In this article, we delve into the Companies Act, 2013, and FEMA to point out a procedural anomaly in the filing of form Foreign Currency Gross Provisional Return ("FC-GPR") for subscribers to the memorandum of association ("MOA").
Companies Act, 2013: As per section 10A of the Companies Act, 2013 ("Act"), when any person, including a non-resident person, incorporates a company, such person being a subscriber to the MOA is required to infuse capital into the company within 180 days of incorporation of the company by filing the form INC-20A1. As per the Act, a company shall allot shares within 60 days of receipt of the subscription amount, but this timeline prescription is only for subsequent share subscriptions such as private placement, rights offer etc. The Act does not prescribe any timeline for allotment of shares for the subscribers to the MOA since the shares are deemed to be allotted to the subscribers of the MOA from the date of incorporation as held by the Bombay High Court in Sant chemicals private limited Vs. Sant chemicals private limited with Aviat chemicals private limited and Jagmohan Singh Arora and others2.
FEMA: As per para 3(1) of the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 ("NDI Reporting Regulations"), equity shares shall have to be issued to the person resident outside India making such investment within 60 days of receipt of the consideration. Further, as per para 4(1) of the NDI Reporting Regulations, the company shall have to file form FC-GPR within 30 days from the date of issue of equity instruments. It is pertinent to note that FEMA uses the word 'issue' and not 'allotment'.
Anomaly: Upon a careful look at the phrasing of FEMA, it does not contemplate a timeline for a situation, for subscribers to the MOA. The question arises here as to what date shall be finalised as the date of issue for the subscribers to the MOA so they can comply with the timeline of filing form FC-GPR. In the case of an initial subscription to the MOA, the money towards the subscription is paid only after incorporation of the company, hence the requirement under section 10A of the Act, as discussed above, is satisfied. Going by the strict text of FEMA, it can be implied that a company has to file form FC-GPR within 30 days of incorporation of the company, i.e. within 30 days of the deemed date of allotment of equity shares, however, the company will still have time of 180 days from the date of incorporation of the company to receive the money (inward remittance) from non-resident subscriber as per the Act.
As per FEMA, the company can only issue shares after receipt of consideration (inward remittance), and after the issuance of shares, the company shall file form FC-GPR within 30 days of such issuance. This is an anomaly where FEMA mandates the companies to file FC-GPR within 30 days of issuance of shares and only upon receipt of consideration; however, as per the Act, the shares are deemed to be issued/allotted to the subscribers before the receipt of consideration, and hence the timelines for compliance gets contradictory in nature. There have been scenarios where FC-GPR forms were filed in strict compliance with the Act prior to the receipt of the initial subscription (inward remittance), and the same was rejected on the grounds that shares could not be issued prior to the receipt of inward remittance.
Moreover, suppose a company puts the date of incorporation as the date of issue of shares in the FC-GPR form and files the form after receipt of money after 90 days of incorporation (still compliant as per the Act). In that case, the form will be rejected for late filing as the form has to be filed within 30 days of issuance of shares. Due to this, companies are forced to provide a different date of issuance of shares subsequent to inward remittance to comply with FEMA, thus violating the Act.
Key takeaway: This anomaly begets a question as to which law should be followed. On one hand, the Act deals with the procedure for issuance and allotment of shares and on the other hand FEMA deals with reporting of inward remittances in India. Upon a careful study of the framework of two laws, it can be inferred that the Act is the primary law governing the companies qua the procedure of issuance and allotment of shares and FEMA should be in consonance with the Actto avoid any procedural inefficacies.
Footnotes
1. Instruction Kit for Form No. INC-20A, by MCA - https://www.mca.gov.in/content/dam/mca-aem-forms/instructionkits/Instruction%20Kit_INC-20A.pdf
2. 1999(3)BOMCR454
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.