FEMA Regulations FDI and NRI Transactions by CA Murali Krishna G [email protected] Date: 13th June 2019
Schematic flow of the Law Act Rules Press Notes Regulations Master AP (DIR) Series FAQs Special Directions Circulars permissions 2 www.sbsandco.com
Approach to FEMA Transactions National Interest Anti Money-Laundering Unregulated Deposits Exchange Control Regulations Corporate Laws Income Tax Act 3 www.sbsandco.com
FEMA Act – Introduction Rationale behind the Act Effective date of new Act Applicability of the Act Its size and nature 49 Sections 6 Rules 25 Regulations Other related matters 4 www.sbsandco.com
Key Definitions (1/4) Authorized Person [2(c)] Capital Account Transaction [2(e)] a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India, includes transactions referred to in sub-section (3) of section 6 Currency [2(h)] includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank 5 www.sbsandco.com
Key Definitions (2/4) Current Account Transaction [2(j)] transaction other than a capital account transaction, and includes payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business payments due as interest on loans and as net income from investments, remittances for living expenses of parents, spouse and children residing abroad, and expenses in connection with foreign travel, education and medical care of parents, spouse and children 6 www.sbsandco.com
Key Definitions (3/4) Foreign Currency [2(m)] Foreign Exchange [2(n)] Means foreign currency and includes deposits, credits and balances payable in any foreign currency drafts, travelers cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency drafts, travelers cheques, letters of credit or bills of exchange drawn by banks, institutions or persons outside India, but payable in Indian currency Foreign Security [2(o)] Means any security in the form of shares, stocks, bonds, debentures or any other instrument denominated or expressed in foreign currency and includes securities expressed in foreign currency, but where redemption or any form of return such as interest or dividends is payable in Indian currency 7 www.sbsandco.com
Key Definitions (4/4) Person[2(u)] – includes individual, HUF, company, firm, AOP or a BOI, whether incorporated or not, every artificial juridical person, and any agency, office or branch owned or controlled by such person; Foreign Security [2(o)] Means any security in the form of shares, stocks, bonds, debentures or any other instrument denominated or expressed in foreign currency and includes securities expressed in foreign currency, but where redemption or any form of return such as interest or dividends is payable in Indian currency 8 www.sbsandco.com
FEMA Trigger Points Transaction between person resident in India and Resident outside India Transaction by Resident in Foreign Exchange Transaction by Non Resident in Rupees Transaction by Resident outside India Transaction by Non Resident in India 9 www.sbsandco.com
Definition of Resident in India (2 (v)) (1/2) But does not a person residing in India for more than 182 include days during the course of the preceding financial year India A person who has gone out of India or who A person who has come to or stays in India, in either case, otherwise than- stays outside India, in either case- (a) for or on taking up employment in India, or (b) for carrying on in India a business or vocation (a) for or on taking up employment outside in India, or (c) for any other purpose, in such circumstances India, or as would indicate his intention to stay in India for an uncertain period; (b) for carrying on outside India a business or vocation outside India, or (c) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period; 10 www.sbsandco.com
Definition of Resident in India (2 (v)) (2/2) (ii) any person or body corporate registered or incorporated in India, (iii) an office, branch or agency in India owned or controlled by a person resident outside India, (iv) an office, branch or agency outside India owned or controlled by a person resident in India. 11 www.sbsandco.com
FOREIGN DIRECT INVESTMENT (FDI) 12 www.sbsandco.com
Types of .. Types FDI Route PIS Route 1133 www.sbsandco.com
Types of FDI FDI Route Automatic Route Government Approval (FIPB/SIA) 14 www.sbsandco.com
Automatic Route Automatic Route Without RBI With RBI Approval * in sectors Approval under Automatic Route (existing before 16-09-03) For all NRs other Erstwhile OCB than Erstwhile OCBs investment* 15 www.sbsandco.com
Government Approval (FIPB/SIA) Government Approval (FIPB/ SIA) Sectors reserved for Govt. The sectoral caps are approval breached pursuant to the 16 www.sbsandco.com investment
PIS Route PIS Route QFI FPIs NRI/OCI 10%/ (24% with approval of Members) 10% /24%/ (Sectoral Cap Repatriable 5% / 10%/ with approval of (24% with approval of Members) Members) 17 www.sbsandco.com Non Repatriable (without any limit)
Entities permitted to Invest in India Non Resident Investors Automatic Route With Approval Any Non Resident (Other than citizen / Government entity of Pakistan or Bangladesh and Approval erstwhile OCBs) RBI Approval 18 www.sbsandco.com
Entities permitted to Invest in India *other than defence, With Approval space and atomic energy and sectors/ activities prohibited for foreign investment Government RBI Approval Approval Citizen of Bangladesh or an entity in Erstwhile OCB investment in sectors Bangladesh under Automatic Route (existing before 16-09-03) Citizen of Pakistan or an entity in Pakistan* Erstwhile OCB (existing before 16-09-03) for sectors not under automatic route Issue of capital against import of capital goods/ preliminary exp or pre-op expenses 19 www.sbsandco.com
Types of Instruments *with optionality Instruments clause for buy-back (30-12-2013) Capital Debt Equity (Fully CCPS (w.e.f ADR/GDR CCD (w.e.f 07- FCCB paid/ Partly 01-05-2007)* 06-2007) paid) 20 www.sbsandco.com
FDI – Prohibited Sectors • Lottery Business including Government / private lottery, online lotteries etc. • Gambling and Betting including casinos etc. • Business of chit fund • Nidhi Company • Trading in Transferable Development Rights (TDRs) • Real Estate Business, or construction of farm houses • Agriculture (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms etc. under controlled conditions and services related to agro and allied sectors) and Plantations (Other than Tea Plantations, coffee, rubber, cardamom , palm oil tree and olive oil tree plantations) 21 www.sbsandco.com
FDI – Prohibited Sectors • Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco or of tobacco substitutes. • Activities / sectors not opened to private sector investment including Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems). • foreign investment in any form, foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also completely prohibited for Lottery Business and Gambling and Betting activities. • Foreign investment in Trusts other than investment by SEBI registered FVCIs in domestic VCF 22 www.sbsandco.com
Process Flow • Convening of Board Meeting to consider issue of shares to Investor and calling of EGM for obtaining approval from Board Approval Members (Section 42 read with Rules made there under) Valuation Report • The company has to obtain valuation report from a Chartered Accountant to arrive at the value of shares proposed to be 23 www.sbsandco.com issued • In case of listed company the valuation >= the value decided under SEBI regulations • In case of Unlisted Companies, the valuation has to be done as per internationally recognized method of valuation (RBI A. P. (DIR Series) Circular No. 4, dated 15/07/2014 and for justification of issue price, pursuant to provision to Sub rule (2) (a) of Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014
Process Flow Shareholders • The company needs to call General Meeting (EGM/AGM as the Meeting case may be) to obtain the approval of members by way of special resolution LOO • The company shall file the approved members resolutions with ROC within 30 days of Shareholder approval in Form MGT-14 • The Board has to approve the Letter of Offer (in PAS-4) along with share application (serially numbered) to be sent to the investor(s). The number of proposed offer to the investors cannot exceed 200 persons aggregate in a FY. 24 www.sbsandco.com
Process Flow Filing of LOO with • Company has to prepare the details/record of Letter of Offer ROC (LOO) in Form PAS-5, and file the same with ROC along with the LOO, within 30 days of circulation of LOO. The value of such Open Escrow bank a/c offer or invitation per person shall be with a minimum investment size of Rs.20,000/- of face value of the securities • The company has to open separate bank account (escrow account) to receive the proposed subscription and can adjust such money only either for allotment of shares or for refund of money. 25 www.sbsandco.com
Process Flow • The investor remits the amount into the Company in eligible currency Remittance • The company shall intimate RBI through AD within 30 days of remittance Intimation to RBI • The intimation to be made through E-biz filing in Annexure II of Circular 44 KYC dated 30/05/2008 and updated on 02/04/2011. The said annexure has been attached as Annexure 5 Consolidated FDI Policy, 07/06/2016 and Annexure 6 UIN to Master Circular dated 01/07/2015, Part IV: Annex I to Master Direction dated 01/01/2016 26 www.sbsandco.com • The company needs to facilitate the AD to obtain KYC information of the remitter from their counterpart bank • The KYC format is prescribed vide Annexure III of Circular 44 dated 30/05/2008 and updated on 02/04/2011. The said annexure has been attached as Annexure 6 to Consolidated FDI Policy, 07/06/2016 and Annexure 7 to Master Circular dated 01/07/2015, Part IV: Annex II to Master Direction dated 01/01/2016 • RBI upon receipt of the intimation allots Unique Identification Number (UIN) for each such remittance and intimates the company • This UIN has to be quoted at the time of filing the FC-GPR / refund of the money
Process Flow • The company shall allot Shares / CCPS / CCD within 60 days of the remittance failing which the money shall be refunded with in 15 days Allotment/ Refund thereafter (Section 42 of Companies Act, 2013 read with rules made there under) PAS-3 • As per FDI, the allotment has to be made within 180 days (w.e.f. 29-11- Form FC-GPR 07) Intimation from RBI • return on allotment is required to be filed with the ROC with in 30 days in Form PAS-3, along with the prescribed details/information of the 27 www.sbsandco.com Allottees [Filing pursuant to Sec. 42(9) and Rule 14 (4) of the Companies (Prospectus and Allotment of Securities) Rules, 2014] • The company after allotting the shares/ CCPS/CCD shall file form FC-GPR with AD who have received the remittance • The intimation to be made through E-biz filing in Annexure I of Circular 102 dated 11/02/2014. The said annexure has been attached as Annexure 1 to Consolidated FDI Policy, 07/06/2016 and Annexure 1 to Master Circular dated 01/07/2015, Part IV: Annex III to Master Direction dated 01/01/2016 • Upon receipt of the Form FC-GPR RBI after scrutiny of the form, allots UIN for FC-GPR which shall be used at the time repatriation by the investor
Transfer of Shares / CCPS/ CCD Transfer NRI / OCI to NRI/ OCI NR to R R to NR NR to NR (including NRI / OCI) Sale/ Gift Gift Gift Sale of Shares (Other Sale of Shares than specified (specified categories categories of industries) of industries) other than Financial The company is in Automatic Route RBI Approval (Needs Automatic Route RBI Approval Services Sector specified Financial to comply with Services Sector conditions specified) Automatic Route Govt Approval 28 www.sbsandco.com
Transfer of shares –Flow • The seller and buyer enters into the agreement / arrangement to buy / sell the shares Sale • The Buyer makes the payment to the seller (Resident Seller / Non-Resident Seller) Remittan ce • The resident party shall intimate to RBI through AD within 60 days of receipt / payment of consideration. The onus of Intimatio submission is on the party resident in India. n to RBI • The intimation to be made through E-biz filing in form FC-TRS. The said form is attached as Annexure 1 to Consolidated FDI Policy, 07/06/2016 and Annexure 8 to Master Circular dated 01/07/2015, Part IV: Annex IV to Master Direction dated 01/01/2016 • The company needs to facilitate the AD to obtain KYC information of the foreign counter party from their counterpart bank KYC • The KYC format is prescribed vide Annexure III of Circular 44 dated 30/05/2008 and updated on 02/04/2011. The said annexure has been attached as Annexure 6 to Consolidated FDI Policy, 12/05/2015 and Annexure 7 to Master Circular dated 01/07/2015, Part IV: Annex II to Master Direction dated 01/01/2016 29 www.sbsandco.com
Transfer of shares –Flow • Upon receipt of Form FC-TRS through E-Biz, the AD remitting or receiving the Endorsement consideration has to issue Certificate for endorsing the Form FC-TRS by AD • The company only upon receipt of the endorsed FC-TRS along with relevant share Noting by the transfer deeds / share certificate and any other relevant document, can record the Company transfer in its Register of Members • In case of listed company the valuation >= the value decided under SEBI regulations Valuation of • In case of Unlisted Companies, the valuation has to be done as per Internationally Shares recognised valuation method (w.e.f. 15/07/2014) 30 www.sbsandco.com
Transfer by R to NR as Gift under RBI approval route The proposed transferee (donee) is eligible to hold such capital instruments The gift does not exceed 5% of the PUC of the Indian company/each series of debentures/each mutual fund scheme. The applicable sectoral cap limit in the Indian company is not breached The transferor (donor) and the proposed transferee (donee) are close relatives as defined in Section 2 (77) of the Companies Act, 2013 The value of capital instruments to be transferred together with any capital instruments already transferred by the transferor, as gift, to any person residing outside India does not exceed the rupee equivalent of USD 50,000 during the calendar year. Such other conditions as stipulated by Reserve Bank in public interest from time to time 31 www.sbsandco.com
Conversion of ECB/Lumpsum Fee/Royalty into Equity The activity of the company is covered under the Automatic Route for FDI or the company has obtained Government approval for foreign equity in the company The foreign equity after conversion of ECB into equity is within the sectoral cap, if any Pricing of shares shall be as prescribed Compliance with the requirements prescribed under any other statute and regulation in force The conversion facility is available for ECBs availed under the Automatic or Government Route and is applicable to ECBs, due for payment or not, as well as secured/unsecured loans availed from non-resident collaborators. 32 www.sbsandco.com
Issue of securities – other cases Issue of shares/preference shares against lump sum technical know-how fee, royalty, under automatic route or SIA/FIPB route, subject to pricing guidelines and compliance with applicable tax laws Issue of Shares on Rights basis company listed on a recognized stock exchange in India, at a price as determined by the company in compliance with SEBI (ICDR) Regulations, 2009 company not listed on a recognized stock exchange in India, at a price which is not less than the price at which the offer on right basis is made to resident shareholders. rights share to such erstwhile OCBs will have to take specific prior permission from RBI. As such, entitlement of rights share is not automatically available to erstwhile OCBs. Existing non-resident shareholders are allowed to apply for issue of additional shares/ CCPS / CCD over and above their rights share entitlements subject to the sectoral caps. 33 www.sbsandco.com
Issue of securities – other cases Capitalisation of various expenses (Govt Approval Route) (Circular No.74, dt. 30/06/11 read with Circular No.55 , dt. 09/12/11 and circular dt. 08/05/2012) • Import of Capital Goods (no second hand machinery)– Subject to Exim Policy compliance, valuation by a third party of import country; capitalisation has to be completed within 180 days of shipment • Pre-operative / Pre-Incorporation expenses – submission of FIRC, certification by statutory auditor, within 180 days of incorporation • Payments made by FI to the company/ through bank account opened in India by the FI • Special Resolution by the applicant company 34 www.sbsandco.com
Pledge of Shares Person eligible promoter of a company registered in India (borrowing company) raised ECB , Whose shares are eligible for pledge pledge the shares of the borrowing company or that of its associate resident companies Eligible Purpose securing the ECB raised by the borrowing company, Compliance required NOC from AD Bank 35 www.sbsandco.com
Pledge of Shares Conditions to be reviewed by AD for issue of NOC ECB is in line with the extant FEMA regulations the loan agreement has been signed by both the lender and the borrower, there exists a security clause in the Loan Agreement requiring the borrower to create charge on financial securities, and the borrower has obtained LRN from the RBI Additional conditions to be fulfilled by the company the period of such pledge shall be co-terminus with the maturity of the underlying ECB; in case of invocation of pledge, transfer shall be in accordance with the extant FDI Policy and directions issued by the RBI; the Statutory Auditor has certified that the borrowing company will utilize / has utilized the proceeds of the ECB for the permitted end –use/s only 36 www.sbsandco.com
Investment in Limited Liability Partnership Firm • Non Resident Investor can invest on repatriation basis under automatic route where 100% FDI is permitted and there are no FDI linked performance related conditions. • Amount is invested by inward remittance or out of NRE/FCNR(B)/NRO account maintained with AD/ Authorized banks. • LLP is now eligible to make downstream investments • Only by way of cash consideration • LLPs not be permitted to avail ECBs • The entity should not engage any prohibited activity • Conversion of a company with FDI, into an LLP, with the prior approval of FIPB/Government 37 www.sbsandco.com
FDI – Reporting on FIRMS Entity Master Form, Business User Registration and Single Entry Form Form ARF – Within 30 days of receipt of foreign inward remittance – Deleted w.e.f 1.9.18 and merged with form FC-GPR Form FC-GPR - Within 30 days from the date of issue of capital instruments (including conversion of ECB in to equity) - By the issuer of such capital instruments Form FC- TRS - Within 60 days from the date of transfer or receipt of sale proceeds, whichever is earlier – By resident transferor or transferee Form DI – Downstream Investment - Within 30 days from the date of issue of capital instruments – By entity making such downsteam investment 38 www.sbsandco.com
Filing of FLA History of FLA Part-B of Form FC-GPR [AP (DIR Series) Circular No. 40, dated 20/04/2007] FLA [AP (DIR Series) Circular No. 45, dated 15/03/2011] FLA – Excel format [AP (DIR Series) Circular No. 133, dated 20/06/2012) Company Every company having FDI/ODI need to submit the FLA [Para 9(2) of Schedule 1] LLP need to file FLA Notification No. FEMA.351 /2015 RB, 30th Sept, 2015 LLP having direct or indirect FDI In Current year or Previous year(s) File FLA on or before 15th July, of every year (e.g., 2016) 39 www.sbsandco.com
NRI TRANSACTIONS 40 www.sbsandco.com
Definitions • Non Resident Indian (“NRI”) - a person resident outside India who is citizen of India; - Holds an Indian passport • Overseas Citizen of India (“OCI”) – A person resident outside India who is registered as an Overseas Citizen of India Cardholder under Section 7(A) of the Citizenship Act, 1955. - Holds a foreign country passport Note: Concept of “Persons of Indian Origin” was merged with OCI effective January 2015 41 www.sbsandco.com
Remittance of Current Income Current Income, means- rent, dividend, pension, interest, etc. Is a permissible credit to NRO a/c Is also permissible direct remittance, when there is no NRO a/c, subject to Furnishing of Certificate from CA stating that It is eligible for remittance; and all applicable taxes have been paid/ provided for Credit to NRE a/c, provided the AD shall ensure that – credit represents current income of the non-resident account holder and income tax thereon has been deducted / provided for. 42 www.sbsandco.com
Prohibited countries for repatriation – NRI / OCI sale proceeds of immovable property (citizens of) (1) Pakistan, (5) China, (2) Bangladesh, (6) Sri Lanka (3) Afghanistan, (7) Iran (4) Nepal and Bhutan sale proceeds of other financial assets (citizens of) (1) Pakistan, (3)Bangladesh, (2)Nepal and Bhutan. 43 www.sbsandco.com
Acquisition of Immovable Property in India NRI/ OCI purchase any immovable property (other than agricultural land/ plantation property / farm house) in India. gift from a person resident in India or a NRI or a OCI. any immovable property (other than agricultural land/ plantation property / farm house) in India inheritance from a person resident in India or a person resident outside India any immovable property in India person resident outside India must have acquired such property in accordance with the provisions of the foreign exchange law in force Non resident spouse of an NRI / OCI can acquire one immovable property in India (other than agricultural land / plantation property / farm house) jointly with his / her NRI / OCI spouse. Such non resident spouse should otherwise not be prohibited from such acquisition. 44 www.sbsandco.com
Transfer of Immovable Property in India NRI or OCI Transfer to a person resident in India any immovable property in India Transfer to NRI or OCI any immovable property (other than agricultural land or plantation property or farm house) Transfer’ includes sale, purchase, mortgage, exchange, pledge, gift, loan or any other form of transfer of right, title, possession or lien In case the transfer is by way of gift the transferee should be a relative as defined in section 2(77) of the Companies Act, 2013. 45 www.sbsandco.com
Mortgage of Immovable Property in India NRI/ OCI can mortgage of residential/ commercial property Automatic route an AD / the housing finance institution in India With prior approval of RBI a bank abroad 46 www.sbsandco.com
Mode of payment of consideration – NRI/ OCI Funds received in India through normal banking channels by way of inward remittance from any place outside India or by debit to his NRE / FCNR(B) / NRO account. No other mode of payment is permitted (including the payment by way of Travelers' Cheques or cash) Need not file any intimation to RBI (if purchase of residential / commercial property is under general permission) 47 www.sbsandco.com
Repatriation of transfer proceeds Can repatriate transfer proceeds of - immovable property other than agricultural land / plantation property / farm house, if the acquisition was in accordance with extant FEMA regulations and purchase consideration at that time was routed through normal banking channels - agricultural land / plantation property / farm house - prior approval of RBI - residential properties – not more than two such properties 48 www.sbsandco.com
Investment in Firms/ Proprietory Concern/ AOP/BOI NRI / OCI can invest on non-repatriation basis under automatic route without any limit. NRI / OCI can invest on repatriation basis with prior approval of RBI. RBI will decide the application in consultation with the GOI Amount is invested by inward remittance or out of NRE/FCNR(B)/NRO account maintained with AD/ Authorized banks. The entity should not engage any prohibited activity 49 www.sbsandco.com
TYPES OF DEPOSIT ACCOUNTS 50 www.sbsandco.com
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