September 20, 2022

Foreign Owned or Controlled Companies (FOCC) under FEMA

FOCC stands for Foreign Owned or Controlled Companies. It refers to those Indian companies or entities which are controlled by non-residents or foreign companies or multinational corporations (hereinafter referred to as “parent company”).

A Foreign company can mark its presence in India through various ways such as having a liaison office, branch office, or project office. However, these offices keep the tag of a foreign company and accordingly are not allowed to work freely as domestic companies and are also not entitled to various benefits available to a domestic company such as tax holidays. Also, these offices can be opened for a limited period of time that too with prior approval from RBI.

Therefore, Foreign investors are more inclined toward options where they have complete control over the entity and also such entities can enjoy benefits as domestic companies. FOCC has become a wonderful source of investment for such investors. FOCC can conduct business in India as a domestic company. As a result, many companies prefer to incorporate an FOCC to enjoy the benefits of a domestic company like Disney India, Star India, etc.

1. Guidelines for Incorporation

FOCC is a company incorporated under the Companies Act, 2013 wherein funds are invested by a non-resident person. Therefore, to regulate FOCC, the following 2 legislatures come into the picture:
- Company Act: To regulate incorporation process and operations issues.
- FEMA: To regulate investment-related procedures.

The process of incorporating an FOCC is similar to the incorporation process of a domestic company with some additional requirements, such as having at least one Indian director out of two if the FOCC is a private limited company. Also, The foreign director’s documents must be in English and apostille-certified.

As previously stated, FEMA acts as a stringent watchdog due to foreign investment. Before investing, FEMA provisions should be closely checked such as sectoral caps, entry channels, approved and forbidden industries, and so on. One can’t invest in any sector, in any proportion, or in any way they want. From each point of view, there is a comprehensive list of sectors.

RBI has defined the following 3 routes of investment:

Automatic Route: Sectors where 100 % FDI is allowed under automatic route such as the Civil aviation industry
Approval Route: Sectors where automatic investment is permitted up to a particular %. Investment beyond such % required prior approval from RBI. Such as Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline where up to 49% investment no approval is required.
Prohibited sectors: Sectors where foreign companies are not at all allowed to enter such as Nuclear power.

There are various industries that have automatic clearance for a set amount of time before requiring government approval, after which it becomes illegal. Private sector banking entities can have a 49 percent auto investment limit, whereas government entities can have a 49 percent to 74 percent limit.

2. Different Types of FOCC

Foreign investors have options to set up FOCC in the following 2 ways:

2.1 Wholly Owned Subsidiary (WOS)

Wholly owned subsidiaries are those where the parent company holds 100% equity shares.
Therefore, the WOS option is permitted for those sectors only where 100% FDI is allowed under the automatic route or where the foreign investor has to obtain approval from RBI for 100% investments

2.2 Joint Ventures

A joint venture is a business model where 2 or more companies agree to put in goods, services, or capital to a particular commercial project. JV is a new project owned by 2 or more companies. Under JV, a new business entity is created and its participants continue to exist as separate firms.
Joint ventures can be formed in fields where FEMA does not permit 100% FDI. In that case, foreign investors can join hands with domestic companies to invest in FOCC.
A joint Venture is mostly resorted to when two companies want to bring their expertise and experience together to accomplish a project. Therefore, a foreign investor may join hands with the domestic player to leverage its local expertise, resources, etc to accomplish the objective of the Joint Venture.

2.3 Acquiring stake in an existing company

Instead of opening a new company, foreign investors may buy stakes in existing companies as well.
For this purpose, any existing shareholder may sell his stake to the foreign company or alternatively, an Indian company may issue new shares to the foreign investors.
In both, cases, i.e., transfer from one shareholder to another or acquisition of new shares, FEMA has required domestic companies to file different documents with RBI.

3. Process of Setting up FOCC

3.1 For setting up a Wholly Owned Subsidiary

As FOCC is a company incorporated under the Companies Act. Therefore, the incorporation process is very much similar to that of incorporating a Non-WOS.
The parent firm must appoint one director, who will represent the parent Company in the operation of WOS, through a resolution (The nominated director can be an Indian or foreign national).
If the first director is not an Indian citizen, then the second director must be an Indian citizen.
Once the incorporation process completes, the WOS Company must receive subscription money from the parent company, and the Authorized Dealer Category I banks must collect the Foreign Inward Remittance Certificate (FIRC) as well as the foreign investor’s KYC.
The WOS must next file an FC- GPR (Foreign Currency- Gross Provisional Return) with the IRS for approval.

3.2 For setting up a joint venture-

A new entity of a Joint venture can be formed either as a company or a limited liability partnership firm.
2 or more parties shall subscribe to the share capital of the Joint venture in their agreed ratio.
Where the investment is made in Joint Venture up to the threshold permitted by RBI then the process of incorporation of JV is the same as Domestic Company or Domestic LLP.
However, if the investment is made beyond the ratio permitted by RBI then prior approval from RBI is required.

3.3 For acquiring equity instruments in an existing company-

There are two ways to acquire a stake in an established business.

The first is the transfer of equity instruments,
whereas the second involves the creation of new shares. Because there will almost always be a transfer of equity instruments.
a Foreign Currency-Transfer of Shares (FC-TRS) must be lodged with the RBI where shares are transferred by existing shareholders to the Foreign Company. However, if additional shares are issued, the domestic company must submit FC- GPR in accordance with the Companies Law’s statutory requirements.

4. Process for obtaining approval

The approval procedure for Foreign Direct Investment (FDI) via the FDI portal- Foreign Investment Facilitation is managed by the Department of Industrial Policy and Promotion (DIPP) in collaboration with the concerned sector ministry.
An application must be submitted as a proposal via the portal, together with the needed papers. If the application is not digitally signed, a physical copy of the application must also be submitted.
Within 2 days of receiving the application, DIPP transmits it to the appropriate ministry and the RBI.
The ministry has the authority to request any extra information, and DIPP must respond within 15 days of obtaining it from the applicant. Within two weeks of receiving the appropriate information, the decision is notified.
When a security clearance is necessary, such as for investments from nations of concern like Pakistan or Bangladesh, the Union Home Ministry must be notified, and its permission is also required.
The Cabinet Committee on Economic Affairs will be consulted if the investment value surpasses INR 5000 crore. If the proposal is to be rejected by the concerned ministry, DIPP has to be consulted.

5. Process for reporting funds received

Whether funds are received through the direct channel or the approved process, the domestic company must disclose them to the RBI. This is done through the AD bank that received the funds by reporting in FC-GPR with information such as the parent company’s name and address, the date the funds were received, the rupee equivalent, and so on.

5.1 Process for filing FC-TRS

The Reserve Bank of India has launched a dedicated webpage called Foreign Investment Reporting and Management System (FIRMS), which includes numerous forms of foreign investment. To file a form, you must first register on the portal.
There are two types of registrations available: Entity User and Business User.
The onus of filing remains with the resident of India, whether transferor or transferee, however, the parent firm must file the form if the shares are acquired from the stock exchange.
Investment information such as CIN and PAN numbers; transfer information such as type and face value of shares; and remittance information such as mode of payment and AD Bank name are just a few of the details that must be filled out.
Some attachments are also necessary, which differ depending on whether the item is being given as a gift or sold. In the event of a gift, the donor’s and donee’s names and addresses, as well as their relationship and the purpose for the present, must be included.
A consent letter for transfer/receipt of consideration in the case of a sale, or shareholding pattern of the company before too and after acquisition by the person resident outside India needs to be attached.

know more about filing the FC-TRS form

5.2 Process for filing FC-GPR

FC- GPR is also filed through the FIRM’s portal of RBI.
It is filed when equity instruments are issued by a domestic company to a person/ entity resident outside India.
The onus of filing is with the domestic company within 30 days of allotment of the instrument.
Some of the details are pre-filled due to the registration and some have to be filled.

know more about filing the FC-GPR form

6. Valuation Requirements

In the case of FOCC valuation requirements may arise in the following scenario:

If incorporating an FOCC:
- Companies Act: No requirement for Valuation
- Income Tax Act: Valuation requirements as per relevant section from a Practicing Chartered Accountant(Non-DCF method) or from a Merchant Banker(Any method)
- FEMA guidelines: Valuation by a Practicing Chartered Accountant/ Cost Accountant or a Merchant Banker may be required under FEMA guidelines for filing FC-GPR
If acquiring capital instruments of an FOCC: If existing shares of a company are being bought from a shareholder then the following needs to be done:
- Companies Act: No requirement for Valuation
- Income Tax Act: Valuation requirements as per relevant section from a Practicing Chartered Accountant(Non-DCF method) or from a Merchant Banker(Any method)
- FEMA guidelines: Valuation by a Practicing Chartered Accountant/ Cost Accountant or a Merchant Banker required under FEMA guidelines for filing FC-TRS
If the fresh issue of shares is being done:
- Companies Act: Valuation to be done by a Registered Valuer
- Income Tax Act: Valuation requirements as per relevant section from a Practicing Chartered Accountant(Non-DCF method) or from a Merchant Banker(Any method)
- FEMA guidelines: Valuation by a Practicing Chartered Accountant/ Cost Accountant or a Merchant Banker may be required under FEMA guidelines for filing FC-GPR

7. Annual Compliances

7.1 FEMA

Regulations provide that form FLA (Foreign Assets and Liability) must be filed annually.
It includes information on all foreign holdings in the company, whether they are FDI (Foreign Direct Investment) or FPI (Foreign Portfolio Investment) (Foreign Portfolio Investment).
It also includes information about the company’s ODI (Overseas Direct Investment), if any.

Know more about FLA Return.

7.2 Income Tax Act

An FOCC is required to file a Transfer Pricing Report (Form 3CEB) with the Income Tax Authorities in case of specific transactions with its foreign Associated Enterprises, in addition to the standard annual returns.
This entails having these transactions audited by a Chartered Accountant who is a Practicing Chartered Accountant.

7.3 Companies Act

In addition to the usual compliance requirements, an FOCC is required to file the same forms as a Domestic company such as AOC-4, MGT-7, applicable forms for changing directors, filing resolutions with RoC, etc.

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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