1) Ignoring the valuation of the shares being issued to foreign investors-
Valuation is mandatory in case funds are raised from foreign investors. Valuation report should not be more than 90 days old on the date of allotment of shares. Valuation Certificate has to be taken from Chartered Account or SEBI registered Merchant Banker. Further, Shares must be issued at price not lower than the Fair Market Value (FMV) of the Company.
2) Not filing FC-GPR forms-
When shares are issued to foreign investors. Form FC-GPR needs to filed with RBI within 30 days of allotment. Many Companies miss filing this form with RBI.
3) Not filing Form FLA annually-
Once funding has been received from foreign investors, filing of Form FLA becomes mandatory annually. Form FLA is required to be filed annually by 15th July or such other date as may be notified by RBI.
4) Not maintaining the KYC of the investors-
One of the common mistakes Companies usually make is not maintaining the KYC documentation of their foreign investors. KYC documentation includes maintaining identity & address proof of foreign investors. In case funding is raised through foreign Company, then that Company’s Certificate of Incorporation (CO), MOA & AOA needs to be maintained In case funding is raised through individual foreign investors, documents like their Tax Identity number, local Id proofs & address proofs like driving license, passport copies need to be maintained.
5) Not complying with filing of the forms & documentations with RBI-
Various forms like FC-GPR & ROC forms like PAS-3 (and MGT-14, where applicable) needs to be filed within due dates to avoid non-compliance & penalties.
6) Assuming complying with FEMA provisions= Income tax provisions-
It is important to note here that FEMA law & Income Tax Law are different. Complying with FEMA does not mean complying with Income Tax provisions. Income Tax provisions needs to be taken care while issuing shares to foreign investors. Shares must be issued at minimum price of FMV since foreign investors shall be taxable under Section 56(2)(x) of the Income Tax Act, 1961 if shares are issued at a price lower than FMV.
7) Not issuing shares on time-
Once funds are received, shares must be issued within 60 days of receipt of money in the Bank account. If shares are not issued within 60 days, money must be refunded. Many Companies ignore this provision of issuance of shares on time.
8) Receiving funds in the wrong account-
Foreign investment must be received through proper banking channel & Investor’s designated account. Once funds are received, banks issue Foreign inward remittance certificate (FIRC) with the purpose code mentioning that funds have been received for shares issuance.
9) Using FDI Money for restricted activities-
Founders usually assume that all foreign investment are freely allowed under automatic route. However it is important to check whether the investment that is being received comes under the sectoral caps or require separate government approval prior to receiving the funds.
10) Not opening a separate bank account in case of Private Placement-
Under ROC provisions, separate bank account needs to be opened when funds are received through private placement.
11) Not checking the investor eligibility-
Common mistakes Companies usually make is accepting funds from countries sharing land border with India without RBI approval. Approval is required where the investor is from or beneficial owner is situated in a country sharing land border with India, such as China, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar and Afghanistan.
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