Annual Return on Foreign Liabilities and Assets (FLA Return) - An Analysis

CS Lalit Rajput
Updated on 01 March 2021

1. Compliance Particular: Annual Return on Foreign Liabilities and Assets (FLA Return)

2. Requirement: FLA Return is required to be submitted mandatorily by all the India resident companies which have received FDI and/ or made ODI in any of the previous year(s), including current year.

3. Who / Why is required to Comply: Entities who holds foreign assets or liabilities in their financial statements as on 31 March.

The annual return on Foreign Liabilities and Assets (FLA) is required to be submitted by the following entities which have received FDI (foreign direct investment) and/or made FDI abroad (i.e. overseas investment) in the previous year(s) including the current year i.e. who holds foreign assets or/and liabilities in their balance sheets;

A Company within the meaning of section 1(4) of the Companies Act, 2013.
A Limited Liability Partnership (LLP) registered under the Limited Liability Partnership Act, 2008
Others [include SEBI registered Alternative Investment Funds (AIFs), Partnership Firms, Public Private Partnerships (PPP) etc.]

4. Key Point: If the Indian company does not have any outstanding investment in respect of FDI and/or ODI as on end of the reporting year, the Company need not submit the FLA Return.

Similarly, if the Indian company has not 'received any fresh FDI and/or ODI in the latest year but the company has outstanding FDI and/or ODI, then that company is still required to submit

5. Due Date: on or before 15 July every year

(Due date of filing the FLA return for 2018-19 has been extended to July 31, 2019)

6. Portal to file FLA Return: FLAIR (https://flair.rbi.org.in/fla/faces/pages/login.xhtml)

The existing mechanism of email based submission of FLA forms will be discontinued.

(FLAIR System: Foreign Liabilities and Assets Information Reporting System)

7. The User Registration requires two uploads

(a) SCANNED(as PDF/JPG) and SIGNEDauthority letter and
(b) Verification letter (SAVED ASXXXX.PDF(NOT SCANNED), NOT SIGNED)

a) Draft Format of Verification letter _ For FLAIR System 2019
https://enlightengovernance.blogspot.com/2019/07/draft-format-of-verification-letter-for.html

b) Draft Format of Authority Letter _ For FLAIR System 2019
https://enlightengovernance.blogspot.com/2019/07/draft-format-of-authority-letter-for.html

8. Format of Registration Form and FLA Form is available

Kindly Note that : Indian entities which do not comply with the said requirement will be treated as non-compliant with FEMA.

Some Important FAQ's:

1. Whether, in Section II- Item 2.3 of FLA Return, the Non-Resident Equity and participating Preference Shares Capital holding (%) is being calculated with respect to Item 1.0 (Total Paid-up capital) or Item 1.1 (Total Equity and participating Preference Shares Capital)?

Since Non-Participating share capital is a type of debt investment and is part of Item 1.0, Non-Resident Equity and participating Preference Shares Capital holding (%) is calculated with respect to item 1.1 (of Section II) and not 1.0.

2. In the Section II Block 2 of FLA form, what should I take for convertible preference share?

Fully diluted preference share

3. Where should we report the premium on issue of Equity Share Capital?

Premium on issue of Equity Share Capital is a part of Reserve, which should be reported under the item 4.1 of 1C- Reserves and Surplus, (in Section II).

4. What should we include in 5. Sales and Purchase (in Section II)?

In these fields, you are required to provide the information relating to all purchases [including capital (from balance sheet) and revenue of goods and services] / sales made domestically as well as foreign during the reference period (April - March).

The detailed information to be furnished in 5. Sales and Purchase are as follows:

a. All expenses (excluding depreciation) /sales shown in profit and loss account to be taken as total purchases/total sale.
b. Both goods and services are to be included.
c. All foreign purchases/ sales i.e. imports and exports, should be captured from P& L Account.

5. In Section III Block 1 of FLA form, which will be the date of first receipt of FDI received?

Take Settlement date/allotment date

6. What is meant by 'Disinvestments in India during the year'/ 'Disinvestments abroad during the year'?

Any disinvestments made by non-resident direct investor of the reporting Indian company during the year should be reported in section III item 3.0 (all blocks). Likewise, any disinvestment made by the reporting Indian company in its DIE abroad during the year should be reported in section IV item 3.0 (all blocks).

7. Where should we report the non-participating preference share issued to non-resident?

Non-participating preference shares are treated as debt securities. (a) If the Non-participating preference shares are held by foreign investor who is also holding equity shares of Indian reporting company, then Non-participating preference share should be reported at item 2.1 of 1.b FDI and 2.b DI in Section III (depending upon the % equity & participating preference share held by foreign investor) at nominal value.

8. Where should we report Fully/Partially/Non-convertible debentures issued to the non-residents in FLA Return?

Fully/Partially/Non-convertible debentures are treated as debt securities. (a) If the debentures (of any type) are held by foreign investor, the amount should be reported at item 2.1 of 1.b FDI and 2.b DI in Section III (depending upon the % equity plus participating preference share held by foreign investor) at nominal value.

9. What treatment should be given to share application money received from non-resident investor?

If the share application money is received from the existing non-resident shareholder, then the outstanding share application money should be reported at item 2.1 of 1.b FDI and 2.b DI in Section III, depending upon per cent of equity plus participating preference share holding by non-resident investor.

10. Whether, any assets or liabilities for Indian party (i.e. domestic assets and liabilities) are to be included in the FLA Return?

Any domestic liabilities or assets (even if it is in foreign currency) should not be reported in the FLA return.

11. What exactly is the meaning of 1.b ODI in Section IV under Foreign assets?

1.b ODI of Section IV on foreign assets captures the information on financial details of Overseas Company in which your company's equity holding is 10 per cent or more

12. If the overseas subsidiaries/ joint venture company's accounting period is different from the reference/reporting period (i.e. April-March) in the Return, then what information should we furnished in Section IV?

Companies are required to furnish the information on outstanding external liabilities and assets as on end-March of previous and latest year. In case if the accounting period of overseas subsidiaries/ joint venture of Indian reporting company is different from the reference period, then the information for end-March should be given on internal assessment basis.

13. In case where overseas company (DIE) is unlisted, how can we calculate the market value of overseas equity investment using OFBV method under 1.b ODI of Section IV?

For valuation of overseas equity investment OFBV Method should be used, as explained below:

OFBV Method:

Market value of equity capital held by you at OFBV for unlisted companies
= (Net worth of the DIE) * (% of equity held by you) Where,

Net worth of the DIE = Paid up Equity & Participating Preference share capital of company +Reserves & Surplus - Accumulated losses (which is automatically calculated in item 3.5 in 1.b ODI).

As per 1.b ODI of section IV the formula is given below:

Item 1.1 Claims on Direct Investment Enterprise = (Item 3.3/ Item 3.2) * (Item 3.5* Item 3.6)/100000 for reference period Where, Item 3.2, Item 3.3, Item 3.5 and Item 3.6 are extracted from 1.b ODI.

14. How will we do the valuation of the equity capital for listed DIE?

If the overseas company is listed then closing share price as on reference period, i.e. end-March of previous and latest year should be used for valuation of equity investment.

15. What information should be reported in FLA return, if balance sheet of the company is not audited before the due date of submission?

If the company's accounts are not audited before the due date of submission, i.e. July 15, then the FLA Return should be submitted based on unaudited (provisional) account. Once the accounts get audited and there are revisions from the provisional information submitted by the company, company can submit the revised FLA return based on audited accounts by end–September.

16. In case where account closing period of the company is different from reference period (end-March), can we report the information as per account closing period?

No, the company cannot report the information as per the account closing period, in case it is different from March closing. Information should be reported for the reference period only, i.e. previous March and latest March, based on the company's internal assessment.

17. If the old/new company fails to file the FLA form before the due date; can the company submit the FLA form?

Yes, company can file the FLA return after due date by taking approval from RBI.

18. If an old/new company wants to file the previous year FLA form; can the company file the previous year FLA form?

Yes, company can file the previous year FLA form (through online FLA portal only) by taking approval from RBI. For taking approval, they need to send mail to surveyfla@rbi.org.in.

19. If an old/new company wants to delete the previous version of FLA form or modify; can the company delete/modify the FLA return?

Yes, company can delete/modify the FLA return after taking the approval from RBI (RBI will provide due date on the FLA portal).

Important Definition(s):

Sl. No.	Particulars	Definition(s)
1	Residence of Enterprises	An enterprise is said to have a centre of economic interest and to be a resident unit of a country (economic territory) when the enterprise is engaged in a significant amount of production of goods and/or services in that centre or when it owns land or buildings located in that centre. The enterprise must maintain at least one production establishment in the country and must plan to operate the establishment indefinitely or over a long period of time
2	Direct investment	Direct investment is a category of international investment in which a resident entity in one economy [Direct Investor (DI)] acquires a lasting interest in an enterprise resident in another economy [Direct Investment Enterprise (DIE)]. It consists of two components, viz., Equity Capital and Other Capital.
3	Equity Capital under Direct Investment	It covers (1) foreign equity in branches and all shares (except non-participating preference shares) in subsidiaries and associates; (2) contributions such as the provision of machinery, land & building(s) by a direct investor to a DIE by equity participation; (3) acquisition of shares by a DIE in its direct investor company, termed as reverse investment (i.e. claims on DI).
4	Other Capital under Direct Investment	The other capital component (receivables and payables, except equity and participating preference shares investment) of direct investment covers the outstanding liabilities or claims arising due to borrowing and lending of funds, investment in debt securities, trade credits, financial leasing, share application money etc., between direct investors and DIEs and between two DIEs that share the same direct Investor. Non-participating preference shares owned by the direct investor are treated as debt securities & should be included in 'other capital'. Identification of the Indian company (Item 9, Section-I).
5	Foreign Subsidiary	An Indian company is called as a Foreign Subsidiary if a non-resident investor owns more than 50% of the voting power/equity capital OR Where a non-resident investor and its subsidiary(s) combined own more than 50% of the voting power/equity capital of an Indian enterprise.
6	Foreign Associate	An Indian company is called as Foreign Associate if non-resident investor owns at least 10% and no more than 50% of the voting power/equity capital OR Where non-resident investor and its subsidiary(s) combined own at least 10% but no more than 50% of the voting power/equity capital of an Indian enterprise.
7	Special Purpose Vehicle	A special purpose Vehicle (SPV) is a legal entity (usually a limited company of some type or, sometimes, a limited partnership) created to fulfil narrow, specific or temporary objectives. SPV have little or no employment, or operations, or physical presence in the jurisdiction in which they are created by their parent enterprises, which are typically located in other jurisdictions (economies). They are often used as devices to raise capital or to hold assets and liabilities and usually do not undertake significant production.