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    HomeBusinessEye on investment flows from neighbours: MCA tweaks incorporation rules aligning with...

    Eye on investment flows from neighbours: MCA tweaks incorporation rules aligning with FEMA

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    Economy

    K.R. Srivats | New Delhi, May 21 | Updated on: May 21, 2022

    Requires shareholders, first time directors to declare FEMA approval status at company incorporation stage itself

    The Corporate Affairs Ministry (MCA) is keen on closing the regulatory gaps when it comes to investments flowing from countries with which India shares its land border. Towards this end, it has now aligned its company incorporation rules with FEMA so as to ensure that nationals of a country which shares land border with India do not get to incorporate a company in India without requisite security clearance from the Home Ministry. 

    Declaration FORM INC9

    MCA’s Company Incorporation Rules have been amended to require declaration from the person incorporating a company that Foreign Exchange Management Act (FEMA) approvals have been obtained or not. 

    This declaration has to be made in the now revamped FORM INC9, which is the declaration form furnished by subscribers to the memorandum of a company and first time directors. This FORM INC9 is submitted with the SPICe+ form (INC-32), which is the main vehicle for incorporation of companies through electronic mode.

    Prior to this change, MCA was not concerned about FEMA aspects. Earlier, when incorporation used to happen, FEMA used to be separate. Now they are trying to integrate so that if persons don’t have FEMA approval , then incorporation itself does not happen, a practising company secretary said. 

    FDI approval

    The latest MCA move comes on the heels of another recent MCA rule change requiring companies to have government approval under FEMA before offering their securities ( equity shares, bonds etc) to any entity from a country that shares a land border with India.

    In cases where the Indian company had offered securities to such entities, they are now required to give a declaration that approval has been given for the transaction and attach the approval letter along with the private placement offer cum application letter.

    It maybe recalled that government had in 2020 placed all foreign direct investment from border countries under the approval route to curb opportunistic takeovers during  the pandemic. It was aimed at preventing Chinese investors from taking control of Indian companies.

    Ashish Gupta, Partner, Chadha & Co, said that latest MCA move to amend its incorporation rules is a welcome move to ascertain whether any government approval is required for the proposed FDI before a company is registered by the Registrar of Companies (ROC). Till now, in several instances it has been observed that a company with FDI, after incorporation, faces challenges at the time of opening its bank account and remitting the share capital if no prior approval for FDI was obtained as required under FEMA, he noted.

    “The amendments in Form INC-9 and the addition of a declaration in Form INC-32 (SPICe+) with respect to whether the investment is from a country sharing a land border with India may draw the attention of promoters to this requirement prior to incorporation, and reduce subsequent difficulties”, Gupta said.

    Atul Pandey, Partner, Khaitan & Co, said that this additional requirement for first subscribers/shareholders and first directors of the company is in consonance with the Government’s enhanced scrutiny on the FDI transactions in India. “We are increasingly seeing regulatory proactiveness since Press Note 3. At the same time, it is important to note that year 2021-22 saw some of the highest FDI inflow into India. The declarations have been added as part of INC-9 places the reliance on the shareholders or directors that they have obtained necessary government approvals or they are not required to obtain government approvals”, Pandey said.

    Gupta however wanted MCA to clarify whether it is mandatory for the foreign subscribers and directors to have a PAN/ DIN for signing the said form as many of them may not have the same at the time of incorporation of the company. 

    At present, DIN is allotted at the time of incorporation of the company, and a declaration with respect to not having a PAN (if that is the case) is submitted by foreign subscribers and directors along with the incorporation application, Gupta added.

    Published on May 21, 2022

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