ADVANCED FEMA CONFERENCE - · PDF file1.8 Correlation between SEBI regulations and FEMA...

ADVANCED

FEMA CONFERENCE

ON 31st AUGUST, 2013

Jointly Organised by Chamber of Tax Consultants and the Bombay Chartered Accountant’s Society

Table of Contents

1. FOREIGN INVESTMENT IN INDIA ............................................................................................ 1

1.1 Foreign Investment in India under Schedule 1, 2 & 3 of Notification FEMA 20/RB dated 3 rd May 2000, as amended(Cited as Notf 20 of the FEMA or as the case may be)................................. 1

1.2 Downstream investments ..................................................................................................... 1

1.3 Investment in real estate sector by non-residents ................................................................. 2

1.4 Investment on Non-Repatriation Basis ................................................................................. 3

1.5 Transfer of Shares from Non-resident to Non-resident ........................................................... 3

1.6 FDI in Pharmaceutical Sector ................................................................................................. 3

1.7 Transfer of shares of company engaged in Pharmaceutical activities ...................................... 3

1.8 Correlation between SEBI regulations and FEMA Regulations ................................................ 4

1.9 Valuation for rights issue ...................................................................................................... 4

1.10 Meaning of Real Estate ......................................................................................................... 5

1.11 Reporting requirements on conversion of FCDs ..................................................................... 5

1.12 Conversion of CCDs ............................................................................................................... 5

1.13 FDI in LLPs ............................................................................................................................ 5

1.14 Downstream Investments ..................................................................................................... 6

1.15 FDI in DVCF ........................................................................................................................... 6

1.16 Indirect Foreign Investment: ................................................................................................. 6

2. OVERSEAS DIRECT INVESTMENT ............................................................................................. 10

2.1 Authorised Dealer in case of Direct Investment Outside India .............................................. 10

2.2 Pre-requisite of filing of Form APR ...................................................................................... 10

2.3 Generation of UIN before making subsequent remittances .................................................. 10

2.4 Indian Party under Investigation by regulatory body ........................................................... 11

2.5 Investments in unincorporated entities overseas under Automatic Route ............................ 11

2.6 Capitalisation of export proceeds ........................................................................................ 11

2.7 Inclusion of Guarantee issued under determination of Financial commitment ...................... 12

2.8 Form ODI - Section D of Part I .............................................................................................. 12

2.9 Form ODI - reporting for restructuring ................................................................................. 13

2.10 Transfer by way of sale of shares of a JV/WOS..................................................................... 13

2.11 Meaning of Financial Sector ................................................................................................ 13

2.12 Approval of foreign regulator .............................................................................................. 13

2.13 Merger of Indian party post overseas direct investment ...................................................... 14

2.14 Overseas direct investment by LLPs ..................................................................................... 14

2.15 Setting up a branch/representative office abroad ................................................................ 14

2.16 Liquidation of foreign company: .......................................................................................... 14

2.17 Regulation 22(4) of Notification 120 .................................................................................... 15

2.18 Meaning of ‘real estate business’ ........................................................................................ 15

2.19 Hedging on foreign commodities exchange ......................................................................... 15

2.20 Procedure to be followed to issue of shares under ESOP ...................................................... 15

2.21 Recently revised criteria of 100% of Net worth for ODI ........................................................ 16

3. EXTERNAL COMMERCIAL BORROWINGS .............................................................................. 18

3.1 Interpretation under End use permitted .............................................................................. 18

3.2 Conversion of Company with ECB into LLP ........................................................................... 18

3.3 Conversion of ECB into Equity ............................................................................................. 18

3.4 IT / ITES sector companies .................................................................................................. 18

3.5 Misc. Services Sectors ......................................................................................................... 19

3.6 Non-allotment of LRN ......................................................................................................... 19

3.7 FAQs on ECBs ..................................................................................................................... 19

4. EXPORT AND IMPORT OF GOODS AND SERVICES ................................................................. 20

4.1 Unification of Global Settlements........................................................................................ 20

5. REMITTANCE FACILITIES FOR RESIDENT INDIVIDUALS .......................................................... 21

5.1 Purchase of immovable property – only part remittance made ............................................ 21

5.2 Outbound Investment by Individuals / Liberalized Remittance Scheme (LRS) ....................... 21

6. ACQUISITION AND TRANSFER OF IMMOVABLE PROPERTY IN INDIA ..................................... 22

6.1 Acquisition of immovable property - Notification 21 ............................................................ 22

6.2 Repatriation of sale proceeds .............................................................................................. 22

7. ESTABLISHMENT OF BRANCH/LIAISON OFFICE IN INDIA ....................................................... 23

7.1 Setting up a branch in India ................................................................................................. 23

7.2 Payments by Foreign Head Office on behalf of Liaison Office or a Branch in India ................. 23

8. OTHERS .............................................................................................................................. 24

8.1 Creation of trust for family estate planning ......................................................................... 24

8.2 NRO Account ...................................................................................................................... 24

8.3 Compounding ..................................................................................................................... 24

8.4 Master Circulars ................................................................................................................. 24

8.5 FAQs on RBI website ........................................................................................................... 24

1

1. FOREIGN INVESTMENT IN INDIA

1.1 Foreign Investment in India under Schedule 1, 2 & 3 of Notification FEMA 20/RB dated 3 rd May 2000, as amended(Cited as Notf 20 of the FEMA or as the case may be)

Brief Facts Regulation 5 of the Ntf. 20, provides for investment in Indian companies by non-residents. On the overall review and analysis of the provisions, it appears that each schedule of regulation deals with types of investment and eligible investors.

Queries a. Schedule 1 deals with all types of eligible investors who are non-residents qualified for FDI. It appears that all the categories of foreign investors including FIIs can invest under Schedule I dealing with FDI. Is this understanding correct?

b. Schedule 2 deals with Portfolio investment by FIIs. Schedule 3 deals with Portfolio investment by NRIs. On a careful analysis it appears that investment by FIIs and investment by NRIs do not encompass same types of investment although both the Schedules are dealing with Portfolio investment by respective eligible investor. Is this a correct understanding?

1.2 Downstream investments

Brief Facts Schedule 1 to Notification 20 deals with the automatic route of investment as FDI. One of the conditions of the automatic route is “Investment is not made in Indian company to acquire the shares of another company”.

Queries a. The FDI policy deals with Direct and Indirect investment and provides for downstream investment as one of the modes of investment which is now part of the Notf 20. Is above provision in Schedule 1 is synonymous with downstream investment as specified in Regulation 14 of the Notification 20?

b. The Government has not withdrawn Press Note no. 2, 3 and 4 of 2009 with respect to Direct and Indirect Investment. The consolidated policy does not provide for the complete reconciliation of what would apply from Press Note 2, 3 and 4. It only mentions that the current policy will apply to the extent that it supersedes the earlier policy. Can you explain the status of Press Note 2, 3 and 4 vis-à-vis the current FDI policy and Regulation 14 of the notification 20 ? What will apply Regulation 14 or the Press note as amended by consolidated Policy?

2

1.3 Investment in real estate sector by non-residents

Brief Facts Press Note 2 of 2005 permits investment in real estate sector in India to non-residents. Some of the main conditions of the Press Note are as under : 1) Minimum area to be developed under each project would be as

under: (i) In case of development of serviced housing plots, a minimum

land area of 10 hectares (ii) In case of construction-development projects, a minimum built-

up area of 50,000 sq.mts (iii) In case of a combination project, any one of the above two

conditions would suffice 2) Minimum capitalization of US$10 million for wholly owned

subsidiaries and US$ 5 million for joint ventures with Indian partners. The funds would have to be brought in within six months of commencement of business of the Company.

3) Repatriation after 3 years from making the original Investment

Queries A number of issues arise out these conditions which need clarification. These issues are:

1) What happens if - a. non-resident is unable to bring in the full amount? b. project is not progressing due to regulatory or other reasons not

predicted by the non-resident at the time of making initial investment which is lower than the above limit

c. due to unpredicted reasons, the area developed is less than the specified area

d. due to certain economic conditions of the project, gestation period has truncated to lower than three years

e. since repatriation can not be considered before 3 years , does this imply that the project cannot be sold even if it is ready before the end of three years?

f. due to reasons beyond the control of non-resident as cited above, is repatriation done before the period of 3 year a subject matter of compounding and whether RBI is competent to compound the matter?

g. If the government approval is obtained for any of the above, is it open to any compounding process?

2) What is the meaning of the term “Project”? Whether there is any

specific requirement based on which activity of an entity would be considered as one project. In other words, in case of constructions on two different plot of lands by one entity can it be be considered to be one project?

3) Whether FDI investment in an existing construction project (meeting all the other criteria) be considered under automatic route?

3

1.4 Investment on Non-Repatriation Basis

Queries Can a non-resident invest in a partnership firm on repatriable basis? Regulation states that a prior approval is required. What are the guidelines which are considered by RBI?

1.5 Transfer of Shares from Non-resident to Non-resident

Brief Facts Para 8.B.I and Para 8.B.II under Section I of Master Circular on Foreign Investment in India specify that Form FC-TRS is to be submitted for Transfer of Shares from Non-Resident to Resident and vice versa respectively.

Queries In case of transfer of shares of an Indian company by a non-resident to another non-resident, can shares be held on Repatriation basis if transfer is as per the regulation 9 of the Notification 120, observing all the conditions of Schedule 1 of the notification ? In case, a resident holding shares of an Indian Company subsequently becomes a non-resident (not a NRI/PIO), can he transfer the shares to another non-resident who wish to hold it on a repatriation basis and whether there are any reporting requirements for the same?

1.6 FDI in Pharmaceutical Sector

Brief Facts “X” Pvt. Ltd. is a pharma manufacturing company in India. It was set up under the automatic route by ABC Inc, a company in the U.S.A as its wholly owned subsidiary in 2012. In 2013, ABC Inc wants to do a further round of investment and subscribe to further equity shares of “X” Pvt. Ltd.

Relevant Discussion / Extract of the Regulation

As per the FDI Policy, any foreign investment in an existing Indian company in the pharma sector would be brownfield investment and require RBI approval.

Queries In the above scenario, will the subsequent investment by ABC Inc into its wholly owned subsidiary, “X” Pvt. Ltd. also require RBI approval?

1.7 Transfer of shares of company engaged in Pharmaceutical activities

4

Brief Facts “X” Pvt. Ltd. is a pharma manufacturing company in India. It was set up under the automatic route by ABC Inc, a company in the U.S.A as its wholly owned subsidiary in 2012. In 2013, ABC Inc wants to sell 10% of the shares held by it in “X” Pvt. Ltd. to JKL Inc, another company in the U.S.A.


As per the FDI Policy, any transfer of shares from a non-resident to another non-resident, which shares were originally acquired under the automatic route, does not require RBI approval.

Queries In the above scenario, would the purchase of shares by JKL Inc from the parent ABC Inc be construed as brownfield investment and require RBI approval?

1.8 Correlation between SEBI regulations and FEMA Regulations

Brief Facts PQR Pvt. Ltd. is a company (NOT an NBFC) incorporated in India and engaged in the business of equity options and derivatives trading on the National Stock Exchange. PQR Pvt. Ltd. is in the process of registering with SEBI under the AIF Regulations as a Category 3 AIF. PQR Pvt. Ltd. now wishes to raise funds from foreign investors.


The FDI Policy has not been amended to specifically deal with AIFs.

Queries Accordingly, in the instant case, would investment by foreign investors into PQR Pvt. Ltd. require RBI approval? Or would such investment fall under the automatic route?

Generally, it appears that in accordance with the newly introduced AIF Regulations, subscription to units of AIF can be made even by Persons Resident Outside India, subject to RBI Guidelines. However, the FEM (Transfer or Issue or Security by Person Resident In India) Regulations, including the relevant schedules thereof are silent about ‘allowing’ or ‘permitting’ persons resident outside India to subscribe to units of an AIF. Is this issue under consideration? Do we expect an amendment soon?

1.9 Valuation for rights issue

Brief Facts For rights issue, under regulation 6(2)(iv), it is provided that – non-

5

residents can be issued shares at a price which is not less than the price at which the offer on right basis is made to resident shareholders. There is no requirement of a valuation report.

Queries Still many banks are insisting on a valuation report. Can RBI come out with a clarification ?

1.10 Meaning of Real Estate

Brief Facts Notification No.24/2000-RB dated 3rd May 2000 provides a different meaning of Real Estate Business than Notification No. 1/2000-RB dated 3rd May 2000. Accordingly, Real Estate Business means “dealing in land and immovable property with a view to earning profit or earning income therefrom”.

Queries Is it permissible for a partnership firm/proprietary concern to acquire immovable property in India with the sole object of leasing it out?

1.11 Reporting requirements on conversion of FCDs

Brief facts A Company has issued fully convertible debentures(FCDs). Form FC-GPR has been filed at the time of allotment of FCDs.

Queries What compliance is required at the time of conversion? Do we have to inform RBI again at that time the number of shares allotted? Should it be on plain paper or any specific form?

1.12 Conversion of CCDs

Brief facts The current guidelines on Foreign Direct Investment provide that Compulsorily Convertible Debentures (CCD) should be mandatorily convertible within a ‘specified time’ and does not envisage minimum or upfront time frame within which the conversion is required to be carried out

Queries Accordingly, please confirm whether an Indian Company and the Foreign Investor should be able to extend or pre-pone the conversion period of CCD as is more mutually beneficial?

1.13 FDI in LLPs

Brief facts FEMA regulations qua Limited Liability Partnership (LLP) are long

6

awaited.

Queries What is the status thereof?

Whether NRI / PIO can today invest in LLP on Non-Repatriation basis?

1.14 Downstream Investments

Brief facts As per recent A.P. Dir Circular 1 dated 4 July 2013 the downstream investments through internal accruals are permissible by an Indian Company engaged only in the activity of investing in the capital of another companies. However, the latest Consolidated FDI policy does not contain any such rigor and downstream investment through internal accruals was permissible even to operating company or operating cum holding company in the policy even in the past

Queries Please explain these changes / provisions?

1.15 FDI in DVCF

Queries Can NRIs invest in DVCF in India on non-repatriation basis?

1.16 Indirect Foreign Investment:

1.16.1 RBI has issued notification no. 278 dated 7.6.2013 and AP circular no. 1 dated 4.7.2013 on Indirect investment.

Consider following example.

In the second level company, the non-resident will have 49% share indirectly.

The second level company has small real estate projects (less than 50,000 sq. meters). Under FDI policy, investment by first level company in the second level

Foreign investor Indian Resident citizen investor

Indian operating company – toy manufacturing

49% 51%

2nd level business company – Real estate development

100%

7

company will not be counted as foreign investment. Through this route, a non-resident can participate in the Real Estate Development business but the conditions of the policy will not apply to the non resident Investor .

Is this a correct understanding all right?

1.16.2 Direct and Indirect investment exceeding sectoral cap - without control by the non-resident over Indian company:

Kindly consider the chart below: Total financial interest of the non-resident investor in the 2nd level business company is 74%. Assume that the 2nd level company is in Scheduled Air Transport services where only 49% investment is permitted. By having this structure, the non- resident can have total financial interest exceeding 49%.

1.16.2.1 Issues:

In this situation, Direct investment is within permissible limits. Hence it is on automatic basis.

Non-resident investor Resident investor

Indian operating company

49% 51%

2nd level business company

51% 49%

8

Indirect investment is permitted as the Indian company is owned and controlled by Indian resident citizens. Legally, the control remains with Indian resident citizens. However financially, the non-resident can have a stake beyond 49%. Legally, this seems to be permissible. Is this correct?

1.16.3 Reporting:

1.16.3.1 Para 6(ii) requires all downstream investments to be reported to DIPP and FIPB.

Whether reporting has to be done where the Indian company is “owned and controlled” by Indian resident citizens?

The reason for asking this query is as under:

Downstream investment means investment by Indian company which is either owned by non-resident, or controlled by non-resident, or owned and controlled by non-resident. Hence if the Indian company is owned and controlled by Indian resident citizens, it is not downstream investment at all.

However para 6(i) states that downstream investment by Indian company “which is not owned and controlled by Indian citizens”, should comply with sectoral caps.

The words “which is not owned and controlled by Indian citizens” are missing in para 6(ii).

Hence it appears that all downstream investments by Indian companies have to report to FIPB / DIPP.

Kindly clarify.

1.16.3.2 The rules further say that for downstream investment, pricing has to be done as per RBI / SEBI rules. Does it mean that even though the investment is by one Indian company into another Indian company, valuation of shares has to be done and certificate has to be obtained from a CA / Merchant banker?

9

In direct FDI, there is a requirement of filing FC-GPR form alongwith a valuation certificate. For indirect foreign investment, there is no such requirement specified.

It means that when we report to FIPB and DIPP, there is no need to submit the valuation report. Kindly confirm if this is correct.

1.16.3.3 The form for reporting is to obtained from the FIPB website. On the website, only application forms are prescribed.

There is no form prescribed for reporting downstream investments. Kindly confirm how should one report.

1.16.4 Indian company owned and controlled by Indian resident citizens and non-residents equally:

AP circular defines “control” and “ownership” by Indian resident citizens and non-residents. The test is ownership and control is based on who owns “more than” 50% of the Indian company or who has the power to appoint “majority” of the directors.

What is the situation if Indian resident citizens and non-residents own 50% each of the Indian company, and have the power to appoint half the board.

In this situation will the Indian company be considered as “Indirect foreign investment”?

10

2. OVERSEAS DIRECT INVESTMENT

2.1 Authorised Dealer in case of Direct Investment Outside India

Brief Facts Regulation 6 of Notification 120 provides for a designated Authorized Dealer for any investment from India either into JV or WOS.

Queries 1) In a case if India party constitutes two Indian companies, then a. Is it necessary to open the bank account in the same branch of

an Authorized Dealer? b. If they have bank accounts with different Authorized Dealers,

then how to comply with the Regulation as to “same Authorized Dealer”?

c. If the reporting in form ODI is made to one of the Authorised Dealer and remittance is made by separate bank account. Will that be sufficient?

2) If an Indian company has invested in a company in Singapore through Mumbai branch of ABC Bank. Later on the company wants to change to banker. What is the procedure to do so? FEMA 120/2000 is silent on the same.

2.2 Pre-requisite of filing of Form APR

Brief Facts Regulation 6 of Notification 120 requires that before making any investment, APR of all the JVs or WOS should have been filed. In a case where the Indian party has made investment in four different Joint Ventures and in a subsequent year, it is required to make additional investment in JV no. 1.

Queries Whether APRs of all the JVs should have been filed or APR of JV no. 1 filed up-to-date should be sufficient

2.3 Generation of UIN before making subsequent remittances

Brief Facts Sometimes, Authorized Dealers (AD) take time to generate Unique Identification Number / Key Identification Number although generation of UIN/ KIN is a simultaneous process with the making of remittance. Normally, ADs do insist upon the UIN for making subsequent remittances.

Queries In such a case, what is the remedy available to the Indian party for making remittance as he is not in any default or violations?

11

2.4 Indian Party under Investigation by regulatory body

Brief Facts Regulation 6 of Notification 120 requires that Indian party should not be on the list of Exporter’s caution list/ list of defaulters of the banking system/ list of defaulters in CIBIL/ under investigation by enforcement agency or regulatory body.

Queries • In above case, just because of investigation against the Indian party is carried out by the agencies, will Indian party not be eligible for the remittance even if it is not convicted?

• However, the language of the declaration at the end of the form ODI suggests that only information of the investigation of any regulatory authority in India/enforcement agencies etc. is to be given (but does not prohibit the Indian party to invest). Under the circumstances, can you guide us as to how the Regulation will apply?

2.5 Investments in unincorporated entities overseas under Automatic Route

Brief Facts Para B.2 of Master Circular on Direct Investment by Residents in Joint Venture/WOS Abroad provides for investment in unincorporated entities overseas for Navratna PSUs.

Queries Does this mean that operations by way of a branch are included as an approved operation within the purview of Notification no. 120?

2.6 Capitalisation of export proceeds

Brief Facts Regulation 6 read with Regulation 11/12 provides for capitalization of exports to the overseas entity if such sales proceeds/ exports proceeds are not overdue.

Queries In such a case, can exports made to third parties be capitalized to the Subsidiary/Joint Venture of the Indian exporter? If answer is yes, does this imply that export proceeds have to be assigned to the overseas subsidiary after the export has been made and what is the documentation requirement to be given to AD as documents would already have been submitted to the AD at the time of exports?

12

2.7 Inclusion of Guarantee issued under determination of Financial commitment

Brief Facts Regulation 6 has been modified with respect to guarantees from time to time. The current master circular reads as under:

a. All forms of guarantees are to be included b. Indian entities may offer any form of guarantee, corporate or

personal (incl. the personal guarantee by the indirect resident individual promoters of the Indian party)/ primary or collateral/guarantee by the promoter company/ guarantee by group company, sister concern or associate company in India.

From the reading of above provision, it appears that certain guarantees may be included twice or some other guarantees may be included thrice. For example, if a loan is taken by overseas venture from an offshore branch of an AD in India, then in such a case, the primary obligation is of the overseas venture to repay the loan, for which the guarantee may have been given by the overseas venture or Indian promoter company and resident indirect promoter. Thus it has an effect of counting it thrice. In effect, a ceiling of 100% of net worth has been substantially reduced.

Further to the above, it may be possible that the Indian party may have deposited some amount with the AD to issue a bank guarantee from the AD along with the corporate guarantee. Thus this may impact the ability to remit funds abroad substantially.

Queries Can RBI issue a clarification or amendment to facilitate global business of Indian companies.

2.8 Form ODI - Section D of Part I

Brief Facts Section D of Part I of form ODI provides for full value of acquisition of the overseas venture, estimated cost of acquisition for Indian party and Financial Commitment of an Indian party.

Queries In case the Financial Commitment is to be remitted in more than one installment,

a. Whether form ODI is required to be filed with each installment or is not required to be filed for subsequent remittances after making the first remittance?

b. Whether the series of amount requested in Section D are chronologically lower one after another [i.e., full value of acquisition of the overseas venture, estimated cost of acquisition for Indian party and Financial Commitment of an Indian party]?

c. Whether amount of remittance can be lower than the financial commitment?

13

2.9 Form ODI - reporting for restructuring

Queries If there is a restructuring of the capital employed by the Indian party, i.e., loan is converted to equity or loan is converted to an export advance etc., will this require any information to RBI as this does not involve any remittance from India?

2.10 Transfer by way of sale of shares of a JV/WOS

Brief Facts Regulation on transfer of shares provides for automatic route of transfer of shares of an overseas venture. Regulation provides for repatriation within 90 days on the sale of such shares and transaction is required to be reported within 30 days of the disinvestment in Part IV of form ODI.

Queries What are the procedures involved in a case the disinvestment is in favour of another Indian party (since there is no overseas remittance involved)? Kindly guide us.

2.11 Meaning of Financial Sector

Brief Facts Regulation 7 applies to Indian party engaged in the financial sector activities.

Queries Neither regulation nor the notification or the Act has defined what is covered under financial sector. However, financial sector meaning is indicated in the FDI policy.

Can the meaning indicated in the FDI policy be considered for the ODI?

2.12 Approval of foreign regulator

Brief Facts One of the conditions of the financial sector investment outside India by an Indian party under Regulation 7 requires that an approval be obtained from regulator in India as well as outside India.

Queries If these activities are not regulated outside India, whether the declaration from an Indian party is sufficient since no such approval is required from a regulator outside India?

14

2.13 Merger of Indian party post overseas direct investment

Brief Facts Regulation 6 of Notification 120/2000 provides ceiling of 100% of net worth for overseas direct investment. An Indian company has invested in a company in Singapore under the automatic route. After some years, the Indian company got merged with other company in India. Post merger, the investment by the merged entity into the overseas company is more than 100% net-worth of the new entity.

Queries In such scenario what is to be done Whether the condition of 100% has to be checked at the time of remittances only or at the time of considering the proposal of Amalgamation?

2.14 Overseas direct investment by LLPs

Queries Overseas investment is allowed to individuals/partnership firms and companies. However LLPs are so far not included. Is it a policy decision or it is through oversight, it is not included under definition of “Indian party” under FEMA 120/2000?

2.15 Setting up a branch/representative office abroad


A.P. (DIR Series) Circular No. 18 dated 04th December, 2006.

i. Initial Expenses: AD Category - I banks may allow remittance up to fifteen per cent of the average annual sales/income or turnover during the last two financial years or up to twenty-five per cent of the net worth, whichever is higher.

Prevalent regulations are as follows:

ii. Recurring Expenses: AD Category - I banks may allow remittance up to ten per cent of the average annual sales/income or turnover during the last two financial years.

Queries However, some banks insist on Form OBR (which was prescribed under Exchange Control Manual).Kindly clarify?

2.16 Liquidation of foreign company:

Brief Facts Under regulation 16, sale of shares of a foreign company is under automatic route. However there is no reference to liquidation of a foreign company.

Queries In case there is a liquidation of foreign company and there is a loss to the Indian company, is any approval required from RBI? (All conditions of automatic route are complied with has there been a sale.) Is the approval to be obtained prior to liquidation or post liquidation?

15

2.17 Regulation 22(4) of Notification 120


In terms of Regulation 22(1) general permission was available to a person resident in India, being an individual to acquire foreign securities by way of gift, under Cashless ESOP Scheme and by way of inheritance. In terms of Regulation 22(4) general permission was also available for transfer, by way of sale, of aforesaid securities. However, with the amendment to Regulation 22(4) vide Notification No FEMA 164/2007-RB dated 9.10.2007 the general permission earlier available for transfer, by way of sale, of aforesaid securities stands withdrawn. No A.P. (DIR Series) Circular to this effect has been issued so far. [Regulation 22(4) states that a person can transfer shares acquired under sub-regulation (2) and (3) only. Sub-regulation (1) is missing.]

Queries Will transfer of securities by way of sale after 9.10.2007 without RBI approval be treated as contravention?

2.18 Meaning of ‘real estate business’


Regulation 2(p) of Notification No FEMA 120/RB-2004 dated 7.7.2004 defines the term ‘real estate business’ as buying and selling of real estate or trading in TDRs but does not include development of townships, construction of residential/commercial premises, roads or bridges.

Queries Buying of property outside India and leasing it out is not restricted. Does it mean that the activity can be undertaken by under the JV/WOS route? Can such an overseas company invest in Indian properties?

2.19 Hedging on foreign commodities exchange

Brief Facts An Indian company has invested in a Wholly owned subsidiary abroad. The WOS will do trading in commodities. For hedging against price fluctuations, it will enter into hedge contracts on foreign commodities exchange.

Queries Is this permitted under notification 120 dealing with oversea Investment?

2.20 Procedure to be followed to issue of shares under ESOP

16

Brief Facts An unlisted public company is proposing to issue shares to its employees under ESOP. Certain employees are non-residents. The company is proposing to frame an ESOP Scheme.

Relevant Discussion / Extract of the Regulation 3.5.5 Issue of shares under Employees Stock Option Scheme (ESOPs) –

CONSOLIDATED FDI POLICY ISSUED BY DIPP ON 5 APRIL 2013

(i) Listed Indian companies are allowed to issue shares under the Employees Stock Option Scheme (ESOPs), to its employees or employees of its joint venture or wholly owned subsidiary abroad, who are resident outside India, other than to the citizens of Pakistan. ESOPs can be issued to citizens of Bangladesh with the prior approval of FIPB. Shares under ESOPs can be issued directly or through a Trust subject to the condition that: (a) The scheme has been drawn in terms of relevant regulations issued by the SEBI, and

(b) The face value of the shares to be allotted under the scheme to the non-resident employees does not exceed 5 per cent of the paid-up capital of the issuing company.

(ii) Unlisted companies have to follow the provisions of the Companies Act, 1956. The Indian company can issue ESOPs to employees who are resident outside India, other than to the citizens of Pakistan. ESOPs can be issued to the citizens of Bangladesh with the prior approval of the FIPB. (Emphasis added)

8. D. Issue of shares under Employees Stock Option Scheme (ESOPs)

MASTER CIRCULAR ON FOREIGN DIRECT INVESTMENT IN INDIA ISSUED BY RBI ON 1 JULY 2013

An Indian Company may issue shares under ESOPs to its employees or employees of its joint venture or wholly owned subsidiary abroad who are resident outside India, other than to the citizens of Pakistan. Citizens of Bangladesh can invest with the prior approval of the FIPB. The face value of the shares to be allotted under the scheme to the non-resident employees should not exceed 5 per cent of the paid-up capital of the issuing company. Shares under ESOPs can be issued directly or through a Trust subject to the condition that the scheme has been drawn in terms of the relevant regulations issued by the SEBI (Emphasis added).

Queries i. Which of the above two circulars on FDI is required to be followed? ii. Whether the unlisted company is free to issues shares under ESOP

Scheme to Non Residents under FEMA ?

2.21 Recently revised criteria of 100% of Net worth for ODI

17


Paragraph 4 of Recent RBI Circular No. 23 dated 14 August 2013 stipulates that the revised 100% net worth criteria shall only to fresh Overseas Direct Investments proposal on prospective basis but would not apply to existing JVs / WOSs set-up under extant regulations. The earlier ceiling of 400 per cent of net worth was not applicable where the overseas investment was made out of balances held in Exchange Earners' Foreign Currency account of the Indian party or out of funds raised through ADRs / GDRs

Queries Can fresh investments in old overseas JVs / WOS be higher than 100% of net-worth i.e. earlier ceiling of 400%? Will the 100 per cent net worth condition not apply where the outbound investment is made from EEFC A/cs. or through ADR / GDR funds? – this is especially since Notification no. FEMA 263/RB-2013 categorically restricts even EEFC / RFC remittances to limit prescribed under LRS in the context of Resident Individuals

18

3. EXTERNAL COMMERCIAL BORROWINGS

3.1 Interpretation under End use permitted

Brief Facts As per Para I(A)(v) under Part I of Master Circular on External Commercial Borrowings and Trade Credits, ECB can be raised for investment such as modernization/expansion of existing production units in real sector

Queries What is real sector has not been defined specifically under the regulations?

3.2 Conversion of Company with ECB into LLP

Brief Facts An Indian company (i.e. eligible borrower) has availed an ECB from an eligible borrower for the permitted end use. The said company is later on converted into LLP.

Queries Since LLP are not allowed to avail ECB whether the Indian company has to repay the loan before conversion or the LLP continue to hold the same?

3.3 Conversion of ECB into Equity


Para VII under Part I of Master Circular on External Commercial Borrowings and Trade Credits

Queries Can ECB be converted into equity shares on non-repatriation basis?

3.4 IT / ITES sector companies


Classification of IT / ITES sector companies

Queries Whether such companies can be construed as software sector – whether NIC code or Software definition as per FEMA No. 23 relevant?

19

3.5 Misc. Services Sectors


Applications by Miscellaneous Services Sectors under the approval route for ECB

Queries What are the criterias for evaluating applications by Miscellaneous Services Sectors under the approval route for ECB?

3.6 Non-allotment of LRN


RBI DESAC is not allotting LRN until FC-GPR for the shares issued to foreign shareholder is taken on record c– this creates delays in genuine projects

Queries how to deal in such cases?

3.7 FAQs on ECBs


Currently, there are no FAQs on ECBs.

Queries / Suggestion It will help users immensely if RBI make public their general views and actions taken on ECBs which is not construed a in accordance with ECB policy for guidance of the public at large.

20

4. EXPORT AND IMPORT OF GOODS AND SERVICES

4.1 Unification of Global Settlements

Brief Facts ‘L’ group operates companies across the globe. It also has a subsidiary in India (LI). LI has import and export transactions with other group entities across the world. It imports as well as exports electronic research reports from/to its group entities. As part of global policy, for ease of administration and control over group finances, parent company LC (Canada entity) has instructed all its group entities to settle finances with itself for transactions done within the group. For eg: if LI exports to LG (Germany entity) and invoices it under Canadian Dollar, it will receive payment from LC in Canadian Dollar within the stipulated credit period and not LG. Further, FIRC to be issued by banker of LI will state that remittance is received from LC. Similarly, if LI imports from LS (Singapore entity) under Canadian Dollar, it will pay LC in Canadian Dollar within the stipulated credit period and not to LS. There is no netting off of receivables against payables.


• There are no corresponding provisions under Master Circular on Export and Import of Goods and Services.

• Further, Notification 14/2000 Regulation 3 and 4 only covers receipt and payment in appropriate currency.

• Sec 3(b) of FEMA, 1999: Payment to/for credit of any person resident outside India

Sec3(c) of FEMA, 1999: Receipt by or on behalf of any person resident outside India).

Queries Whether the above arrangement is permitted? Will LI be in violation of Sec 3(b)/(c) of FEMA, 1999? If these transactions are not covered under any rules, can RBI give an approval on a specific being made to it?

Also, can the purpose in FIRC be mentioned as receipt on account of exports made to LG although payment is being received from LC?

21

5. REMITTANCE FACILITIES FOR RESIDENT INDIVIDUALS

5.1 Purchase of immovable property – only part remittance made

Brief Facts An individual has already made part payment towards purchase of immovable property before issuance of recent A. P. (DIR Series) Circular No.24 dated 14th August 2013 prohibiting acquisition of immovable property under LRS Scheme.

Queries Can the individual remit the balance consideration for property although it may exceed the prescribed limit of US$ 75,000 if there was no obligation on his part to make remittance when he made the first remittance?

5.2 Outbound Investment by Individuals / Liberalized Remittance Scheme (LRS)

Brief Facts As per the recent Master Circular on Miscellaneous Remittance dated 1 July 2013 Indian Residents are eligible to invest in the shares of only a listed company under the LRS Scheme. However, earlier Master Circular dated 2 July 2012 mentioned that Indian residents can invest in shares of listed company or otherwise. Based on the same, several Indian Residents under the LRS Scheme have invested in unlisted companies abroad. Also, the recent Master Circular / Notifications are silent about the grandfathering of investments already made by Indian Resident Individuals in the Unlisted Companies under the LRS Scheme.

Queries 1. How should one read these circulars / provisions jointly with recent FEMA Notification No. 263?

2. As per Notification No. FEM 263/RB- 2013 the JV or WOS to be acquired / set up by a resident individual, shall be an operating entity only and no step down subsidiary is allowed to be acquired or set up by the JV or WOS. (a) What would be the position if the JV / WOS is initially an operating company but later on through fresh capital from other investors or through internal accruals invests in downstream overseas operating companies? (b) How would the resident individual investor be responsible if he has no majority or control over such JV?

3. Would above rigor apply to earlier investments made under LRS?

4. Whether an individual can invest in an LLP under this scheme?

5. How would past real estate investment commitments be funded by Individuals in the backdrop of recent restrictions in Real Estate Sectors under revised LRS guidelines?

22

6. ACQUISITION AND TRANSFER OF IMMOVABLE PROPERTY IN INDIA

6.1 Acquisition of immovable property - Notification 21

Brief Facts Regulation 4(c) of the Notification 21 specifies Gift and inheritance as distinct modes of acquisition by a foreign citizen of Indian origin. There is no provision for acquiring the agricultural land by a citizen of India through Inheritance under Regulation 3.

Queries Can a Non-Resident being an Indian Citizen acquire agricultural land by way of inheritance?

6.2 Repatriation of sale proceeds

Brief Facts Regulation 6 provides for the repatriation of the sale proceeds of the Residential and other properties of the PROI. Regulation 6(b)(iii) provides for repatriation of sale proceeds of not more than two Residential properties.

Queries Whether the said limit is for life time? RBI permission is necessary in case of sale of third property? How this condition will apply when Residential Properties are purchased and sold many time by the PROI during his lifetime?

23

7. ESTABLISHMENT OF BRANCH/LIAISON OFFICE IN INDIA

7.1 Setting up a branch in India

Brief Facts As per Section (A) to Master Circular on Establishment Of Liaison /Branch/Project Office In India By Foreign Entities, one of the criteria for setting up a branch is that the foreign company should have a 5 year track record; and also have a net worth.

Queries At times, the foreign company is profitable but has been in existence for less than 5 years, will RBI permit to set up a branch – if other criteria are satisfied?

7.2 Payments by Foreign Head Office on behalf of Liaison Office or a Branch in India

Queries 1. The Head office has incurred expenses for setting up a branch in India (with due RBI approval). The HO would like to recover these expenses from the branch. Is this permitted?

2. Even after setting up the branch in India, the HO may incur some expenses on behalf of its Branch. The HO would like to recover the expenses from the Branch. Is this permitted?

24

8. OTHERS

8.1 Creation of trust for family estate planning

Queries 1. Can non-resident individuals be made beneficiaries in a trust set up in India by their relatives who are residents in India wherein trust property consists of primarily property in India (i.e. shares, real estate, etc)?

2. Can non-resident individuals be made beneficiaries in a trust set up in India by their relatives who are non-residents of India wherein trust property consists of primarily property in India (i.e. shares, real estate, etc)?

8.2 NRO Account

Brief Facts Many foreign companies would like to open NRO account in India to collect bonafide receivables and effect aggregate remittances or meet their expenditure / legal dues in India

Queries The recent NRO Master Circular indicates a USD 1 million ceiling for all such bank accounts instead of NRIs only?

8.3 Compounding

Brief Facts Few recent compounding orders indicate a trend of increasing amounts of compounding penalty / fees even for simple and procedural defaults

Queries 1. Is there any change in basis in the levy as hitherto? 2. Recent RBI communication state that lawyers / legal representatives

are not encouraged by RBI to attend compounding proceedings?

8.4 Master Circulars

Brief Facts It is a general understanding that Master circular do not provide for any change in the law but it summarises various circular and notifications issued during the period as referred to in the master circular, however at times it is found that Master circular do change the existing position

Queries How does one reconcile the situation and interpret the understanding?

8.5 FAQs on RBI website

Brief Facts Most FAQs on RBI website are of 2012

Queries / Suggestions There should be a policy of updating them on once a year like Master Circulars.

Old FAQs may be reflected in archive sections for reference.

ADVANCED FEMA CONFERENCE - · PDF file1.8 Correlation between SEBI regulations and FEMA...

Documents

Transcript of ADVANCED FEMA CONFERENCE - · PDF file1.8 Correlation between SEBI regulations and FEMA...