The core of the issue lies in Form FC-TRS, which is the form you use to report share transfers between Indian residents and non-residents. The RBI relies on this form to keep track of foreign investments, and getting it right is crucial for FEMA compliance. But the problem is that the timing for filing this form seems to contradict how these deals have been done in practice, leaving businesses in a tricky spot.

The FEMA Contradiction

Here’s the lowdown on the confusing part. According to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules), you have to file Form FC-TRS within 60 days of the share transfer or the money changing hands, whichever is earlier. That’s a pretty clear deadline.

However, the Foreign Direct Investment (FDI) Policy, 2020, which also falls under the umbrella of FEMA, says something a bit different. It suggests that when shares are held in physical form, the company should only record the transfer after receiving an approval from an authorized dealer (AD Bank) that the funds have been received. This approval is basically a stamped FC-TRS form.

For years, many companies have just been recording the share transfers as soon as the money and transfer documents are exchanged. This made a lot of sense, especially in the fast-paced world of M&A. But now, the RBI’s new instructions are flagging this as a potential violation of FEMA regulations.

The Impact on Deals: Delays and Risks

This contradiction is a real pain, especially for buyers. In a typical deal, a buyer wants the shares transferred the same day they hand over the purchase price. It’s about trust and security. But because of these new FEMA instructions, a buyer might have to pay the seller and then wait for days to get the AD-approved FC-TRS form before the company can officially record the share transfer.

This delay creates some serious risks:

• Trust Issues: What happens if there’s a problem with the AD approval? The buyer has already paid, but they don’t have the shares yet. This is a tough spot, especially when a buyer and seller don’t know each other well.
• Transaction Delays: Getting the AD-approved FC-TRS can take a few days, especially if there are multiple parties involved. These delays can mess up the timeline for an M&A deal and add unwanted uncertainty. This new FEMA rule adds another layer of complexity.
• Valuation Woes: Any significant delay could affect a company’s valuation or disrupt its business timeline, which is the last thing you want during a major acquisition. The purpose of FEMA is to streamline foreign investment, not to create these kinds of hurdles.

To tackle this, some companies are getting creative. For example, a board resolution could be passed to “in-principle” approve the transfer, with the final recording happening only after the FC-TRS form is approved. This gives the buyer some comfort that the deal is on track, even with the FEMA delay.

What Else is in the New FEMA Rules?

The new instructions from the RBI also offered some good news, showing they’re trying to make the process more efficient.

• Don’t Hold Up New Deals: The RBI has told AD Banks not to delay recording a new FC-TRS simply because a company has an unresolved FEMA non-compliance from a past transaction. Compounding of past non-compliances is a separate, voluntary process.
• Get Guidance: If a company can’t get all the necessary documents for a past transaction, the AD Banks are supposed to refer those cases to the RBI for guidance instead of stonewalling the process. This is a practical step to ensure compliance with FEMA without creating endless delays.

FAQs

Q1: What is Form FC-TRS?

FC-TRS stands for Foreign Currency Transfer of Shares. It’s a reporting form that a resident transferor or transferee must file with their authorized dealer bank to report a share transfer between a resident and a non-resident. This is a crucial step for FEMA compliance.

Q2: What’s the main conflict between the NDI Rules and the FDI Policy?

The NDI Rules say to file FC-TRS within 60 days of the share transfer or payment, whichever is earlier. However, the FDI Policy, which is also a FEMA document, says that for physical shares, the company should only record the transfer after getting an AD Bank’s approval on the FC-TRS form, which creates a potential timing issue.

Q3: What is “compounding” under FEMA?

Compounding is a way to voluntarily admit to a FEMA violation, pay a penalty, and get it resolved without going through a full legal proceeding. It’s a way for companies to rectify past mistakes and get back on track.

Q4: Why are these rules affecting M&A deals?

The requirement to wait for the AD-approved FC-TRS form before the share transfer is officially recorded can cause delays. This is a big problem in M&A deals where buyers and sellers want to complete the transaction as quickly as possible to mitigate risk.

Conclusion

Navigating foreign exchange regulations like FEMA is always a challenge, especially when there are new rules or conflicting instructions. While the RBI’s recent clarification aims to tighten compliance, it’s also created some friction in how M&A deals are done. The key takeaway for anyone involved in a cross-border deal is to be aware of this specific requirement for Form FC-TRS.

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