BY CA. DEEPENDER KUMAR 1. Structure of FEMA Applies to the whole of India and all branches, offices...

FOREIGN EXCHANGE MANAGEMENT

ACT,1999BY CA. DEEPENDER KUMAR

1

Structure of FEMAApplies to the whole of India and all branches, offices and agencies outside India which are owned or controlled by a person resident in India.

FEMA has 49 sections of which 9 (section 1 to 9) are substantive and the rest are procedural/ administrative.

Section 46 of FEMA grants power to Central Government to make rules to carry out the provision of FEMA.

Section 47 of FEMA grants power to RBI to make regulations to implement its provisions and the rules made there under.

RBI is entrusted with the administration and implementation of FEMA

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Substantive Provisions

Section Description

1 Application and Commencement of FEMA

2 Definitions

3 to 9 Provisions relating to Regulations and Management of Foreign Exchange

10 to 12 Provisions relating to Authorized Person

13 to 15 Provisions relating to Contraventions and Penalties

16 to 38 Provisions relating to Adjudication, Appeal and Directorate of Enforcement

39 to 49 Miscellaneous Provisions


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ReferencesProvisions of FEMA cannot be found at one place but are spread over at different places. The FEMA contains only basic legal framework. The practical aspects are covered in Rules made by Central government and regulations made by RBI.

References :(i) Foreign Exchange Management Act,1999(ii) Rules made by Central government(iii) Regulations/notification made by RBI(iv) Consolidated FDI policies issued by DIPP (Annually)(v) Press note /press release issued by DIPP (Annually)(vi) AP (DIR Series) circular issued by RBI(vii) Master circulars issued by RBI (Annually)(viii) Website: www.rbi.org.in, www.dipp.nic.in, www.fipb.gov.in

www.deepanilassociates.com

http://www.rbi.org.in/

http://www.dipp.nic.in/

A.P. (Dir Series) Circulars Directions issued by RBI u/s. 10(4) and 11(1) of FEMA to

Authorized Persons (AP)

These directions are called – A.P. (Dir Series) Circulars

APs are Authorized Dealers, Money Changers and banks who are authorized to deal in Foreign Exchange

These Circulars are operational instructions to AP by RBI.

Legal validity of these Circulars have been upheld in the case of Prof. Krishnaraj Goswami v. RBI, [2007 (6) Bom. CR 565]

Court upheld the power of RBI to issue such Circulars based on powers conferred to RBI u/s. 10(4) & 11(1) & negated the contention that RBI has no jurisdiction to issue such Circulars


Notifications under FEMAand Master Circulars

Notifications are issued by the Central Government in the Official Gazette.

Section 47 of FEMA grants power to RBI to make regulations.

Master Circulars issued by RBI every year on 1st July to subsumes the position as on date and consolidates all the existing circulars (subject wise).


Some of the important definitions

Authorized Person Capital Account TransactionCurrent Account TransactionExportForeign ExchangePerson Person Resident in India Person resident outside IndiaRepatriate to IndiaSecurityTransfer


Residential Status under FEMAPERSON RESIDENT IN INDIA [Sec. 2(v)(i) of FEMA]:

Residing in India for more than 182 days during the course of preceding F.Y. but doesn’t include

a person going out of India or staying outside India, in either case

For or on taking up employment outside India, orfor carrying business or vocation outside India, orfor any other purpose, in such circumstances as would

indicate his intention to stay outside India for uncertain period;

a person coming to India or staying outside India otherwise than

for or on taking up employment in India,orfor carrying business or vocation in India , orfor any other purpose in such circumstances as would

indicate his intention to stay in India for uncertain period:Cont….. 8www.deepanilassociates.com

Residential Status under FEMA(ii) Any person or body corporate registered or incorporated in India,(iii) an office , branch or agency in India owned or controlled by a person resident outside India,(iv) An office branch or agency outside India owned or controlled by a person resident in India.

PERSON RESIDENT OUTSIDE INDIA[Sec. 2(w) of FEMA]: a person who is not resident in India.

Person: Person Includes:(i) An Individual, (ii) a Hindu Undivided family (iii) a company (iv) a firm (v) an association of person or body of individuals, whether incorporated or not, (vi) every artificial juridical person, not falling within any of the preceding sub clauses, and (vii)any agency, office or branch owned or controlled by such person.


Capital Account Transactions Definition U/s 2(e)"capital account transaction" means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India, and includes transactions referred to in sub-section (3) of section 6 of FEMA;

Capital Account transactions are prohibited unless generally permitted - they are regulated by RBI.

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Capital account transactions are governed by Foreign Exchange Management (Permissible Capital Account Transaction) Regulations, 2000.

Capital account transactions are classified into 2 schedules :-

Schedule I – Classes of capital account transactions of persons resident in India

Schedule II – Classes of capital account transactions of persons resident outside India

Capital Account Transactions

Cont……


Schedule I:(Classes of capital account transaction of

person resident in India)

1. Investment by a person resident in India in foreign securities.

2. Foreign currency loans raised in India and abroad by a person resident in India.

3. Transfer of immovable property outside India by a person resident in India.

4. Guarantees issued by a person resident in India in favour of a person resident outside India.

5. Loans and overdrafts (borrowings) by a person resident in India from a person resident outside India.


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6. Maintenance of foreign currency account inn India and outside India by a person resident in India.

7. Taking out of insurance policy by a person resident in India from an insurance company outside India.

8. Loans and overdrafts by a person resident in India to a person resident outside India.

9. Remittance outside India of capital assets of a person resident in India.

10.Sale and purchase of foreign exchange derivatives in India and abroad and commodity derivatives abroad by a person resident in India.




Schedule II:(Classes of capital account transaction of

person resident outside India)1. Investment in India by a person resident outside

India, that is to say : (i) issue of security by a body corporate or an

entity in India and investment therein by a person resident outside India; and

(ii) investment by way of contribution by a person resident outside India to a capital of a firm or a proprietorship concern or an association of person in India.

2. Acquisition and transfer of immovable property in India by a person resident outside India.

3. Guarantee by a person resident outside India in favour of, or on behalf of, a person resident in India.

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4. Import and export of currency/currency notes into/from India by a person resident outside India.

5. Deposits between a person resident in India and a person resident outside India.

6. Foreign currency account in India of a person resident outside India.

7. Remittance outside India of capital assets in India of a person resident outside India.


Current Account Transactions Definition U/s 2(j) of FEMA

"current account transaction" means a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transaction includes,-

(i) payments due in connection with foreign trade, other current business, services, and short term banking and credit facilities in the ordinary course of business,

(ii) payments due as interest on loans and as net income from investments,

(iii) remittances for living expenses of parents, spouse and children residing abroad, and

(iv) expenses in connection with foreign travel, education and medical care of parents, spouse and children;

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Current account transactions are governed by Foreign Exchange Management (Current Account Transactions) Rules, 2000.

Current account transactions are divided into 3 schedules in Current Account Transactions Rules:-Schedule I – Prohibited TransactionsSchedule II – Transactions requiring prior approval of Government of IndiaSchedule III – Transactions requiring prior approval of RBI

Current Account Transactions



Schedule I : Remittance out of lottery winnings Remittance of income from racing/riding etc., or

any other hobby Remittance for purchase of lottery tickets,

banned/prescribed magazines, football pools, sweepstakes etc.

Payment of commission on exports made towards equity investment in Joint Ventures/Wholly Owned Subsidiaries abroad of Indian companies.

Remittance of dividend by any company to which the requirement of dividend balancing is applicable.

Payment related to “Call Back Services” of telephones.

Remittance of interest income on funds held in Non-resident Special Rupee Scheme a/c.



Schedule I I: Cultural Tours – Approval from Ministry of Human

Resources Development (Department of Education and Culture)

Advertisement in foreign print media for the purposes other than promotion of tourism, foreign investments and international bidding (exceeding US$ 10,000) by a State Government and its Public Sector Undertakings.- Approval from Ministry of Finance, Department of Economic Affairs]

Remittance of freight of vessel charted by a PSU-Approval from Ministry of Surface Transport (Chartering Wing)

Remittance of hiring charges of transponders by (a) TV Channels (b) Internet service provider- Approval from (a) Ministry of Information and Broadcasting and/or (b) Ministry of Communication and Information Technology]

Cont……19


Schedule I I: Remittance of container detention charges Ministry of

Surface Transport (Director exceeding the rate prescribed by Director General of Shipping) – Approval from General of Shipping

Advertisement in foreign print media for the purposes other than promotion of tourism, foreign investments and international bidding (exceeding US$ 10,000) by a State Government and its Public Sector Undertakings.- Approval from Ministry of Finance, Department of Economic Affairs]

Remittance of prize money/sponsorship of sports activity abroad by a person other than International/National/State Level sports bodies, if the amount involved exceeds US $

100,000 – Approval from Ministry of Human Resource Development (Department of Youth Affairs and Sports)

Remittance for membership of P & I Club- Approval from Ministry of Finance (Insurance Division)



Schedule III: (Approval from RBI) Individuals can avail of foreign exchange facility for the

following purposes within the limit of USD 2,50,000 only. Any additional remittance in excess of the said limit for the following purposes shall require prior approval of the Reserve Bank of India.

(i) Private visits to any country (except Nepal and Bhutan). (ii) Gift or donation. (iii) Going abroad for employment. (iv) Emigration* (v) Maintenance of close relatives abroad. (vi) Travel for business, or attending a conference or specialised

training or for meeting expenses for meeting medical expenses, or check-up abroad, or for accompanying as attendant to a patient going abroad for medical treatment/check-up.

(vii) Expenses in connection with medical treatment abroad* (viii) Studies abroad* (ix) Any other current account transaction* Note the Individual may avail of exchange facility for an amount in excess of

the limit prescribed under the LRS Scheme if it is so required by a country of emigration, medical institute offering treatment or the university, respectively

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Schedule III: (Approval from RBI) Other Than Individuals The following remittances by persons other than individuals shall require

prior approval of the Reserve Bank of India.(i) Donations exceeding one per cent of their foreign exchange earnings

during the previous three financial years or USD 5,000,000, whichever is less, for

creation of Chairs in reputed educational institutes; contribution to funds (not being an investment fund) promoted by

educational institutes; contribution to a technical institution or body or association in the field of

activity of the donor Company.(ii) Commission, per transaction, to agents abroad for sale of residential flats

or commercial plots in India exceeding USD 25,000 or five per cent of the inward remittance whichever is more.

(iii) Remittances exceeding USD 10,000,000 per project for any consultancy services in respect of infrastructure projects and USD 1,000,000 per project, for other consultancy services procured from outside India.

(iv) Remittances exceeding five per cent of investment brought into India or USD 100,000 whichever is higher, by an entity in India by way of reimbursement of pre-incorporation expenses. 22

FOREIGN INVESTMENT

IN INDIA23

Significance of Foreign Investment1. Through foreign investment corporations

extend their business activity into foreign countries.

2. The main object of Foreign investment is to acquire or retain control over markets and/or productive resources.


Relevant FEMA Regulations

Consolidated FDI Policy, DIPP, Commerce

Ministry

AP Dir Circulars –

RBI’s Changes

FEMA Regulations –

Mode of Investment


Foreign Investment

Foreign Direct Investments

Automatic Route

Govt. Route

Persons Resident outside India

Foreign Portfolio

Investments

FIIs NRIs, PIO, QFIs

Foreign Venture Capital

Investments

SEBI regd. FVCI

VCF, IVCUs

Other Investments

FIIs NRIs, PIO, QFIs

Investments on non-repatriatable

basis

NRIs, PIOs

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Types of Foreign Investments


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Forms of Foreign Investments

Foreign Direct Investment

Foreign Investments under Portfolio Investment Scheme (PIS)

Foreign Venture Capital Investments

Other Foreign Investments

Immovable Properties in India


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ENTRY ROUTE of FDI

BAN ROUTE GOVT. ROUTEAUTOMATIC

ROUTE

• Business of Chit Fund• Nidhi Company• Agriculturalor

Plantation activities• Real Estate business*

or construction of farm house

• Tradingin Transferable Development Rights (TDRs)

• LotteryBusiness, Gambling and betting

• Manufacture of cigars, cigarettes or tobacco, etc

(limited extent as defined by regulations)

• The foreign investor or the Indian company should obtain prior approval of the Government of India, Ministry of Finance, Foreign Investment Promotion Board (FIPB)/ SIA for the investment. Some are:

• Tea sector including tea plantation (100%)

• Defence Industry• Print Media• Broadcasting

The foreign investor or the Indian company does not require any approval from the Reserve Bank or Government of India for the investment. Some are:•E-commerce activities•Wholesale trading•Industrial Parks•Construction: Townships, Housing, Built-up infrastructure•Coal and LigniteAutomatic Route depends on sector, sectoral cap and capitalisation norms and other eligible activities.

A person resident outside India or an entity incorporated outside India subject to FDI policy issued by DIPP.

Bangladesh’s Citizen/Entity can invest after taking FIPB approval can invest under FDI Scheme in allowed sectors.

Pakistan’s Citizen/Entity can invest after taking FIPB approval can invest under FDI Scheme in allowed sectors (except defence, space and atomic energy and sectors/ activities prohibited for foreign investment).

NRIs, resident and citizens of Nepal or Bhutan are permitted to invest in shares/ convertible debentures of Indian Company.

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Eligibility of FDI in India


Equity Shares

Compulsorily Convertible Debentures/Preference shares into equity shares and warrants

Prior to December 30, 2013, issue of other types of preference shares such as nonconvertible, optionally convertible or partially convertible, were to be in accordance with the guidelines applicable for External Commercial Borrowings (ECBs). On and from December 30, 2013 it has been decided that optionality clauses may henceforth be allowed in equity shares and compulsorily and mandatorily convertible preference shares/debentures to be issued to a person resident outside India under the Foreign Direct Investment (FDI) Scheme. The optionality clause will oblige the buy-back of securities from the investor at the price prevailing/value determined at the time of exercise of the optionality so as to enable the investor to exit without any assured return.

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Instruments of FDI


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Pricing Guidelines- Listed company

Instrument Pricing GuidelinesFresh Issue to Public At price determined by SEBI Guidelines.

Preferential Allotment Atleast at the Price determined as per SEBI guidelines by SEBI registered Merchant Banker or Chartered Accountant as per internationally accepted method of valuation on arms length basis,

Transfer of Existing shares from Resident to Non-Resident

Atleast at the Price determined as per SEBI guidelines by SEBI registered Merchant Banker or Chartered Accountant as per internationally accepted method of valuation on arms length basis

Rights Shares At a price determined by the company

Amalgamation/Merger Shares can be issued of New Company to Foreign Investors satisfying allowed sector and sectoral cap.

Buy Back of Shares/Reduction of Capital

Fall under General Permission for transfer of shares from Non-Resident to Indian Company, price shall not be more than the minimum price at which the transfer of shares can be made from a resident to a non-resident


Instruments Pricing Guidelines

Subscriber to Memorandum Shares

Issue at Face Value

Other New Allotment Chartered Accountant as per as per internationally accepted method of valuation accepted method of valuation on arms length basis,

Transfer of Existing shares from Resident to Non-Resident

Chartered Accountant as per as per internationally accepted method of valuation accepted method of valuation on arms length basis

Rights Shares At a price which is not less than the price at which the offer on right basis is made to the resident shareholders

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Pricing Guidelines – Unlisted company


Instruments Pricing Guidelines

Convertible Instrument:

Price to be determined based on the conversion formula, price at the time of conversion >= Fair Market Value at the time of issuance of instrument.

Amalgamation/Merger

Shares can be issued of New Company to Foreign Investors satisfying allowed sector and sectoral cap.

Buy Back of Shares/Reduction of Capital

Fall under General Permission for transfer of shares from Non-Resident to Indian Company, price shall not be more than the minimum price at which the transfer of shares can be made from a resident to a non-resident

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Pricing Guidelines - Unlisted company


34

The pricing of the partly paid equity shares shall be determined upfront and 25% of the total consideration amount (including share premium, if any), shall also be received upfront; The balance consideration towards fully paid equity shares shall be received within a period of 12 months.

The time period for receipt of the balance consideration within 12 months shall not be insisted upon where the issue size exceeds rupees five hundred crore and the issuer complies with Regulation 17 of the SEBI (Issue of Capital and Disclosure Requirements(ICDR)) Regulations regarding monitoring agency. Similarly, in case of an unlisted Indian company, the balance consideration amount can be received after 12 months where the issue size exceeds rupees five hundred crores. However, the investee company shall appoint a monitoring agency on the same lines as required in case of a listed Indian company under the SEBI (ICDR) Regulations. Such monitoring agency (AD Category -1 bank) shall report to the investee company as prescribed by the SEBI regulations, ibid, for the listed companies.

The pricing of the warrants and price/ conversion formula shall be determined upfront and 25% of the consideration amount shall also be received upfront. The balance consideration towards fully paid up equity shares shall be received within a period of 18 months

Pricing guidelines


Inward remittance through normal banking channels.

Debit to NRE / FCNR (B) account of a person concerned maintained with an AD category I bank.

Conversion of royalty / lump sum / technical knowhow fee due for payment or conversion of ECB, shall be treated as consideration for issue of shares.

Conversion of import payables / pre incorporation expenses / share swap can be treated as consideration for issue of shares with the approval of FIPB.

Debit to non-interest bearing Escrow account in Indian Rupees in India which is opened with the approval from AD Category – I bank and is maintained with the AD Category I bank on behalf of residents and non-residents towards payment of share purchase consideration.

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MODE of Payment


• Intimations of Receipt of Share Application Money submitted to RBI through Authorised Dealer Category- I Bank (AD) within 30 days of receipt of remittance.

• Foreign Inward Remittance Certificate (FIRC) obtain from AD, with proper indication of purpose of remittance

• In case Investor and Remitter are different, then No Objection Certificate (NOC) should obtained from Remitter in favour of Investor

• Know Your Customer should be obtained for Investor and Remitter, as the case may be.

• Unique Identification Number (UIN) will be provided by RBI for every remittance.

Intimation

• Allotment should be made with 180 days of receipt of funds• Pricing Guidelines issued by RBI to be followed.• Refund of excess share application money through Normal Banking Channel, if

not allotted within 180 days otherwise approval to be taken from RBI.

Allotment of Shares/CCDs/CCPS

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Procedural Aspect - FRESH ALLOTMENT


• Submitted to RBI through AD Bank within 30 days of allotment.

• Along with Share Valuation from Chartered Accountant.• Compliance Certificate from Company Secretary.• Board Resolution• Copy of Letter of UIN allotted of RBI.• Brief of CCD/CCPS agreement, in case CCD/CCPS are issued.• MOA & AOA in case of Subscriber to Memorandum Shares.• Registration Number will be provided by RBI on allotment.

FC-GPR

• Annual Return on Foreign Liabilities and Assets to be filed by 15 July, every year.

• It is to be filed by email, [email protected]

Annual Reporting by Indian Company

37

.


With a view to promoting the ease of reporting of transactions under foreign direct investment, the Reserve Bank of India, under the aegis of the e-Biz project of the Government of India has enabled the filing of the following returns with the Reserve Bank of India viz.

Advance Remittance Form (ARF) - used by the companies to report the foreign direct investment (FDI) inflow to RBI; and

FCGPR Form - which a company submits to RBI for reporting the issue of eligible instruments to the overseas investor against the above mentioned FDI inflow.

(A.P (DIR Series) Circular No.77 dated February 12, 2015)

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RBI reporting through-e biz platform


Sale

by R

esi

den

t to

Non

-R

esi

dent FC-TRS Submitted to RBI through AD

Bank by Resident in Quadruplicate within 60 days of receipt of Sale ConsiderationConsent letter of buyer and sellerShareholding Pattern of Investee Company (before and after)Share Valuation Certificate from Chartered AccountantCopy of Brokers’ Note, if Stock exchange SaleUndertaking from buyer for his eligibility of accruing shares as per Sectoral limit and pricing guidelines.Undertaking form FIIs, not breached SEBI guidelines S

ale

by N

on

-Resi

dent

to

Resi

dent FC-TRS Submitted to RBI through AD

Bank by Resident in Quadruplicate within 60 days of payment of Sale ConsiderationConsent letter of buyer and sellerNRIs- Consideration from NRE/NRO accountShare Valuation Certificate from Chartered AccountantNo Objection/Tax Clearance from Income Tax authority/Chartered AccountantUndertaking from buyer for his eligibility of accruing shares pricing guidelines.

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Procedural Aspect – Acquisition/ transfer of existing shares (FC-TRS)


DOWN STREAM FDI

Foreign Company

Indian Company

Another Indian

Company

Direct FDI

Indirect FDI


Condition for Indirect FDI • FDI via Indian Cos

• Owned & Controlled by Resident Indian Citizens =

Domestic Investment not counted as FDI

• Owned or Controlled by NRs = Indirect FDI

• Ownership

• >50% of Capital (Eq / CCDs / CCPS)

• Control

• Right to appoint a majority of Directors or to control

management or policy decisions including by virtue

of their Shareholding or Management Rights or

Share Holders Agareement or Voting Agreements


Foreign Venture Capital Investments

A SEBI registered Foreign Venture capital Investor (FVCI)

with specific approval from the Reserve Bank

invest in IVCU or VCF or in a scheme floated by such VCFs

subject to the condition that the domestic VCF is registered with SEBI.

FVCIs can purchase equity / equity linked instruments / debt / debt instruments, debentures of an IVCU or of a VCF or in units of schemes / funds.


Limited Liability Partnership (LLP) formed and registered under the Limited Liability Partnership Act, 2008 shall be eligible to accept Foreign Direct Investment (FDI) under Government approval route.

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FDI IN LLP


Indian Depository Receipts (IDR)

Purchase of other securities by FIIs

Investment by Multilateral Development Banks (MDBs)

Foreign Investment in Tier I and Tier II instruments issued by banks in India

Qualified Foreign Investors (QFIs) investment in the units of Domestic Mutual funds

Infrastructure Debt Funds (IDF)44

OTHER FOREIGN INVESTMENTS


Other Foreign InvestmentsPurchase of other securities by NRIs On non-repatriation basis without any limit

Purchase shares / convertible debentures issued by an Indian company

Government securities, treasury bills, units of domestic mutual funds, units of Money Market Mutual Funds

on-convertible debentures issued by an Indian Company

On repatriation basis without any limit Government dated securities Treasury bills or units of domestic mutual funds; Bonds issued by a public sector undertaking (PSU) in

India and Shares in Public Sector Enterprises being disinvested by

the Government of India, provided the purchase is in accordance with the terms and conditions stipulated in the notice inviting bids.


Buyback of Shares Reduction of Capital Buyout by Promoter Voluntary Liquidation

Exit Option


OVERSEAS

DIRECT

INVESTMENT47

Introduction

Investment by an Indian party, either under Automatic or Approval route, by way of contribution to capital or subscription to the MOA of foreign entity or by way of purchase of existing shares of foreign entity either by Investment through stock exchange; or Private placement; or Market purchase; or Investment in a Joint Venture or Wholly

Owned Subsidiary abroad.

But does not include Portfolio Investment.


Reference Material

Master Circular on Direct Investments by

residents in Joint Venture /Wholly

Owned Subsidiary abroad

www.rbi.org.inAP (DIR) series Circular issued from time to time

FEMA Notification No. 120/RB-2004 dated July7, 2004

Notification Master Circular

Website

AP (DIR Series ) Circular


Promoting global business by Indian entrepreneurs.

Promote economic and business co-operation between India and other countries.

Transfer of technology and skill, share R & D.

Access to global market and promote brand image.

Increase in exports of Plant & Machinery and goods and services

Source of Foreign Exchange Earnings – dividend, royalty, technical know-how and other entitlements.

Significance of ODI


Eligible to make overseas investment/Indian party

.

•Resident corporate entities

.

•Registered Partnership Firms/LLPs

.

•Individual/ Trust/ Society


Wholly Owned Subsidiary/JV

'Wholly Owned Subsidiary (WOS)' means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country, whose entire capital is held by the Indian party;

'Joint Venture (JV)' means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country in which the Indian party makes a direct investment

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Financial Commitment

'Financial commitment' means the amount of direct investment by way of contribution to equity and loan and guarantees issued by an Indian party to or on behalf of its overseas Joint Venture Company or Wholly Owned Subsidiary (with in the 400 per cent of the net worth of the last audited balance sheet of the Indian party)

(In case of individual it will the limit under LRS scheme)

Net worth means – paid up capital and free reserve in the Indian party


Prohibitions

• 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).

Real Estate

• However, Indian banks operating in India can set up JV/WOS abroad provided they obtain clearance under the Banking Regulation Act 1949.

Banking Business


General PermissionGeneral permission has been granted to persons residents in India for purchase / acquisition of securities in the following manner:

out of the funds held in RFC account;

as bonus shares on existing holding of foreign currency shares; and

when not permanently resident in India, out of their foreign currency resources outside India.

General permission is also available to sell the shares so purchased or acquired.


Mode of Investment

JV

/WOS Step down subsidiary (operating)

Guarantee to JV/WOS/step

down subsidiary Investment

through

SPV

Investment Mode.


Modes of Funding - ODI

Funding Modes

Drawal of foreign exchange from

AD bank

Swap of shares

Capitalization of export dues

Proceeds of ECB/FCCB

In exchange of ADR / GDR

Balance in EEFC account

Proceeds raised through ADR/GDR


Routes of Investment through ODI

Automatic RouteAn Indian Party does not require any prior approval from the Reserve Bank for making overseas direct investments. The Indian Party should approach an Authorized Dealer Category – I bank with an application in Form ODI and the prescribed enclosures / documents for effecting the remittances towards such investments.

Approval Route

Proposals not covered by the conditions under the automatic route require the prior approval of the Reserve Bank for which a specific application in form ODI with the documents prescribed therein is required to be made through the Authorized Dealer Category – I banks.


Compliances

•Board Resolution/Special Resolution for Investment in overseas entity

Step 1

•Valuation of shares only if it is acquisition of existing company

Step 2

•Reporting in Form ODI within 30 days from the remittance*

Step 3

•RBI will allot UIN for investment in entity. Second remittance to the JV/WOS cannot be made unless UIN for the first remittance is received.

Step 4

•Filing of share certificate with AD bank within 6 months

Step 5

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•Post investment changes/setting up step down subsidiary need to be reported within 30 days

Step 6

•Filing of APR by 30t

h

June of every year

Step 7

•Filing of FLA by 15t

h

July of every year

Step 8

•Repatriate to India all dues viz. dividends, royalty, technical fees, etc within 60 days of falling due.

Step 9


ODI Form

Part I

•File within 30 days from the date of ODI Made

Part II

•To be filed by AD Bank for Reporting of Remittances

Part III

•APR file every year by 30th June as per the audited/unaudited financial statements of JV/WOS abroad

Part IV

•File at the time of disinvestment of ODI with 30 days from the date of disinvestment


Significance of UIN

UIN can apply Online – Automatic Generated mail for Allotment of UIN (by the AD Bank))

Second Remittance can’t be made without getting UIN

Single UIN allotted for every investment made in a particular JV/WOS abroad by Indian party/resident individualMandatory to quote UIN in APR and ODI form at the time of second remittance and other correspondence with AD Bank


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Setting of JV/WOS BY Resident Individual under ODI Scheme

With effect from August 05, 2013, a resident individual (single or in association with another resident individual or with an ‘Indian Party’ as defined in the Notification) satisfying the criteria as per Schedule V of the Notification, may make overseas direct investment in the equity shares and compulsorily convertible preference shares of a Joint Venture (JV) or Wholly Owned Subsidiary (WOS) outside India. The limit of overseas direct investment by the resident individual shall be within the overall limit prescribed by the Reserve Bank of India under the provisions of Liberalised Remittance Scheme, as prescribed by the Reserve Bank .

(i) Resident individual is prohibited from making direct investment in a JV or WOS abroad which is engaged in the real estate business or banking business or in the business of financial services activity.

(ii) The JV or WOS abroad shall be engaged in bonafide business activity.(iii)Resident individual is prohibited from making direct investment in a

JV / WOS [set up or acquired abroad individually or in association with other resident individual and / or with an Indian party] located in the countries


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identified by the Financial Action Task Force (FATF) as "non co-operative countries and territories" as available on FATF website www.fatf-gafi.org or as notified by the Reserve Bank.(iv) The resident individual shall not be on the Reserve Bank’s Exporters Caution List or List of defaulters to the banking system or under investigation by any investigation / enforcement agency or regulatory body.(v) The JV or WOS, to be acquired / set up by a resident individual under this Schedule, shall be an operating entity only and no step down subsidiary is allowed to be acquired or set up by the JV or WOS.(vi) For the purpose of making investment under this Schedule, the valuation shall be as per Regulation 6(6)(a) of this Notification(vii) The financial commitment by a resident individual to / on behalf of the JV or WOS, other than the overseas direct investments as defined under Regulation 2(e) read with Regulation 20A of this Notification, is prohibited.(viii) Resident Individual has to follow all the reporting requirement, post investment changes requirement and disinvestment requirement as an Indian party follow.


Disinvestment

Liquidation of JV/WOS Transfer of Shares Writing off Investment


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Liberalized Remittance

Scheme (LRS)


Limit Raised- USD 125,000 per financial year to USD 250,000 per financial year for both capital and current account transactions

(A.P. (DIR Series) Circular No. 106 dated June 1, 2015)

PERMISSABLE CAPITAL ACCOUNT TRANSACTIONS opening of foreign currency bank account abroad; purchase of property abroad; making investments abroad; setting up WOS and JV abroad; extending loans**including loans in INR to NRIs who are relatives as defined

in Companies Act, 2013.

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Liberalized Remittance Scheme for Current and Capital A/c

Transactions


i. Private visits to any country (except Nepal and Bhutan)ii. Gift or donation.iii. Going abroad for employmentiv. Emigration*v. Maintenance of close relatives abroadvi. Travel for business, or attending a conference or specialized

training or for meeting expenses for meeting medical expenses, or check-up abroad, or for accompanying as attendant to a patient going abroad for medical treatment/ check-up.

vii. Expenses in connection with medical treatment abroad*viii. Studies abroad*ix. Any other current account transactionNOTE- Remittance in excess of the said limit- Prior Approval of RBI

*Individuals may avail of exchange facility for an amount in excess of the overall limit prescribed under the LRS, if it is so required by a country of emigration, medical institute offering treatment or the university respectively. 68

Purposes- Individual can avail foreign exchange facility


Cont….

Individual remits any amount under the said LRS in a financial year, then the applicable limit for such individual would be reduced from USD 250,000 by the amount so remitted:

For a person who is resident but not permanently resident in India and

• is a citizen of a foreign State other than Pakistan; or• is a citizen of India, who is on deputation to the

office or branch of a foreign company or subsidiary or joint venture in India of such foreign company,

Remittance up to his net salary

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.


Donations for educational institutions;

Commissions to agents abroad for sale of residential flats/commercial plots in India;

Remittances for consultancy services and

Remittances for reimbursement of pre-incorporation expenses

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Facilities for Persons other than individual


Section 13 of FEMA- Any Procedural aspect not followed within time frame allowed will attract penalty (a) maximum to thrice of sum involved in contravention

if not quantifiable then INR 200,000/-

Where such contravention is a continuing one, further penalty of maximum INR 5000/- every day.

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Penal Provisions


Section 15- Any contravention under section 13 may, on an application made by the person committing such contravention, be compounded within one hundred and eighty days from the date of receipt of application by the Director f Enforcement or such other officers of the Directorate of Enforcement and officers of the Reserve Bank as may be authorised in this behalf by the Central Government in such manner as may be prescribed.

Compounding of contravention can be done subject to para 7.2 of A.P. (DIR Series) Circular No. 56 Dated June 28, 2010

Para 7.2 Contraventions relating to any transaction where proper approvals or permission from the Government or any statutory authority concerned, as the case may be, have not been obtained, such contraventions would not be compounded unless the required approvals are obtained from the concerned authorities.

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POWER TO COMPOUND CONTRAVENTION


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S. No. Name of Act/ Regulation

1 Foreign Exchange Management Act,1999

2 Foreign Exchange Management (Export And Import Of Currency) Regulations, 2000

3 Foreign Exchange Management (Acquisition And Transfer Of Immovable Property In India) Regulations, 2000

4 Foreign Exchange Management (Acquisition And Transfer Of Immovable Property Outside India) Regulations, 2000

5 Foreign Exchange Management (Adjudication Proceedings And Appeal) Rules, 2000

6 Foreign Exchange Management (Borrowing And Lending In Rupees) Regulations, 2000

7 Foreign Exchange Management (Borrowing Or Lending In Foreign Exchange) Regulations, 2000

Acts and Regulations to operate and Regularizes of Foreign Exchange

transitions :


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8 Foreign Exchange Management (Encashment of Draft, Cheque, Instrument and Payment of Interest) Rules, 2000

9 Foreign Exchange Management (Authentication of Documents) Rules, 2000

10 Foreign Exchange Management (Current Account Transactions) Rules, 2000

11 Foreign Exchange (Compounding Proceedings) Rules, 2000

12 Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000

13 Foreign Exchange Management (Issue of Security in India by a Branch, Office or Agency of a Person Resident outside India) Regulations, 2000

14 Foreign Exchange Management (Deposit) Regulations, 2000

15 Foreign Exchange Management (Guarantees) Regulations, 2000


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16 Foreign Exchange Management (Realisation, Repatriation and Surrender of Foreign Exchange) Regulations, 2000

17 Foreign Exchange Management ( Foreign Currency Accounts by a Person Resident in India) Regulations, 2000

18 Foreign Exchange Management (Possession and Retention of Foreign Currency) Regulations, 2000

19 Foreign Exchange Management (Insurance) Regulations, 2000

20 Foreign Exchange Management (Remittance of Assets) Regulations, 2000

21 Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2000

22 Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000

23 Foreign Exchange Management (Establishment in India of Branch or Office or other place of business) Regulations, 2000


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24 Foreign Exchange Management (Export of Goods and Services) Regulations, 2000

25 Foreign Exchange Management (Investment in Firm or Proprietary Concern in India) Regulations, 2000

26 Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000

27 Currency Futures (Reserve Bank) Directions, 2008

28 Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004

29 Foreign Exchange Management (Offshore Banking Unit) Regulations, 2002

30 Foreign Exchange Management [Withdrawal of General Permission to Overseas Corporate Bodies (OCBs)] Regulations, 2003

31 Foreign Exchange Management (Crystallization of Inoperative Foreign Currency Deposits) Regulations, 2014


CA Deepender Kumar

DEEPENDER ANIL & ASSOCIATES

Head Office101, E-36, Jawahar park, Laxmi Nagar, Delhi-110092

Branch OfficePlot-5A, IInd Floor, Sector-3A,Rachna, Vaishali, Ghaziabad (UP)- 201010

Mob No: 9910099584 9312245584

[email protected]


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mailto:[email protected]

BY CA. DEEPENDER KUMAR 1. Structure of FEMA Applies to the whole of India and all branches, offices...

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