LSF – The Journey
The uniform ‘late submission fee’ (“LSF”) is a relatively new concept in the Indian exchange control regime. The Foreign Exchange Management Act, 1999 (“FEMA”), as originally introduced by the legislature, did not envisage the concept of LSF. Resolving a delay in reporting of equity or debt transactions under FEMA would necessarily require compounding of offences before the Reserve Bank of India (“RBI”). Given that compounding is not the most time efficient or simple process, it implied that even for insignificant or genuine delays, parties would have to undergo several steps, thus making the system clogged with late filings and filings becoming more cumbersome than they needed to be.
With the intent to simplify the late filing process, the RBI introduced an alternative to compounding i.e. the concept of LSF, 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”)[1]. This meant that for foreign exchange transactions on or after November 7, 2017, the reporting delays could be regularised by paying LSF. However, the compounding option continues to be operational as LSF payment was introduced merely as an additional/ alternative option to regularise reporting delays, without undergoing the compounding procedure, which is a right under law[2].
The applicability of LSF was later extended to external commercial borrowings (“ECB”), with the introduction of the new ECB framework in 2019[3]; and overseas investments, with the introduction of the new overseas investment (“OI”) framework in 2022[4].
Therefore, the concept of LSF existed under three different frameworks, which the RBI would refer to at the time of imposing LSF on different categories of delayed filings. With an aim to streamline this imposition and to bring more ease of determination on the amount being imposed as LSF, the RBI introduced a uniform LSF computation method, which would be levied on delayed reporting of transactions, by way of a circular dated September 30, 2022 (“Circular”)[5].
Through this blog, we propose to evaluate the systems in place prior to the Circular vis-à-vis the uniform system introduced by the Circular and whether it will indeed meet the objectives with which it has been introduced.
Pre-Circular Era: How was LSF calculated?
Prior to the introduction of the uniform computation matrix, LSF was calculated with specific computation matrices, as applicable.
For foreign investment (“FI”) reporting delays, an annual LSF of 0.05% was levied if the amount involved was up to INR one crore, with the maximum LSF is such cases being INR ten lakh or 300% of the amount involved, whichever is lower. The annual LSF was threefold i.e., 0.15% if the amount involved was more than INR one crore, with the maximum LSF is such cases being INR one crore or 300% of amount involved, whichever is lower. Further, the percentage of LSF would be doubled after every twelve months.
For ECB reporting delays, i.e., Form ECB and Form ECB-2, a fixed LSF of INR fifty thousand per year was levied for a period up to three years from the due date of submission/ date of drawdown, which would be increased to INR one lakh per year if the period of delay extended beyond three years from the due date of submission/ date of drawdown. The exception here being a delay of up to 30 calendar days in the filing of ECB 2 return, in which case a LSF of INR five thousand would be levied.
For OI reporting delays, the filings/ returns which do not capture flows or any other periodical reporting such as Form ODI Part-II/ APR, FLA Returns, Form OPI, etc., would attract a fixed LSF of INR seven thousand five hundred.[6] However, the filing/ returns which capture the reporting of non-fund based transactions or any other transactional reporting, such as Form ODI-Part I, Form ODI-Part III, Form FC, etc., would attract a yearly amount of 0.025% of the amount involved, over and above the fixed component i.e. INR seven thousand five hundred. Given that the Circular was issued within a few weeks of the release of the revised OI framework, the method of computation of LSF for delays in OI filings that was prescribed under the Foreign Exchange Management (Overseas Investment) Directions, 2022, was similar to the uniform method of computation of LSF under the Circular.[7]
Post-Circular Era: How LSF is to be calculated:
Pursuant to the Circular, the different applicable calculation methodologies have been consolidated in a common calculation matrix, which is as follows, and levied on a per return basis[8]:
| Type of reporting delays | Applicable LSF |
| Form ODI Part-II/ APR, FCGPR (Part B), FLA Returns, Form OPI, evidence of investment or any other return which does not capture flows or any other periodical reporting. | INR 7,500 |
| FCGPR, 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 reporting of non-fund based transactions or any other transactional reporting. | INR [7,500 + (0.025% × A × n)] |
Where “n” is the number of years of delay in submission rounded-upwards to the nearest month and expressed up to two decimal points. To provide further clarity, the Circular has mentioned that if LSF has been levied but not paid within 30 days, then such levy will be null and void and any payments made thereafter will not be considered. The applicant can subsequently approach for LSF payment for the same delayed reporting (with an upper limit of up to three years from the due date of reporting/ submission), and in such a case, the date of receipt of such new application will be the reference date for the purpose of calculation of “n”.
“A” is the amount involved in delayed reporting. The Circular also states that the maximum LSF amount that can be levied is capped at 100 per cent of ‘A’ and will be rounded upwards to the nearest hundred.
In terms of procedure, the RBI typically accepts a delayed filing by making it subject to LSF payment. The LSF amount that is due and payable is calculated by the RBI and notified to the person/ entity making the delayed filing by way of an e-mail or by way of a remark in the filing acknowledgement/ portal. In case of any discrepancy in the LSF calculation, the applicant has the option to write to the RBI and seek clarity.
Pre-Circular era vis a vis Post Circular era: Key Takeaways
a. Rationalisation of LSF: Unlike the preceding regimes for FI and ECB, the uniform matrix under the Circular categorises two classes of filings: (i) filings that are recurring and based on a specific timeline attract a fixed LSF of seven thousand five hundred; and (ii) the filings, which evidence the occurrence of a transaction i.e. inflow or outflow of funds from India, attract a variable LSF over and above the fixed component of INR seven thousand five hundred, which is calculated based on the actual amount and the time period involved in the delayed filing.
b. Difference in the amounts of LSF: The new matrix for calculation of LSF may prove either beneficial or detrimental for a contravener, when compared with the old regime, based on variables such as the amount and the time involved. For instance:
- X Private Limited (“X”), a company resident in India, has been imposed with a minimum LSF for a delayed filing. Under the old regime, X would have been obligated to pay INR hundred (in case of foreign investment)[9] or INR five thousand (in case of an external commercial borrowing)[10]. However, under the new regime, X shall be obligated to pay a minimum LSF of INR seven thousand five hundred.
- X has been imposed with the maximum LSF for a delayed filing in relation to a foreign investment it has received. Under the old regime, X would have been obligated to pay an LSF as high as 300% of the amount involved. However, under the new regime, X’s obligation has been capped at a maximum of 100% of the amount involved.
- X has availed an external commercial borrowing of INR hundred crore. However, it seeks to make a delayed filing for Form ECB-2, a year from when the filing was due. Under the old regime, X would have to pay a LSF of INR fifty thousand[11]. However, under the new regime, X shall be obligated to pay a LSF of INR two lakh fifty-seven thousand five hundred[12], even when the LSF is calculated basis the principal amount only.
c. Time Frame: LSF option can be availed till a period of three years from the due date of reporting or submission. Post expiry of the said three years, the contravener will continue to have the ability to apply for compounding procedure as established under FEMA for rectifying the delays in filings.
d. Inclusive Scope: The old regime identified specific reporting and filing contraventions that under respective FI, ECB and OI frameworks, exhaustively listed names of forms which could be subject to LSF. However, the new regime specifies only an indicative list and makes LSF available for all possible types of reporting and filing contraventions under FEMA.
The introduction of a uniform system of LSF calculation may be seen as a welcome move by the applicants since it rationalises the levying of LSF and promotes certainty in determining the amount that can be levied as LSF. While the amount of LSF payable for reporting delay may be more than what was contained in the old regime when crossing certain thresholds in terms of amounts and timelines for the delay, there appears to be predictability in the LSF imposition mechanism. The RBI’s objective to set up a one-stop-shop Circular on LSF appears to be definitive and its implementation is expected to streamline the administrative steps involved in the payment of LSF for delayed FEMA filings.
For further information, please contact:
Ritika Rathi, Partner, Cyril Amarchand Mangaldas
ritika.rathi@cyrilshroff.com
[1] The Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017, available at: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11161&Mode=0. These regulations were passed in supersession of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000, and Foreign Exchange Management (Investment in firm or proprietary concern in India) Regulations, 2000. Further, these regulations have now been superseded with Foreign Exchange Management (Debt Instruments) Regulations, 2019. Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, and Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019.
[2] All the contraventions under FEMA can be regularized by compounding procedure, except for the contravention laid down under Section 3(a) of FEMA. See, Master Direction on Compounding under FEMA, available at: https://rbidocs.rbi.org.in/rdocs/notification/PDFs/01MDC010116BADB4521C423465C9679DBFA22845C7D.PDF.
[3] External Commercial Borrowings (ECB) Policy – New ECB Framework, available at: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11456&Mode=0.
[4] Foreign Exchange Management (Overseas Investment) Directions, 2022, available at: https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT110B29188F1C4624C75808B53ADE5175A88.PDF.
[5] Circular No. RBI/2022-23/122 – A.P. (DIR Series) Circular No. 16 dated September 30, 2022, available at: https://rbidocs.rbi.org.in/rdocs/notification/PDFs/APDIRSERIES16B175DFF736684DCA87CB5546DCF4DA27.PDF.
[6] The option to pay LSF and rectify the delayed filings in relation to the overseas investments made under the previous overseas investment regime i.e. under Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004, shall also be available for a period of three years from August 22, 2022. This feature has been replicated and reiterated in the Circular as well.
[7] Foreign Exchange Management (Overseas Investment) Directions, 2022, available at: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12381&Mode=0.
[8] However, for any number of Form ECB-2 returns, delayed submission for each loan registration number (LRN) is treated as one instance for the fixed component. Further, ‘A’ for any ECB-2 return will be the gross inflow or outflow (including interest and other charges), whichever is more.
[9] Para IV(B)(b)(ii) of the Master Direction – Reporting under Foreign Exchange Management Act, 1999, as applicable prior to the Circular.
[10] Para 6.4 of External Commercial Borrowings (ECB) Policy – New ECB Framework, available at: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11456&Mode=0.
[11] Id.
[12] Calculated as per the formula [7,500 + (0.025% × A × n)], where A is INR hundred crore (100,00,00,000) and n is one year.
