Basics of FEMA -...

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Headline Verdana Bold ICAI Pune West Study Circle 23 April 2017 CS Abdullah Fakih Basics of FEMA

Transcript of Basics of FEMA -...

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Headline Verdana Bold

ICAI Pune West Study Circle23 April 2017

CS Abdullah Fakih

Basics of FEMA

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Basics of FEMA 2

Contents

Particulars

Historical Perspective

FEMA - Broad framework

Important definitions

Current and Capital Account Transactions

Inbound investment

Outbound investment

ECB

Compounding of offences

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Historical perspective

FERA FEMA

FERA 1947

• Introduction of Exchange Control in

India

FERA 1973

• New Act focused on corporate

sector and restricted foreign

investment -

• Introduced concept of FERA

companies (40% foreign ownership)

• Violation - a CRIMINAL OFFENCE

FERA Amendment Act 1993

• Liberalisation to facilitate cross

border transactions – Government

Control continues

• Restriction on employment of

foreign nationals removed

• FERA Companies Concept Deleted

FEMA 1999

• Regulation vs Management

• Partial Capital Account Convertibility

• Strict KYC and AML guidelines

• Violation - CIVIL OFFENCE

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Broad Framework

FEMA

Foreign

Exchange

Management

Regulations

Master

Circulars/

Master

Directions

Press

Releases

Consolidated

FDI Policy

Foreign

Exchange

Management

Act

AP Dir

(Series)

Circulars

Press NotesAmendment

Notifications

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Important definitions

Person resident in India means-

a person residing in India for more than 182 days during the course of the precedingfinancial year but does not include-

A. a person who has gone out of India or who stays outside India, in either case-

− for or on taking up employment outside India, or− for carrying on outside India a business or vocation outside India, or− for any other purpose, in such circumstances as would indicate his intention to stay

outside India for an uncertain period;

B. a person who has come to or stays in India, in either case, otherwise than-

− for or on taking up employment in India, or− for carrying on in India a business or vocation in India,− for any other purpose, in such circumstances as would indicate his intention to stay

in India for an uncertain period;

any person or body corporate registered or incorporated in India. an office, branch or agency in India owned or controlled by a person resident outside

India. an office, branch or agency outside India owned or controlled by a person resident in

India.

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Important definitions

Person resident outside India means a person who is not resident in India

Non-Resident Indian (NRI) means an individual resident outside India who is citizen of India oris an 'Overseas Citizen of India' cardholder within the meaning of section 7(A) of the CitizenshipAct, 1955

Capital account transaction means a transaction which alters the assets or liabilities, includingcontingent liabilities, outside India of persons resident in India or assets or liabilities in India ofpersons resident outside India, and includes following transactions specified in Section 6(3) ofFEMA:

transfer or issue of any foreign security by a person resident in India; transfer or issue of any security by a person resident outside India; transfer or issue of any security or foreign security by any branch, office or agency in India of a

person resident outside India; any borrowing or lending in rupees in whatever form or by whatever name called; any borrowing or lending in rupees in whatever form or by whatever name called between a

person resident in India and a person resident outside India; deposits between persons resident in India and persons resident outside India; export, import or holding of currency or currency notes; transfer of immovable property outside India, other than a lease not exceeding five years, by a

person resident in India; acquisition or transfer of immovable property in India, other than a lease not exceeding five

years, by a person resident outside India; giving of a guarantee or surety in respect of any debt, obligation or other liability incurred by a

person resident in India and owed to a person resident outside India; or by a person residentoutside India

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Important definitions

Current account transaction means a transaction other than a capital account transactionand without prejudice to the generality of the foregoing such transaction includes,-

payments due in connection with foreign trade, other current business, services, andshort-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.

Foreign currency means any currency other than Indian currency

Foreign exchange 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 inIndian 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.

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Current and Capital account transactions

• Investments

• Loans

• Setting up Offices in India

• Immovable Property

strictly regulated

freely permittedNegative list principle

• Prohibited list

• Requiring Govt approval

• Requiring RBI approval

Capital Account

Current Account

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Section 3 restrictions

Without the general or special permission of RBI, no person can:

deal in or transfer any foreign exchange or foreign security to any personnot being an authorized person;

make any payment to or for the credit of any person resident outside Indiain any manner;

receive otherwise through an authorized person, any payment by order oron behalf of any person resident outside India in any manner.

enter into any financial transaction in India as consideration for or inassociation with acquisition or creation or transfer of a right to acquire, anyasset outside India by any person.

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Inbound investment

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Inbound Investment - Schemes

Inbound Investment

Schedule 1

Foreign Direct Investment

Schedule 2

Portfolio Investment Scheme –FII/FPI

Schedule 6

Investment by FVCI

Schedule 5

Purchase of Other Securities by

FII/FPI/NR/NRI

Schedule 8

QFI Investment in Equity Shares

Schedule 7

Indian Depository

Receipts by NR Companies

Schedule 3

Portfolio Investment

Scheme – NRI

Schedule 4

NRI – Non Repatriate

Schedule 9

FDI in LLP

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Inbound Investment - Routes

Automatic Route

•Permitted for most sectors

•No prior approval required, only post-facto filing

•Remittance through normal banking channels

•Subject to compliance with the pricing guidelines

•E.g. IT/ITes, Service sector, Infrastructure, Manufacturing

Approval Route

•Sectors not falling under automatic route.

•Investment only post obtaining approval from FIPB

•E.g. Defence, broadcasting, single and multi-brand retail etc.

Restricted List

•Atomic energy

•Lottery business

•Gambling and betting

•Trading in Transferable Development Rights

•Real Estate business

•Manufacturing of Tobacco/Tobacco substitutes

100% FDI permitted without approvals in most sectors

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Foreign Direct Investment (FDI)

Foreign Direct Investment - Automatic Route – illustrative sectors

Cap Sector/ Activity

100%

• Manufacturing• Mining (other than of titanium bearing minerals and ores)• Greenfield / existing projects in Civil Aviation Sector• Greenfield pharmaceuticals• Wholesale / cash & carry trading and B2B e-commerce• Financial services regulated by financial sector regulators viz. RBI, SEBI, IRDA, PFRDA• Power (except atomic energy)• Special Economic Zones • Setting up of industrial parks and Construction Development Projects (Conditional)• Courier Services• Petroleum & Natural Gas exploration• Tea Sector including tea plantations• Credit Information Companies (CIC)• Non-scheduled air transport services • Asset Reconstruction Company• Cable Network• Direct to Home broadcasting• Mobile TV• Teleports • Duty free shops• Other Financial Services (regulated by financial sector regulators)

74% • Brownfield pharmaceutical

49%

• Telecommunication services• Private Sector Banks• Infrastructure Company in the Securities Market viz. Stock exchange, Commodity derivative exchange, depositories

and clearing corporations• Power exchanges• Single Brand product retailing • Air transport services (Scheduled Air Transport)• Defence production• Insurance• Pension

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Foreign Direct Investment (FDI)

Foreign Direct Investment - Approval Route – illustrative sectors

Cap Sector/ Activity

100%

• Mining and separation of titanium bearing minerals and ores• Telecommunication services > 49%• Single Brand product retailing > 49%• Satellite – establishment and operation• Brownfield pharmaceutical > 74%•Defence >49%• Air transport services > 49%

74%• Private Sector Bank > 49%• Security agencies in private sector >49%

51% • Multi Brand Retail Trading

49%• Up linking of news and current affairs TV channel• FM Radio

26% •Newspapers

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FDI in E-commerce

100% FDI allowed in E-commerce activities

No FDI Permitted in Inventory based model of E-commerce

The terms E-commerce, E-commerce Entity, Inventory and Marketplace based model of e-commerce has been defined

E-commerce Entity may provide support services viz. warehousing, logistics, order fulfillment, call center, payment collection and other services

E-commerce Entity shall not permit more than 25% of the sales affected through its marketplace from one vendor or their group companies

E-commerce Entity shall not directly or indirectly influence the sale price of goods or services sold and shall maintain level playing field

E-commerce entity will have to revise their operating model to make it in compliance with the aforementioned norms.

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Equity Shares

Fully, compulsorily and mandatorily convertible debentures

Fully, compulsorily and mandatorily preference shares

DRs and FCCBs

Types of Instruments

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Instruments with optionality clause

Optionality clauses are allowed in equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares subject to following conditions

There is a minimum lock-in period of one year or a minimum lock-in period as prescribed under FDI Regulations, whichever is higher.

The lock-in period is effective from the date of allotment of such shares or convertible debentures;

After the lock-in period, the non-resident investor exercising option/right is eligible to exit without any assured return, as under:

− In case of a listed company, the non-resident investor is eligible to exit at the market price prevailing at the recognized stock exchanges;

− In case of unlisted company, the non-resident investor is eligible to exit from the investment in equity shares of the investee company at a price worked out as per any internationally accepted pricing methodology at the time of exit duly certified by a Chartered Accountant or a SEBI registered Merchant Banker.

The guiding principle is that the non-resident investor is not guaranteed any assured exit price at the time of making such investment/agreement and shall exit at a fair price computed at the time of exit.

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Valuation

Unlisted Companies

As per any internationally accepted method of valuation method

Listed Companies

As per SEBI Guidelines

i.e. Ruling market price

Fresh issue of shares – at a price which is not less than the value determined

Subscription to MOA –whether valuation needed?

Transfer of shares -

NR to R - at a price which is less than the value determined

R to NR - at a price which is equal to or higher than the value determined.

Valuation requirement

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Transfer of Shares

19

Category Manner Prior Approval/No

approval

Conditions

NR to NR (other than

NRI and OCB)

Sale/gift No approval Sector under

automatic route

NRI to NRI Sale/gift No approval

NRI to NR Sale/Gift Prior approval

NR to R Gift No approval

NR to R/NR Market sale No approval Only through

registered stock

broker

NR to R Sale under private

arrangement

No approval 1. Pricing guidelines

are met

2. Within the

sectoral caps

3. Subject to SEBI

guidelines, if

applicable

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Transfer of Shares

20

Category Manner Prior Approval/No

approval

Conditions

R to NR Sale No approval 1. Pricing guidelines

are met

2. If on deferred

basis, only up to

25% up to 18

months

3. Subject to SEBI

guidelines, if

applicable

4. FIPB approval is

obtained, if

applicable

R to NR Gift Prior approval is

required

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Reporting Requirement

Reporting of Inflow

• Advance reporting with 30 days of receipt along with KYC and FIRC

• Form FC-GPR within 30 days of issue of shares

• Annual Return on Foreign Liabilities & Assets by 15th July every year

Reporting of transfer of shares

• Form FC-TRS within 60 days of receipt of amount of consideration

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Issue / Acquisition of Shares – post M&A of Indian Company

Regulation 7 of FEMA 20

Where a Scheme of merger or amalgamation of two or more Indian companies or a reconstruction by way of demerger or otherwise of an Indian company, has been approved by a Court in India, the transferee company or, as the case may be, the new company may issue shares to the shareholders of the transferor company resident outside India, subject to the following conditions, namely:

the percentage of shareholding of persons resident outside India in the transferee or new company does not exceed the percentage specified in the approval granted by the Central Government or the Reserve Bank, or specified in these Regulations

Provided that where the percentage is likely to exceed the percentage specified in the approval or the Regulations, the transferor company or the transferee or new company may, after obtaining an approval from the Central Government, apply to the Reserve Bank for its approval under these Regulations;

the transferor company or the transferee or new company shall not engage in agriculture, plantation or real estate business or trading in TDRs;

the transferee or the new company

− files a report within 30 days with the Reserve Bank giving full details of the shares held by persons resident outside India in the transferor and the transferee or the new company, before and after the merger/amalgamation/reconstruction,

− Also furnishes a confirmation that all the terms and conditions stipulated in the scheme approved by the Court have been complied with.

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Pricing Guidelines on Right shares

Regulation 6(2) of FEMA 20

An Indian company which satisfies the following conditions, may offer to a person resident outside India, equity or preference shares or convertible debentures on right basis:

(i) The offer on right basis does not result in increase in the percentage of foreign equity already approved, or permissible under the Foreign Direct Investment Scheme;

(ii) The existing shares or debentures against which shares or debentures are issued by the company on right basis were acquired and are held by the person resident outside India in accordance with these Regulations;

(iii) The offer on right basis to the persons resident outside India shall be:

in the case of shares of a company listed on a recognized stock exchange in India, at a price as determined by the company;

in the case of shares of a 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.

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Acquisition of Bonus Shares

Regulation 6A of FEMA 20

An Indian company may issue bonus shares to its non-resident shareholders, subject to the following conditions:

the shares against which bonus shares are issued by the company (hereinafter referred to as 'the original shares') were acquired or held by the non-resident shareholder in accordance with the Rules/Regulations applicable to such acquisition;

the bonus shares acquired by the non-resident shareholder shall be subject to the same conditions including restrictions in regard to repatriability as are applicable to the original shares

Form FC-GPR needs to be filed within 30 days from the date of allotment of Bonus Shares

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Downstream Investment

Downstream investments by foreign owned and controlled Indian companies will be subject to the following conditions:

such a company has to notify Secretariat for Industrial Assistance, DIPP and FIPB of its downstream investment within 30 days of such investment.

downstream investment by way of induction of foreign equity in an existing Indian Company to be duly supported by a resolution of its Board of Directors as also a Shareholders’ Agreement, if any.

issue/transfer/pricing/valuation of shares shall continue to be in accordance with extant SEBI/RBI guidelines;

For the purpose of downstream investment, the Indian companies would need to bring in requisite funds from abroad and not leverage funds from the domestic market. Downstream investments through internal accruals is permissible

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FDI in LLP

RBI has on 3 March 2017 amended FDI Regulations concerning FDI in LLP

FDI in LLPs is permitted, subject to the following conditions:• FDI is permitted under the automatic route in LLPs operating in sectors/activities where

100% FDI is allowed through the automatic route and there are no FDI linked performance conditions.

• An Indian company or an LLP, having foreign investment, will be permitted to make downstream investment in another company or LLP engaged in sectors in which 100% FDI is allowed under the automatic route and there are no FDI linked performance conditions. Onus shall be on the Indian company / LLP accepting downstream investment to ensure compliance with the above conditions.

• FDI in LLP is subject to the compliance of the conditions of LLP Act, 2008.

Key changes in revised Schedule 9 are as under:• Company having FDI can be converted into an LLP under automatic route (as against

government approval route earlier), if it is engaged in a sector where foreign investment upto 100% is permitted under automatic route and there are no FDI linked performance conditions.

• Restrictions on LLPs to avail ECB removed.• Restrictions on only Indian Company to be eligible to act as designated partner of LLP

has now been removed. In other words, any body corporate including foreign company would be eligible to act as designated partner of LLP (through an individual nominee).

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Outbound investment

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Outbound Investment – Eligible Entities

Outbound Investment

CompaniesLimited Liability

Partnerships

Entities engaged in Financial

Services SectorMutual Funds

Individuals

(LRS)

Proprietary concern /

unregistered Partnership

Firms

Partnership Firms

Registered Trust / Society

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Limit & conditions

400% of the Net worth as per latest audited balance sheet permitted under automatic route. Net worth means paid up capital + free reserve

Any financial commitment exceeding USD 1 billion in a financial year require prior approval of RBI even when the total financial commitment is within 400%.

400% financial commitment condition not applicable to investments made out of EEFC account or proceeds of ADR/GDR.

Total financial commitment to include:

− Remittance of foreign exchange including investment in shares/ loan− Capitalization of the export proceeds − 100% of the guarantees / bank guarantees issued in favor of or on behalf

of JV /WOS− 50% of the performance guarantee.− Share Swap

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Limit & conditions

Investment (or financial commitment) in a foreign entity engaged in real estate meaning buying and selling of real estate or trading in Transferable Development Rights (TDRs) is prohibited.

Valuation norms - In case of partial / full acquisition of an existing foreign company –

where the investment is more than USD 5 million, valuation of the shares of the company shall be made by a Category I Merchant Banker registered with SEBI or an Investment Banker / Merchant Banker outside India registered with the appropriate regulatory authority in the host country; and,

in all other cases by a Chartered Accountant or a Certified Public Accountant.

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Method of Funding

Drawal of foreign exchange from an AD bank in India;

Capitalization of exports;

Swap of shares;

Proceeds of External Commercial Borrowings (ECBs) / Foreign Currency Convertible Bonds (FCCBs);

In exchange of ADRs/GDRs issued in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993, and the guidelines issued thereunder from time to time by the Government of India;

Balances held in EEFC account of the Indian Party and

Proceeds of foreign currency funds raised through ADR / GDR issues.

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Transfer of shares

Automatic route available to the Indian entities to transfer its shareholding complying with the following conditions:

the sale does not result in any write off of the investment made;

the sale is to be effected through a stock exchange where the shares of the overseas JV/WOS are listed;

if the shares are not listed on the stock exchange and the shares are disinvested by a private arrangement, the share price is not less than the value certified by a Chartered Accountant/ Certified Public Accountant as the fair value of the shares based on the latest audited financial statements of the JV/WOS;

the Indian Party does not have any outstanding dues by way of dividend, technical know-how fees, royalty, consultancy, commission or other entitlements and/or export proceeds from the JV or WOS;

the overseas concern has been in operation for at least one full year and the Annual Performance Report together with the audited accounts for that year has been submitted to the Reserve Bank;

the Indian party is not under investigation by CBI/DoE/SEBI/IRDA or any other regulatory authority in India.

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Transfer of shares involving write off of the investment

An Indian Party may disinvest, without prior RBI approval if the amount to be repatriated on disinvestment is less than the amount of the original investment in the following cases:

Where the JV/WOS is listed in the overseas stock exchange;

Where the Indian Party is listed on a stock exchange in India and has a net worth of not less than Rs. 100 crore;

Where the Indian Party is an unlisted company and the investment in the overseas venture does not exceed USD 10 million, and

Where the Indian Party is a listed company having a net worth of less than Rs.100 crore but investment in an overseas JV/WOS does not exceed USD 10 million.

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Write off of capital and receivables

Indian companies having at least 51 % stake in an overseas JV, may write off capital (equity / preference shares) or other receivables, such as, loans, royalty, technical knowhow fees and management fees in respect of the JV /WOS can undertake write off of capital / receivables :

Listed Indian companies - 25 % of the equity investment in the JV /WOS under Automatic route

Unlisted companies - 25 % of the equity investment in the JV /WOS under the Approval Route.

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Issue of Corporate Guarantee

Indian Companies are permitted to give corporate guarantees on behalf of their

• first level step down operating JV /WOS

• set up by their JV / WOS operating as either an operating unit or as an Special Purpose Vehicle (SPV)

under the Automatic Route subject to compliance with the 400% net worth limit

Issuance of corporate guarantee on behalf of

• second generation or subsequent level step down operating subsidiaries

• require prior approval of RBI provided Indian Party indirectly holds 51 % or more stake in the overseas subsidiary for which such guarantee is intended to be issued

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Capitalization of dues

Payments due from the foreign entity towards exports, fees, royalties or any other dues from the foreign entity for supply of technical know-how, consultancy, managerial and other services can be capitalized under the automatic route.

Capitalization of export proceeds remaining unrealized beyond the prescribed period of realization will require prior approval of RBI

Indian software exporters are permitted to receive 25% of the value of their exports to an overseas software start-up company in the form of shares without entering into Joint Venture Agreements, with prior approval of RBI.

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Investment in Financial Services Sector

Investment (or financial commitment) in an entity outside India engaged in the financial sector must in compliance with the following conditions:

- Indian entity should be registered with the regulatory authority in India for conducting the financial sector activities;

- Indian entity should have earned net profit during the preceding 3 financial years from the financial services activities;

- Indian entity has obtained approval from the regulatory authorities concerned both in India and abroad for venturing into such financial sector activity; and

- Indian entity has fulfilled the prudential norms relating to capital adequacy as prescribed by the concerned regulatory authority in India.

Any additional investment (or financial commitment) through an SPV or by an existing JV/WOS or its step down subsidiary in the financial services sector is also required to comply with the above conditions.

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Obligation of the Indian Investor

Intimate RBI within 30 days of any post investment changes / setting up of downstream company / change in shareholding pattern

Receive share certificates with 6 months from the date of remittance

Repatriate to India all dues receivable form foreign entity like, dividend, royalty, technical fee etc. with in 60 days of its falling due

Sale proceeds on account of transfer of shares of the overseas JV / WOS needs to be repatriated to India within 90 days

File APR with RBI every year, within in all other cases by a Chartered Accountant or a Certified Public Accountant. APR to be based on audited Accounts. In case accounts of foreign JV / subsidiary are not audited, Indian Company needs to adopt and ratify the unaudited accounts and the statutory auditor of the Indian company needs to certify the same.

File Annual Return on Foreign Liabilities and Assets (FLA) by July 31 of every

year with RBI - all the Indian companies which have received FDI and/or made FDI abroad (i.e. overseas investment) in the previous year(s) including the current year

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Investment by Resident Individuals

Only upto LRS limit (EEFC/ RFC account included in LRS)

Real estate business, banking business or financial services sectors are prohibited

The JV/WOS has to be operating entity only and no step down subsidiary is permitted to be acquired / setup by the JV /WOS.

Valuation guidelines at par with Indian Companies

Disinvest (partially/ fully) only by way of transfer / sale / liquidation / merger of JV/WOS permitted, post completion of one year from the date of first remittance.

Disinvestment proceeds needs to be repatriated within 60 days

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External Commercial Borrowings

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Revised ECB Framework – relevant Circulars

The revised Framework was introduced vide the following:

AP (DIR Series) Circular No. 17

dated 29 September 2015:

Framework for the issuance of Rupee

Denominated Bonds Overseas (Masala

Bonds)

AP (DIR Series) Circular No. 32 dated 30 November 2015:

Revised framework for medium term foreign currency denominated

ECB with Minimum Average Maturity (MAM) of 3-5 years, long term

foreign currency denominated ECB with MAM of 10 years and

Rupee denominated ECB with MAM of 3-5 years

Notification No.FEMA.358/2015-RB

dated 2 December 2015:

Amended the Foreign Exchange Management

(Borrowing or Lending in Foreign Exchange)

Regulations, 2000 for prescribing changes to

the regulations for foreign exchange and rupee

borrowing under approval and automatic routes

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Definition

Commercial loans raised by eligible resident entities from recognised non-resident entities conforming to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc.

Based on MAM and the currency of borrowing, ECB have been segregated into following three distinct clusters, referred to as ‘Tracks’:

Track 1 Track II Track III

Medium term foreign currency denominated ECB with minimum average maturity of 3/5 years.

Long term foreign currency denominated ECB with minimum average maturity of 10 years

Indian Rupee (INR) denominated ECB with minimum average maturity of 3/5 years.

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Permitted Routes

ECB

AutomaticApproval

(RBI Route)

Conditions Prescribed

• Eligible Borrowers

• Recognized Lenders

• Amount & Maturity

• All-in-cost ceilings

• End use restrictions

• Other conditions

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Eligible Borrowers

Track I

Companies engaged in manufacturing, software development, shipping and airlines.

SIDBI

Units in SEZs

Export Import Bank of India (Approval Route)

Companies in Infrastructure Sector, NBFC – IFC, AFC, Holding Companies and CICs

Track II

All categories under Track I

Companies in infrastructure sector

Holding companies

Core Investment Companies (CICs)

Real Estate Investment Trusts and Infrastructure Investment Trusts governed by SEBI

Track III

All categories under Track II

All NBFCs

NBFCs, Not for Profit companies, Societies, trusts and cooperatives, NGOs engaged in micro finance activities

Companies engaged in miscellaneous services like R&D, training (other than educational institutes), supporting infrastructure, providing logistics services

SEZ / NMIZ Developers

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Recognized Lenders

Track I & Track II

International banks

International capital markets

Financial institutions – Multilateral, Regional, Government

Export credit agencies

Suppliers of equipment

Foreign equity holders

Overseas branches / subsidiaries of Indian banks

Track I & Track II

Overseas long term investors such as:

Prudentially regulated financial entities;

Pension funds;

Insurance companies;

Sovereign Wealth Funds;

Financial institutions located in International Financial Services Centers in India

Overseas branches / subsidiaries of Indian banks not permitted in Track II

Track III

All categories under Track I except overseas branches / subsidiaries of Indian Banks

In case of NBFCs-MFIs, other eligible MFIs, not for profit companies and NGOs, ECB can also be availed from overseas organizations and individuals

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All in cost ceiling

Track I

For ECB with MAM of 3 to 5 years - 300 basis points per annum over 6 month LIBOR or applicable bench mark

For ECB with MAM of more than 5 years –450 basis points per annum over 6 month LIBOR or applicable bench mark

Penal interest, if any, for default or breach of covenants should not be more than 2% over and above the contracted rate of interest

Track II

The maximum spread over the benchmark will be 500 basis points per annum

Remaining conditions will be as given under Track I

Track III

The all-in-cost should be in line with the market conditions

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End use – Track I

Import of capital goods including payment towards import of services technical know-how and license fees, provided the same are part of these capital goods;

Local sourcing of capital goods;

New project;

Modernization /expansion of existing units;

Overseas direct investment in Joint ventures (JV)/ Wholly owned subsidiaries (WOS);

Acquisition of shares of public sector undertakings at any stage of disinvestment under the disinvestment programme of the Government of India;

Refinancing of existing trade credit raised for import of capital goods;

Payment of capital goods already shipped / imported but unpaid;

Refinancing of existing ECB provided the residual maturity is not reduced.

Units is SEZ can raise ECB only for their own requirements.

Shipping and airlines companies can raise ECB only for import of vessels and aircrafts respectively.

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End use – Track I

SIDBI can raise ECB only for the purpose of on-lending to the borrowers in the Micro, Small and Medium Enterprises (MSME sector), where MSME sector is as defined under the MSME Development Act, 2006, as amended from time to time.

ECB proceeds can be used for general corporate purpose (including working capital) provided the ECB is raised from the direct / indirect equity holder or from a group company for a minimum average maturity of 5 years.

NBFC-IFCs and NBFCs-AFCs can raise ECB only for financing infrastructure.

Holding Companies and CICs shall use ECB proceeds only for on-lending to infrastructure Special Purpose Vehicles (SPVs)

ECBs for the following purposes will be considered only under the approval route:

- Import of second hand goods as per the Director General of Foreign Trade (DGFT) guidelines;

- On-lending by Exim Bank.

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End use – Track II

The ECB proceeds can be used for all purposes excluding the following:

- Real estate activities

- Investing in capital market

- Using the proceeds for equity investment domestically;

- On-lending to other entities with any of the above objectives;

- Purchase of land

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End use – Track III

NBFCs can use ECB proceeds only for:

- On-lending for any activities, including infrastructure sector as permitted by the concerned regulatory department of RBI;

- providing hypothecated loans to domestic entities for acquisition of capital goods/equipment; and

- providing capital goods/equipment to domestic entities by way of lease and hire-purchases

Developers of SEZs/ NMIZs can raise ECB only for providing infrastructure facilities within SEZ/ NMIZ.

NBFCs-MFI, other eligible MFIs, NGOs and not for profit companies can raise ECB only for on-lending to self-help groups or for micro-credit or for bonafide micro finance activity including capacity building.

For other eligible entities under this track, the ECB proceeds can be used for all purposes excluding the following:

- Real estate activities

- Investing in capital market

- Using the proceeds for equity investment domestically;

- On-lending to other entities with any of the above objectives;

- Purchase of land

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Limit to raise ECB

Up to USD 750 million or equivalent for the companies in infrastructure and manufacturing sectors, Non-Banking Financial Companies -Infrastructure Finance Companies (NBFC-IFCs), NBFCs-Asset Finance Companies (NBFC-AFCs), Holding Companies and Core Investment Companies;

Up to USD 200 million or equivalent for companies in software development sector;

Up to USD 100 million or equivalent for entities engaged in micro finance activities; and

Up to 500 million or equivalent for remaining entities.

ECB proposals beyond aforesaid limits will be considered under the approval route. For computation of individual limits under III, exchange rate prevailing on the date of agreement should be taken into account.

In case the ECB is raised from direct equity holder, aforesaid individual ECB limits will also subject to ECB liability: equity ratio of 4:1 under automatic route and 7:1 under the approval route. Ratio is not applicable if total of all ECBs raised by an entity is up to USD 5 million or equivalent.

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Automatic Route

a) Execute a Loan Agreement with the overseas lender.

b) Prepare and file form 83 for obtaining Loan Registration Number (LRN) in duplicate, certified

by the Company Secretary or Chartered Accountant to the Authorized Dealer.

c) AD will process the application and forward the one copy to Department of Statistics And

Information System, RBI for generating LRN.

d) First draw down should be only after obtaining LRN.

Approval Route

Application in form ECB through designated AD bank to RBI along with appropriate documents.

Once approval is received, proceed with the process stated under automatic route.

On-going compliance

ECB-2 Return certified by the designated AD bank needs to be submitted on monthly basis - to

reach RBI within 7 working days from the close of month to which it relates.

Process and compliances

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Powers with AD Bank

AD Banks have been delegated with the powers to approve the following aspects in relation to

ECB’s:

• Changes/modifications in the drawdown/repayment schedule - with or without change in the

average maturity period or all-in-cost;

• Changes in the currency of borrowing;

• Change of the AD bank;

• Changes in the name of the Borrower Company;

• Transfer of ECB;

• Change in the recognized lender;

• Change in the name of Lender;

• Cancellation of LRN;

• Change in the end-use of ECB proceeds;

• Reduction in amount of ECB;

• Change in all-in-cost of ECB;

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Conversion of ECB into Equity

Conditions:

• Activities to be under Automatic Route / FIPB approval obtained

• Sectoral Cap not breached

• Pricing guidelines followed (listed / unlisted company)

Reporting structure

• Full conversion of outstanding ECB into equity – Form FC-GPR to AD & Form ECB-2 to DSIM

within 7 working days from the close of the month

• Partial conversion of outstanding ECB into equity – Form FC-GPR for converted portion &

Form ECB-2 to DSIM mentioning converted and unconverted portion

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Rupee Denominated Bonds

Rupee Denominated Bonds / Masala Bonds refer to rupee-denominated borrowings in overseas markets. All payments relating to these bonds are expressed in rupees and the rate for conversion of the foreign currency in which the bonds are to be settled, would be the rate prevailing when such payment is made, thereby shifting the currency risk onto the investors

Earlier, overseas borrowings were predominantly in foreign currencies. These carried high currency risk due to forex fluctuation. The M.S. Sahoo Committee constituted to suggest a framework for access to domestic and capital markets, reported in 2015 that such currency risk caused the most critical market failure associated with ECB

This prodded a rethink of the policy on rupee denominated borrowings and in an innovative move in September 2015, the RBI opened up the Masala Bonds route to Indian issuers seeking competitively priced funding from the international markets. Since then, HDFC and NTPC have raised over Rs.5000 crore through issue of Masala Bonds

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Framework

Eligible

borrowers

• Any corporate or body corporate as well as Real Estate Investment Trusts (REITs),Infrastructure Investment Trusts (InvITs), Banks

Maturity• Minimum maturity period of 3 years

All-in-cost• All in cost should be commensurate with prevailing market conditions

Amount

• Under the Automatic Route the amount will be INR 50 Billion per annum. Casesbeyond this limit will require prior approval of the RBI

Underwriting

• Indian banks can act as arranger and underwriter. However, they cannot hold morethan 5 % of the issue size after 6 months of issue

Agreement

• There should be a clause in Agreement/Offer Document so as to enable the issuerto obtain the list of primary bond holders;

• The agreement / offer document should also state that the bonds can only be sold /transferred / offered as security overseas subject to compliance with IOSCO / FATFjurisdictional requirements

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Eligible Investor

Any resident investor from a FATF compliant jurisdiction or a member of aFATF style Regional Body;

Securities market regulator of the international jurisdiction is a signatory ofInternational Securities Commission’s Multilateral MOU or a signatory ofbilateral MOU of SEBI for information sharing arrangements;

Should not be from a jurisdiction having a strategic Anti-Money Laundering orCombating the Financing of Terrorism deficiencies to which counter measuresapply; or a jurisdiction that has not made sufficient progress in addressing thedeficiencies or has not committed to an action plan developed with the FATF toaddress the deficiencies

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End-Use

The proceeds can be used for all purposes except for the following:

Real estate activities except development of integrated township/affordable housing projects

Investing in capital market and using proceeds for equity investment domestically

Activities prohibited as per the FDI guidelines

On-lending to other entities for any of the above objectives;

Purchase of land

58

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Compounding of offences

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Section 13

If any person contravenes:-

• Any provision of this Act, or contravenes any rule, regulation, notification,direction or order issued in exercise of the powers under this Act, orcontravenes any condition subject to which an authorization is issued by theRBI, he shall, upon adjudication,

• be liable to a penalty up to thrice the sum involved in such contraventionwhere such amount is quantifiable,

• or up to two lakh rupees where the amount is not quantifiable,

and where such contravention is a continuing one, further penalty which mayextend to five thousand rupees for every day after the first day during which thecontravention continues.

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Compounding of offences under FEMA

• Reserve Bank has been empowered to compound the contraventions of all theSections of FEMA, 1999, except clause (a) of Section 3 of the Act.

• Directorate of Enforcement would exercise powers of compounding under clause(a) of Section 3 of FEMA, 1999 (dealing essentially with Hawala transactions).

• As a measure of customer service and in order to facilitate the operationalconvenience, compounding powers have been delegated to the Regional Officesof the Reserve Bank of India to compound specified offences under FEMA

• Contraventions relating to establishment in India of LO / BO / PO to becompoundable by FED Cell, New Delhi

• Master Direction on Compounding specifies indicative amount of compoundingfee which may be levied for offences depending upon nature of contravention,amount and time period involved

• To ensure more transparency and greater disclosure, it has been decided tohost the compounding orders passed on or after June 1, 2016 on RBI’s website(www.rbi.org.in). The data on the website will be updated at monthly intervals

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