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Indian cos can't keep money secrets anymore

MUMBAI: Many in the corporate world are shaken by Reserve Bank of India’s queries on foreign investments that companies have received over the years, the declarations they have to give along with the information, and the probable consequences of incorrect reporting.In the elaborate format given by the regulator, a senior company official — which is likely to be the company secretary or a director — will have to sign a declaration stating, “foreign investment received and reported now will be utilised in compliance with the provision of Prevention of Money Laundering Act 2002 (PMLA) and Unlawful Activities (Prevention) Act, 1967 (UAPA)”.It’s an undertaking that most companies are reluctant to give —having entered into fancy offshore structures to overcome caps on foreign investment or sidestep restrictions on foreign currency loans. None of them want these deal details to resurface through a new reporting mechanism. “It’s evident that the regulator and the government would like to keep an eye on the quantum as well as the quality of foreign investment. But there are concerns. Based on review of the draft forms, there is lack of clarity on why receipt and reporting of foreign investment is being linked to harsh laws like PMLA which by itself comprehensively deals with specific offences,” said Moin Ladha, partner at law firm Khaitan & Co.The initial set of data on all direct and indirect foreign investments has to be shared by July 20. “It may not be always easy for a company to monitor indirect foreign investment,” said Ladha. Such investments relate to situations where the Indian shareholder of a company is in turn controlled by a foreign entity.A company or a limited liability partnership that has received foreign investment will also have to spell out whether it is being investigated by Enforcement Directorate, Central Bureau of Investigation or any other agency for violation of Foreign Exchange Management Act. Here, they face the dilemma whether any notice from an agency would be construed as ‘investigation’. 64969135 According to Tejesh Chitlangi, senior partner, IC Universal Legal, disclosure requirements cast an obligation on companies to even disclose structures wherein there were potential non-compliances on account of aggressive interpretation of prevalent regulatory regime and hence were not reported in the first place. Companies, he said, are in a catch-22 situation as complying with the new requirement may suddenly drag past noncompliances into limelight.Similar to disclosing indirect foreign investment, it will be challenging for companies to describe investments received from alternative investment funds (AIFs). While AIFs are local money pooling vehicles for venture capital funds, private equity houses, real estate and hedge funds, a fund’s capital infusion in a company would be considered as foreign investment if the manager or sponsor of the AIF is a foreign entity.“There are practical challenges, especially for public companies, to determine whether any of its shareholder is foreignowned or -controlled. Some companies would be struggling to provide the required information, part of which is needed since the date of incorporation. The time frame to provide the data and the extension till July 20 looks inadequate and the repercussions of not providing the data are serious,” said Rajesh Gandhi, partner, Deloitte India.According to regulatory directive that was issued in June, the price at which companies placed shares with foreign investors would have to be justified by a merchant banker or chartered accountant.And, while the declaration — on matters like PMLA compliance and ED/CBI probe — may be signed by the company secretary or compliance head of an organisation, the signatory in turn will have to be authorised by someone who under the circumstances can only be an executive director or the managing director.

Source: ET

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