in the Indian company making the downstream investment shall be considered for computing its total foreign investment;
5. The indirect foreign investment received by a wholly owned subsidiary of an Indian company will be limited to the total foreign investment received by the company making the downstream investment;

(5) Downstream investment made into Indian companies will be subject to the following conditions:

(a) The downstream investment should have the approval of the Board of Directors as also a Shareholders' Agreement, if any;

(b) For the purpose of downstream investment, the Indian entity making the downstream investment shall bring in requisite funds from abroad and not use funds borrowed in the domestic markets. Downstream investments can be made through internal accruals. For this purpose, internal accruals will mean profits transferred to reserve account after payment of taxes.

Further raising of debt and its utilisation shall be in compliance with the Act, rules or regulations made thereunder.

(c) Capital instrument of an Indian company held by another Indian company which has received foreign investment and is not owned and not controlled by resident Indian citizens or is owned or controlled by persons resident outside India may be transferred to:

1. A person resident outside India, subject to reporting requirements in Form FCTRS;
2. A person resident in India subject to adherence to pricing guidelines.
3. An Indian company which has received foreign investment and is not owned and not controlled by resident Indian citizens or owned or controlled by persons resident outside India.

(d) The first level Indian company making downstream investment shall be responsible for ensuring compliance with the provisions of these regulations for the downstream investment made by it at second level and so on and so forth. Such first level company shall obtain a certificate to this effect from its statutory auditor on an annual basis. Such compliance of these regulations shall be mentioned in the Director's report in the Annual Report of the Indian company. In case statutory auditor has given a qualified report, the same shall be immediately brought to the notice of the Regional Office of the Reserve Bank in whose jurisdiction the Registered Office of the company is located and shall also obtain acknowledgement from the RO.

(e) The provisions at (c) and (d) above shall be construed accordingly for an LLP.

Note: Downstream investment made in accordance with the guidelines in existence prior to February 13, 2009 would not require any modification to conform to these regulations. All other investments, after the said date, would come under the ambit of these regulations. Downstream investments made between February 13, 2009 and June 21, 2013 which is not in conformity with these regulations should have been intimated to the Reserve Bank by October 3, 2013 for treating such cases as compliant with these regulations.

Timeline for reporting DI

The form DI for Downstream Investment has to be reported to Secretariat for Industrial Assistance, DIPP within 30 days of such investment or infusion of funds as Regulation FEMA 20(R)

 National Financial Reporting Authority (NFRA): Requirement of Form 1

 BACKGROUND

National Financial Reporting Authority (“NFRA”) is newly set up independent regulator of the Audit profession. It is one such body proposed under Companies Act 2013 to double check and to oversee the quality of service rendered by Chartered Accountants in India to provide review on matters relating to Accounting and Auditing standards and thereby suggesting measures of improvement.

Prior to the set up of NFRA, ICAI used to monitor the Auditors of big companies.

This move for establishment of NFRA is to act against erring Auditors and Auditing firms to reduce the corporate scams in India, thereby to ensure better compliances by the Indian Corporates.

The relevant provisions to NFRA are:

·         Sub section (2) and (4) of Section 132:- Constitution of National Financial Reporting Authority

·         Sub section (1) of Section 139:- Appointment of Auditors

·         Sub section (1) of Section 469:- Power of Central Government to Make Rules

·         The National Financial Reporting Authority rules, 2018

The classes of the companies and bodies corporate governed by the NFRA are well stated in Rule 3 of the Rules, 2018

1)    Listed companies;

2)    Unlisted companies with paid up capital of INR 500 crore or more or Annual Turnover of INR 1000 crore or more or outstanding loans, debentures and deposit of more than INR 500 crore or more, as on 31st March of immediate preceding FY

3)    Insurance Companies, banking companies, companies with business of generation or supply of electricity, companies governed with special act or companies incorporated in reference with clauses (b) to (f) of Section 1(4)

4)    Any reference made by Central Government to NFRA authority

5)    Body corporate registered outside India, which is subsidiary or associate company of companies or body corporate registered in India, with income or Net worth of subsidiary or associate company is plus 20% of consolidated income / consolidated Net worth (body corporate as defined in this clause are required to file Form NFRA-1)

Rule 3(2) states that every existing body corporate (other than the one stated in point 1 to 5 above) are required to file Form NFRA-1 (details of auditor) within 30 days from rules been notified i.e. :

·         Private companies

·         Unlisted companies which are not covered under Rule 3(1)

·         Any other companies / body corporate which are not governed under NFRA authority and NFRA Rules

Rule 3(3) states that Body corporate other than companies as defined under Section 2(20) to intimate appointment of auditor within 15 days in Form NFRA-1. Please note that as per Rule 3(2), companies from (a) to (d) are not required to file form NFRA-1.

Information / Documents required to file form NFRA-1:

                                                                                                     

Indian Body Corporate

Foreign Body Corporate

1)    PAN of Indian authorized individual 2)    PAN of body corporate 3)    DIN of Director/Membership No. of CS/PAN of Manager or CEO or CFO 4)    Income tax PAN of auditor/audit firm 5)    Membership number of auditor/auditor firm registration number 6)    In case the auditor is appointed due to casual vacancy, then membership no. of auditor or registration no. of audit firm who/which vacated the office needs to be provided in the form. 7)    Copy of written consent given by auditor & Copy of resolution passed by the body corporate 8)    Digital Signature (DSC) of User (Director/Manager/CEO/CFO/Company Secretary)

1)    Passport Number of foreign authorized individual 2)    Registration number of foreign body corporate and name of provider of registration number

Fraudulent Transactions under IBC

Section 66 deals with Fraudulent trading or wrongful trading

(1) If during the corporate insolvency resolution process or a liquidation process, it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose, the Adjudicating Authority may on the application of the resolution professional pass an order that any persons who were knowingly parties to the carrying on of the business in such manner shall be liable to make such contributions to the assets of the corporate debtor as it may deem fit.

(2) On an application made by a resolution professional during the corporate insolvency resolution process, the Adjudicating Authority may by an order direct that a director or partner of the corporate debtor, as the case may be, shall be liable to make such contribution to the assets of the corporate debtor as it may deem fit, if—

(a) before the insolvency commencement date, such director or partner knew or ought to have known that the there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of such corporate debtor; and

(b) such director or partner did not exercise due diligence in minimising the potential loss to the creditors of the corporate debtor.

Explanation.—For the purposes of this section a director or partner of the corporate debtor, as the case may be, shall be deemed to have exercised due diligence if such diligence was reasonably expected of a person carrying out the same functions as are carried out by such director or partner, as the case may be, in relation to the corporate debtor.

Extension of Sec 66. Now where order is passed under Sec 66(1) or (2) , then NCLT can pass three more orders. 1) the liability to pay can be called as Charge or whatever the amount is due to them from the corporate debtor.
2)They have huge powers of enforcing the charge
3) Sec 66 (2) clearly mentions that Adjudicating Authority has powers, to rank the debt of that person lower in the order in case the company goes into liquidation and according to Sec 56 even a Secured creditor can be paid after unsecured creditor

Two more aspects, this is civil liability under Sec 66. The limitation doesn't apply. It is not criminal liability for the directors

There is no time limit under Sec 66. IP can go for longer period. However there is restrictions under Sec 43 wherein IP has to look back to last two years for the related transactions which are exist. For the transactions with other parties, time period is only 1 year. So as an IP, getting the information from Corporate debtor and the directors of the company is not easy task. Suspected transactions has to be looked upon smartly. The basic documents to be looked upon to detect are Balance Sheet, list of debtors, accounting data in a software base, irregular types of transactions.

Over the period of time, like 5 years, you can see the each asset and transactions, bad debts provisions, and there are so many transactions which can predict fictitious sales. So be vigilant on each transaction on the balance sheet.

It is duty of IPs, how can you make Directors be personally liable for these aspects. IP has the been cast the duty to detect the transactions particularly the type of transactions where the elements of fraud exists. Even if the forensic auditor has submitted the report, IP has to be extra cautious while submitting the report. IP is requested not to keep the forensic report as base whereas review the report including the forensic report and the allegations needs to be specific. Also it must be submitted with clear evidences. And the data must be credible. In case you are presenting digital evidences like in form CD, Hard disk, or clone hard disk of PC, then, it must be submitted in accordance of IT Act and Indian Evidence Act.


Related sec 43, 45, 50

Sec 43 talks about preferential transactions and relevant time

Sec 45 talks about avoidance of undervalued transactions

Sec 50 for the Extortionate credit transactions

Judgement of Mumbai NCLT, the case "Prag Distillery"dated 21st Feb 2019, the application was made under Sec 43, 49, 60(5) and 66 of IBC Code. Sec 43, Sec 49 the contentional and allegation of RP was rejected. The opposite party agreed to transfer back the part of machinery/ plant that is why this order was passed otherwise there was no substance in the case.

Another case Orchid Pharma with NCLT Chennai under Sec 43 and 66 of IBC Code. The application lacks particulars. It says transactions mentioned are beyond 2 years. Since these transactions are older than 2 years, no order was passed.