Corporate Governance & Uniformization of LSF Under FEMA

Abstract

This article discusses the significance of corporate governance in ensuring transparency, accountability, responsibility, and risk management in the Indian corporate world. The Securities and Exchange Board of India (SEBI) has made it mandatory for listed companies to disclose all material information that may create liability for shareholders and investors. Recent events involving PTC India Financial Services and Adani Enterprises highlight the importance of adhering to the legal compliance and rules of corporate governance. Non-compliance can reduce rankings for environmental, social, and governance (ESG) norms, impacting the enterprise's goodwill. The article emphasizes the need for organizations to emphasize corporate governance and adhere to the highest ethical standards. The article concludes by explaining the Late Submission Fee (LSF) concept, introduced with the notification of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017. It has now been decided to bring uniformity in the imposition of LSF across functions by the RBI.

---

In today's corporate world, governance has become imperative to any business organization's success and effective management. It refers to a system or mechanism through which an organization is controlled and directed through rules and regulations to perform certain activities while keeping in mind the diverse interests of various stakeholders and keeping in check that these interests are not in conflict with each other. It ensures transparency, accountability, responsibility, and risk management.

Since the Securities and Exchange Board of India (SEBI) is the main functioning body behind ensuring legal compliance by the listed companies, a consultation paper was released by the Securities and Exchange Board of India (SEBI) to modify the rules for improving corporate governance at listed businesses by giving shareholders more authority, under these rules, SEBI has made it compulsory to disclose all material information which may create liability on the shareholders and investors and promoters that invest before an IPO are given individual rights. Disclosure of various financial and non-financial information by the company is mandated by SEBI according to Regulation 26 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. Giving such special rights to these stakeholders will ensure better contributions from their side toward the overall governing of the organization. This is what makes the task of corporate governance effective and easy.

Recently, many Indian enterprises have been associated with unfair and illegal practices in the market. One such firm, PTC India Financial Services (PFS), has been questioned by the Ministry of Corporate Affairs (MCA) for allegedly breaking the regulations for the hiring of forensic auditors in a loan default case and failing to give the former independent directors access to the audit report for more than two years. This violates Section 149 (powers and duties of independent directors) and Section 177 (Constitution of an audit committee, its role, and responsibilities) of the Companies Act, 2013. The MCA also noticed PFCCL's failure to secure the required Ministry of Power clearances for many projects and anomalies in the procurement process for several projects. Such non-compliance with the statutory rules such as the Companies Act, 2013 and the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, established by law, violates the corporate governance rules, which require adherence to the legal compliance and rules.

Another news came after Adani Enterprises, the vast Indian conglomerate's stock, and its founder Gautam Adani's value were negatively impacted by allegations of accounting fraud and stock manipulation made by Hindenburg Research, a short-seller research company based in New York. This alleged conduct of Adani Enterprises violates of:

• Section 12A (Prohibition of manipulative and fraudulent practices, including insider trading) of the Securities and Exchange Board of India Act, 1992

• Regulation 3 (Prohibition of fraudulent and unfair trade practices in securities market) of the Prevention of Fraudulent and Unfair Trade Practices Regulations, 2003

• Section 12A (Prohibition of manipulative and deceptive devices, including price rigging, manipulation of security prices, and cornering of securities) of The Securities Contracts (Regulation) Act, 1956.

Due to ethical issues, Sustainalytics, a sustainability ratings company, reduced the corporate governance-related rankings for three Adani Group enterprises in India. The reduced ratings will affect these enterprises' environmental, social, and governance (ESG) norms. This should serve as a reminder and warning for other enterprises to stop using unfair practices to have decent goodwill in the corporate world.

To conclude, corporate governance is crucial in the Indian setting because it helps to guarantee that firms function transparently and ethically, that stakeholders' interests are protected, and that long-term value is created for shareholders. With new laws and regulations that have increased accountability and transparency in corporate decision-making, India's legal and regulatory corporate governance framework has grown dramatically.

Hence, to achieve long-term success, organizations in India must emphasize corporate governance and adhere to the highest ethical standards.

The recent RBI notification of September 30, 2022, states that "The Late Submission Fee (LSF) was introduced for reporting delays in Foreign Investment (FI), External Commercial Borrowings (ECBs) and Overseas Investment related transactions with effect from November 07, 2017, January 16, 2019, and August 22, 2022, respectively. It has now been decided to bring uniformity in the imposition of LSF across functions."

Now the question arises, what are the FEMA Act and the LSF?

The Foreign Exchange Management Act (FEMA) 1999 was enacted on December 29, 1999, after replacing the Foreign Exchange Regulation Act (FERA) of 1973. The government's post-liberalization policies were not followed by FERA (Foreign Exchange Regulation Act, 1973), so they had to be replaced with FEMA. FEMA changed all criminal offenses into civil offenses.

In its primary sense, the FEMA, 1999 is a set of laws that gives the Reserve Bank of India the authority to enact rules on foreign exchange and gives the Indian government the ability to do the same following India's foreign trade policy.

While being introduced, the FEMA needed to have the concept of a Late Submission Fee (LSF). The Reserve Bank of India (RBI) requires compounding of offenses in order to report a delay in foreign Investment transactions. This process was cumbersome for both RBI and the defaulters. Thus, LSF was introduced with the notification of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 ("TISPRO Regulations/ FEMA 20R Regulations)". This meant that a simple late submission fee would regularise the reported delays.

In 2019, the LSF applied to external commercial borrowings (ECB) and overseas investments (OI) in 2022. In order to calculate the LSF, specific computation matrices were utilized:

Pre-Circular LSF Calculation for FI

• For amounts up to INR 1 Crore, annually 0.05% was levied

• For such defaults, the maximum being INR 10 Lakhs or 300% of the amount involved, whichever is lower

• For amounts above INR 1 Crore, an annual 0.15% was levied

• Maximum being INR Crore or 300% of the amount involved, whichever is lower.

• Subsequently, the % of LSF would double after every 12 months.

Pre-Circular LSF Calculation for ECB

• For a period of up to 3 years, a fixed LSF of INR 50,000 was applied from the due date

• If extended beyond three years, the LSF rate would double to INR 1 Lakh

• An exception was 30 calendar days delay post-filling Form ECB-2, in which only INR 5,000 was levied.

Pre-Circular LSF Calculation for OI

• Non-periodic or non-flow reporting defaults levy fixed INR 7500 LSF.

• Fund-based transaction reporting or any other transactional reporting attract 0.025% in addition to the fixed INR 7500

As a result, there were three different frameworks that the RBI would use to define LSF when applying it to various types of delayed filings. The RBI developed a uniform LSF calculating procedure to streamline this imposition and improve the ease of determining the amount imposed as LSF.

Post Circular LSF Calculation

​Sr. No.	Type of Reporting delays	LSF Amount (INR)
1	Form ODI Part-II/ APR, FCGPR (B), FLA Returns, Form OPI, evidence of investment or any other return which does not capture flows or any other periodical reporting	7500
2	FC-GPR, FCTRS, Form ESOP, Form LLP(I), Form LLP(II), Form CN, Form DI, Form InVi, Form ODI-Part I, Form ODI-Part III, Form FC, Form ECB, Form ECB-2, Revised Form ECB or any other return which captures flows or returns which capture reporting of non-fund transactions or any other transactional reporting	[7500 + (0.025% × A × n)]

Key:

"n": If LSF has been assessed but has yet to be paid within 30 days, the levy is void, and any payments received after that point should be considered.

The upper limit is three years from the due date of reporting/submission

"A": The amount involved in delayed reporting. The most incredible amount of LSF that may be assessed is 100 percent of "A," rounded to the closest hundred.

The minimum LSF amount has increased to INR 7,500 (in FI AND ECB cases) due to the LSF Circular's implementation. Consequently, regardless of the amount involved in Reporting, the applicants previously subject to a minimum LSF amount of INR 100 (in the event of FI) and INR 5,000 (in the case of ECB) will now be liable to a minimum LSF amount of INR 7,500.

The good news is that the maximum LSF amount (in the case of FI and ECB) has been limited to 100% of the amount involved in the delayed reporting, which is a positive move as it will lessen the financial burden of many applicants who fall under it.

In conclusion, the applicants may welcome implementing a uniform approach to LSF calculation since it rationalizes the collection of LSF and fosters confidence in estimating the amount that may be collected as LSF despite the backdrop in FI and ECB cases.

There appears to be predictability in the LSF imposition process, even though the amount of LSF payable for reporting delay may exceed that contained in the former regime when reaching certain thresholds regarding sums and dates for the delay.

The RBI has a clear goal in mind when creating a one-stop-shop LSF Circular, and it has simplified the administrative procedures for paying LSF for overdue FEMA filings.

Image Source: http://surl.li/hwuff

*This article is authored by Radhika Chugh & Rishita Yadav, Students from Symbiosis Law School, Noida and reviewed by Shantam Sinha, Student from Symbiosis Law School, Noida.