INBOUND INVESTMENT- FEMA PROVISIONS

If you learn only methods you will be tied to your methods, but if you learn principles you can device your own methods.

FEMA Overview
STRUCTURE OF THE FEMA (ACT)
y FEMA has in all 49 sections of which 9

(section 1 to 9) are substantive and the rest are procedural/administrative.

y Section 46 of the Act grants power to Central Government

to makes rules and section 47 of the Act grants power to RBI to make regulations to implements its provisions and the rules made there under.
y Thus RBI is entrusted with the administration and

implementation of FEMA
3 S K Dadar, Doon University

Difference in implementation of Income Tax Act & FEMA

y Under Income Tax, issue is of taxability of income which is

determined for the full amendments are annual.

year,

therefore

generally

y Whereas FEMA regulations are there for undertaking

transaction itself, therefore clarity at the time of undertaking transaction is a must and therefore amendments keep pace with changes taking place in economy.

S K Dadar, Doon University

Current & Capital A/c Transactions

y Capital A/c transactions means a transaction which

alters assets or liabilities including contingent liabilities outside Indian of person resident in India and vice-versa. Its a economic definition rather than accounting or legal definition y Current A/c transaction - transaction other than a capital a/c transaction

S K Dadar, Doon University

Current & Capital Account Transaction

y Difference between concept of Capital Assets and

Capital A/c transaction y e.g. Import of machinery on payment of cash. From FEMA perspective it is current a/c transaction ( to be looked from Balance of payment position of Country)

S K Dadar, Doon University

Current & Capital A/c transactions

y General Policy is y Current A/c transactions are freely permitted unless

prohibited whereas Capital A/c transactions are prohibited unless generally permitted. y Current A/c transactions are regulated by Central Government whereas Capital A/c transactions are regulated by RBI y Sec. 6(3) of FEMA, prescribes the class of capital a/c transactions which are regulated.

S K Dadar, Doon University

Sec. 6(4) & 6(5)

y Sec. 6(4) A Person Resident in India, may hold, own,

transfer or invest in foreign currency, foreign security or any immovable property situated outside India- If such property was acquired, held or owned by such persons when he was resident outside India or inherited from a person who was resident outside India
y Sec. 6(5)- Similar provisions for Persons Resident Outside

India and assets held in India

S K Dadar, Doon University

Inbound Investments FEMA Provisions

S K Dadar, Doon University

If u want 1 year of prosperity grow grains, If u want 10 year of prosperity grow trees & If u want 100 years of prosperity grow people

10

S K Dadar, Doon University

Destination India
A decade and a half ago the prospect of India becoming a major player in the global economy seemed a distant dream, only a theoretical possibility. During the last 14 years there has been a sea change not only in the worlds perception about Indias future, but in our own perception about ourselves. The world has acknowledged the arrival of India. We no longer discuss the future of India: we say the future is India.

11

S K Dadar, Doon University

Background of Inbound Investment

y FDI policy is formulated by Government of India. y FEMA regulations prescribe the mode of investments i.e.

manner of receipt of funds, issue of shares/convertible debentures and preference shares and reporting of the investments to RBI.

12

S K Dadar, Doon University

Inbound Investment Check Points Investor (Other than citizen & entity of Pakistan) NRI Non-Resident Prohibited Activities Proposed Activity in India Approval Route Automatic Route Mode of Remittance Procedural Compliance at the time of Investment Annual Compliance
13 S K Dadar, Doon University

NRE Inward Remittance

Inbound Investments

Non Corporate Entity (Notification 24)

Corporate Entity (Notification 20) J/V, WOS

Establishment of Branch / Liaison office/Project Office (Notification 22)

Transfer of existing Shares

To Non Resident (Regulation 10A)

By Non Resident (Regulation 9 & 10B)

Overview of Inbound Investments

14 S K Dadar, Doon University

A. Fresh Investment. Schedules 1. FDI Scheme. i. Private / Direct Investment. ii. ADR / GDR Issue. 2. Investment by FIIs under PIS. 3. Investment by NRIs under PIS. 4. Purchase & Sale of shares by NRIs on Non Repatriable basis. 5. Purchase & Sale of Securities other than Shares or CDs by Non Resident. 6. Investment in Venture Capital undertaking by Regd. Foreign VC. B. Right Shares. (Regulation 6) C. Effect of Shares on Merger / Demerger. (Regulation7) D. ESOP. (Regulation 8)

Foreign Direct Investment

(Schedule I - Notification 20)

Automatic Route

Approval Route:

Activities Prohibited:

Annexure A activities. Retail Trading. Annexure B activities Automatic Energy. beyond sectoral cap. Lottery Business. Gambling & Betting. Housing & Real Estate Business.

15

S K Dadar, Doon University

Provisions of Notification No.20

Important Definitions: y Capital - equity, Preference shares, Convertible Preference, Convertible debentures y Entity incorporated outside India - entity incorporated or registered under the relevant statutes y Govt. Approval - from SIA - DIPP or FIPB
y Investment on repatriation basis- sale proceeds net of taxes

eligible for repatriation out of India

16

S K Dadar, Doon University

Notification No.20..
y Regulation 4- An Indian entity shall not issue any security to

y y y y y
17

any person resident outside India or record in its books any transfer of security from or to such person Regulation 5 prescribes the various schemes under inbound investment for NR and NRIs Reg 6 & 7 Acquisition of Right Shares & under merger/demerger Reg 8-Issue of shares under ESOP Reg 9 & 10- provisions relating to transfer of shares by/to Non Resident Reg 11- Repatriation of sale proceeds
S K Dadar, Doon University

Basic Framework
y Schedule 1 : FDI Scheme y Schedule 2 : FII Scheme y Schedule 3 : Portfolio Investment Scheme for NRI

(Repatriable) y Schedule 4 : Investment Scheme for NRI (Non-repatriable) y Schedule 5 : Investment Scheme for securities other than share / convertible debentures y Schedule 6 : Investment Scheme for Foreign Venture Capital Investment

18

S K Dadar, Doon University

Foreign Direct Investment

Available Financial Instruments Equity Shares, Compulsorily Convertible Preference Shares and compulsorily Convertible Debentures. Not Available to Investors who are Citizens of Pakistan OR Entities of Pakistan Available with approval of FIPB (AP (DIR) No.22 dt.19/12/2007) To Citizens & Entities of Bangladesh

19

S K Dadar, Doon University

FDI Scheme
FDI Scheme can be categorized in following 3 segments: y Sectors/activities where FDI is prohibited y Sectors/activities which require Approval from Govt.Approval Route y Sectors/activities which require procedural compliance and intimation to RBI without any approval- Automatic Route of RBI

20

S K Dadar, Doon University

FDI Prohibited in following activities or items

Retail Trading (except single branded product retailing) Atomic Energy Lottery Business Gambling and Betting Housing and Real Estate business, (other than construction of integrated township) y Agriculture (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisiculture and Cultivation of vegetables, mushrooms etc. under controlled conditions and services related to agro and allied sectors) and Plantations (Other than Tea plantations)
y y y y y

21

S K Dadar, Doon University

FDI Prohibitioncontinued..
y Other activities prohibited are-Business of chit fund

and Nidhi company, trading in TDRs, Construction of farm houses (in terms of Notification No.1Permissible Capital Account Transactions)

22

S K Dadar, Doon University

Automatic Route for FDI

Available in following cases:
y Company which is not engaged in items included in Annexure A

to Schedule I of Not.20 (Annex. A lists out activities which are prohibited and automatic route is not available) y Shares are issued up to the limits specified in Annexure B (prescribes Sectoral cap) to Schedule I (provided activity doesnt require industrial license under Industries (Development & Regulation Act) or under the locational policy under Industrial Policy of 1991

23

S K Dadar, Doon University

Automatic Route for FDI (Continue..)

y Shares are not issued by the Indian company with a view to

acquire existing shares of any Indian Company y Shares can be issued to provider of technology, or against royalty payment or against ECB, subject to sectoral guidelines

24

S K Dadar, Doon University

Approval Route for FDI

Activities/Sectors requiring prior approval of Government:
y Proposals in which foreign collaborator has an existing

financial or technical collaboration in the same field (Press Note 1 of 2005)

y Proposals falling outside sectoral policy/cap y Activities listed in part A of Annexure A y Investment in SSI unit manufacturing items reserved for

small scale sector

25 S K Dadar, Doon University

Provisions for Certain Specific Sectors _________________________

26

S K Dadar, Doon University

FDI in SSI units

y SSI unit cant have more than 24% from any industrial

undertaking either foreign or domestic y More than 24% FDI requires Government approval if items are reserved for small scale sector, it will also require industrial license. y An SSI unit, not manufacturing items reserved for Small sector, can have more than 24% equity by giving up SSI status and can go under Automatic route. y An EOU can have more than 24% equity participation from Non Resident

27

S K Dadar, Doon University

Trading Sector
Investment can be made under Automatic route for
y Up to 100% in Wholesale/ cash & carry trading (PN 7/2008) y Up to 100% in Trading for exports y (PN/4 of 2006)

Under approval from FIPB, investment is permitted Up to 51% for Retail trade of Single brand products (PN/3-06)
Any addition to the product/product categories to be sold under Single Brand would require a fresh approval of the Government.

28

Up to 100% for Items sourced from small scale sector y Up to 100% for Test marketing of such product for which company has approval for manufacture S K Dadar, Doon University

Construction Sector
100% FDI permitted under Automatic route in y Construction Development projects including housing, commercial premises, resorts educational institutions, recreational facilities, city and regional level infrastructure, townships

Note: FDI is not allowed in Real Estate Business.

29

S K Dadar, Doon University

Construction Sector.. Continued..

y Minimum area to be developed under each project:
y Development of serviced housing plots, a minimum land area of
10 hectares

y Construction-development projects, a minimum built-up area of

50,000 sq.mts

y Combination project, any one of the above two conditions

y Capitalization and lock-in requirements:

y Minimum capitalization of UDS 10 million for wholly owned subsidiaries and USD 5 million for joint ventures with Indian partners y The funds would have to be brought in within six months of commencement of business of the company y Original investment cannot be repatriated before a period of three years from completion of minimum capitalization y Investor may be permitted to exit earlier with prior approval of the Government through FIPB

30

S K Dadar, Doon University

Construction Sector .. Continued..

y 50% of the project to be developed within 5 years y Investors not allowed to sell undeveloped plots* y The project to conform to norms and standards as laid down in applicable regulations y Obtain all necessary approvals y State Government/Municipal/Local Body concerned, which approves the building/development plans, to monitor compliance of above conditions


undeveloped plots would mean where roads, water supply, street lighting, drainage, sewerage, and other conveniences, as applicable under prescribed regulations, have not been made available. Investor needs to provide this infrastructure and obtain completion certificate from concerned local body/service agency before he would be allowed to dispose off serviced housing plots.

31

S K Dadar, Doon University

Construction Sector.. Continued..

y Exclusion from the applicability of Press Note 2 of 2005:
y Hotel & Tourism (Press Note 4 of 2001) y Hospitals (Press Note 2 of 2000) y Special Economic Zones (Special Economic Zones Act, 2005) y Industrial Parks (PN 3/ 2008)

32

S K Dadar, Doon University

Construction sector for NRIs

100% investment permitted under Automatic Route in following: y Development of serviced plots and construction of built-up residential premises y Investment in real estate covering construction of residential and commercial premises including business centers and offices y Development of townships y City and regional level urban infrastructure facilities, including both roads and bridges y Investment in manufacture of building materials y Investment in participatory ventures in (a) to (e) above y Investment in housing finance institutions which is also opened to FDI as an NBFC.
33 S K Dadar, Doon University

NBFC Sector- 100% under Automatic Route in 18 activities

Minimum Capitalization Norms Fund based NBFC FDI up to 51% - US$ 0.5 million to be brought upfront. FDI above 51% to 75% - US$ 5 million to be brought upfront. FDI above 75% to 100% - US$ 50 million, of which US$ 7.5 million upfront and balance in 24 months. Non-Fund based NBFC Minimum US$ 0.5 million

34

S K Dadar, Doon University

FDI Scheme- General Provisions

Issue Price y Listed Company- As per SEBI guidelines y Unlisted Company-CCI Valuation y Dividend balancing requirement abolished Rate of dividend on Preference shares y Cannot exceed 300 basis points over the PLR of SBI Mode of payment for inbound investment y Inward remittance through banking channels y Debit to NRE/FCNR A/c y Capitalization of lumpsum fee, royalty and ECBs (other than import dues deemed as ECB or Trade Credit)
35 S K Dadar, Doon University

Acquisition of Right Shares

y NR may acquire equity/preference or CDs offered on right y y y y

basis subject to following conditions: Sectoral cap to be maintained Existing shares were acquired in accordance with the regulations Price is not lower than the price which is offered to resident shareholders Same conditions to apply regarding repatriability as are applicable to original shares

36

S K Dadar, Doon University

Acquisition of shares after merger/demerger

y In case the percentage of shareholding likely to increase on

account of merger/de-merger, Govt., approval & RBI approval needed y New company should not carry on agricultural, plantation or real estate business or trading in TDRs.
y To file a report in 30 days with RBI

37

S K Dadar, Doon University

Issue of shares under ESOP

y Indian company can issue shares to employees of its J/V or

WOS abroad
y The scheme should be approved by SEBI y Face value of the shares to be allotted under scheme to the

non resident employees not to exceed 5% of the paid up capital

38

S K Dadar, Doon University

PIS by NRIs
y Limit of 5% by single NRI, 10% by all NRIs (this can be

increased to 24%) to be maintained

y Payment to come from NRE/FCNR or NRO (in case of non

repatriable investment) y Delivery based purchase and sale permitted

y Shares purchased under PIS cannot be transferred under

private arrangements to person resident in India or outside India without prior approval of RBI y OCBs are not permitted after 29/11/2001 to invest in PIS

39

S K Dadar, Doon University

Investment in Shares/CDs on non repatriation basis by NRIs

y Scheme applies to investment other than PI y NRIs may acquire without any limit, shares under public issue,

private placement or right issue y Central Govt., approval needed if investor has previous JV or technical collaboration or trade mark agreement in the same or allied field y Not permitted- investment in companies engaged in chit fund/nidhi, agricultural/plantation or real estate business or construction of farm house or dealing in TDRs

40

S K Dadar, Doon University

Investment in securities other than shares or CDs by Non Resident

y Scheme available to FIIs & NRIs y Investment on repatriation basis in

- dated Govt., securities/treasury bills, NCD and Units of Domestic MF Other conditions on FII for composition of investment and registration with SEBI y NRIs can also invest in shares of Public Sector enterprise in disinvestment process y Investment on Non Repatriation basis by NRIs in units of money market funds in India or National Plan/Saving Certificates.
41 S K Dadar, Doon University

Procedure under Automatic Route

Intimation to Authorized Dealer y within 30 days from receipt of funds in Annexure II to Form FC-GPR
y Intimation to be filed along with KYC Report

(Annexure III to Form FC-GPR gives KYC Report) y To file report in form FC-GPR (Part A of Annexure I) within 30 days from the date of issue of shares y Annual Return in FC-GPR (Part B of Annexure I) by 31st July

42

S K Dadar, Doon University

Procedure under Approval Route

y Applications for NRI investment, EOU and Retail

Trading (Single Brand) should be submitted to SIA in DIPP

y Applications for FDI other than above should be

submitted to FIPB unit, DEA, MoF

y Application in Form FC-IL

43

S K Dadar, Doon University

Time Limit for issue of shares/CDs

y Notification No.170 dt. Nov 29, 2007,( AP (DIR) Series y y y y

Circular No. 20 dated 14th Dec 07) Shares & CDs to be issued within 180 days from the date of receipt of inward remittance or date of debit to NRE/FCNR A/c. In case Share Application is outstanding beyond a period of 180 days .. application to be made with sufficient reasons for refunding share application If 180 days have elapsed on Nov 28, 2007- approval of RBI needed either for issue or for refund

44

S K Dadar, Doon University

Transfer of Shares- without RBI approval/ or any procedure

Transferor PROI- other than NRI & OCB Transferee PROI (including NRI) Mode of Transfer Sale or gift (prior approval of Govt., by transferee, in case transferee has previous J/V or technical collaboration in same field) Sale or gift (conditions same as above) Note: above conditions not to apply to IT sector & certain international financial institutions/bank.

NRI/OCBs

NRI

45

S K Dadar, Doon University

Transfers without any permission/procedural compliance

Transferor Transferee Mode of Transfer for shares/C.Deb., of Indian Company

PROI

Person Res. Gift in India Sell on Recognized Stock Exchange Indian Company Under buy back/ capital reduction scheme (other than financial serv sector)

PROI PROI

46

S K Dadar, Doon University

Transfer of security with prior permission

Transferor Transferee Mode

Person Resident in India

Person Resident Outside India (Not being erstwhile OCBs) Non Resident

Gift

NRI

Sale

47

S K Dadar, Doon University

Transfer of Shares/CDs by way of Sales

y From Resident to Non Resident y Applicable to industries of Annexure B to FDI schedule, except y y y y y y

Banking, NBFC & Insurance and Financial Services sector. Transfer doesnt fall under SEBI takeover regulations (RBI approval for Fin services & SEBI takeover) Sectoral caps are maintained (if not then first Govt., approval & then RBI approval) From Non Resident to Resident Applicable to other than those covered under Reg.9 Both the above categories of transfer are Subject to P, D & R (pricing guidelines, Documentation & Reporting Requirements)

48

S K Dadar, Doon University

Pricing, documentation & reporting for transfer by way of sale

y Transfer between resident & non resident y Parties involved y Seller (non resident/ resident) y Buyer (non resident/ resident) y Duly authorized agents of seller/ buyer y AD Branch y Indian Company

49

S K Dadar, Doon University

Pricing Guidelines
y For transfer from Res to NR (non OCBs) y Price shall not be less than y Ruling market price for listed shares y CA certified fair valuation as per CCI guidelines for unlisted

shares

50

S K Dadar, Doon University

Pricing Guidelines
y For transfer from NR (including OCBs) to Resident- In case

of listed shares y At prevailing price & sale effected through merchant banker or registered stock broker y In other cases- avg. (avg of daily high and low) quotations of one week preceding the date of appln with 5% variation y Price could be higher up to a ceiling of 25% as arrived above, if shares are sold to Indian promoters for passing management control

51

S K Dadar, Doon University

Pricing Guidelines (NR TO R). Contd..

y For thinly traded shares y 1- consideration per seller per company is up to INR 20.0 lacs-

mutually agreed price between seller & buyer, based on current valuation methodology and valuation certificate from statutory auditors y 2- for consideration exceeding INR 20 lacs-at sellers option (a) higher of the price based on EPS multiple or NAV linked to book value multiple OR (b) prevailing market price in small lots so that entire shareholding is sold in not less than 5 trading days

52

S K Dadar, Doon University

Pricing Guidelines (NR TO R). Contd..

y In case of unlisted shares y At a price lower of two valuations- one by Statutory Auditors

and other by CA or Cat-I merchant banker registered with SEBI

53

S K Dadar, Doon University

Documentation
y Form FC-TRS in quadruplicate y For sale by person resident in India y Consent letter from both seller & buyer or their agent (PoA in y y y y

case signing by agent) Share holding pattern after investment by Non Resident CA cert for valuation/ brokers note Undertaking from the buyer that he is eligible to acquire shares and FDI limit complied with Undertaking from FII/sub account that individual ceiling prescribed by SEBI not breached

54

S K Dadar, Doon University

Documentation
y For sale by person resident outside India y Consent letter from both seller & buyer or their agent (PoA in y y y y

case signing by agent) Copies of RBI approval for NRI/OCBs to determine investment on repatriation/non repatriation basis Fair valuation certificate from CA No objection/Tax clearance certificate from income tax authority/ Chartered Accountant Undertaking from buyer for adherence to pricing guidelines.

55

S K Dadar, Doon University

Reporting by AD
y R return for actual inflow/ outflow of forex y Two copies of FC-TRS to FED

Recording of transfer in Indian company y On submission of A.D. certified copy of FC-TRS y Note- Shares purchased under PIS cannot be transferred by way of sale under private arrangement
y

56

S K Dadar, Doon University

Investment in Firm or Proprietary Concern

y Permitted to NRIs/PIOs y PIOs who are not citizen of Bangladesh, Pakistan or Sri

Lanka y Firm should not undertake- Print Media, Agricultural/ Plantation & dealing in land and immovable property y Capital invested cant be repatriated y Income can however be repatriated

57

S K Dadar, Doon University

Establishment of Branch or Liaison office in India (Notification No 22)

Permitted activities for a branch in India of a person resident outside India: y Export/Import of goods. y Rendering professional or consultancy services. y Carrying out research work, in which the parent company is engaged. y Promotional technical of financial collaborations between Indian companies and parent or overseas group company. y Representing the parent company in India and acting as buying/selling agent in India. y Rendering services in IT and development of software in India.
S K Dadar, Doon University

58

Establishment Branch or Liaison office in India (Notification No 22) Continue.

Permitted activities for a Liaison office in India of a person resident outside India: y Rendering technical support to the product supplied by parent/group companies. y Foreign airline/shipping company. y For Liaison Office y Representing in India the parent company/group company. y Promoting export import from/to India. y Promoting technical/financial collaborations between parent/ group companies and companies in India. y Acting as a communication channel between the parent company and Indian company.
59 S K Dadar, Doon University

Application to RBI for opening branch or liaison office

y A person resident outside India desiring to establish a

branch or liaison office in India shall apply to RBI, in form FNC 1.

60

S K Dadar, Doon University

Remittance of profit or surplus

A person resident outside India shall produce following documents to the authorised dealer through whom the remittance is effected y For remittance of profit of a branch:  Certified copy of the audited balance sheet and profit and loss account for the relevant year  A CAs Certificate certifying: The manner of arriving at the remittable profit That the entire remittable profit has been earned by undertaking the permitted activities, and That the profit does not include any profit on revaluation of the asset of the branch
61 S K Dadar, Doon University

Remittance of profit or surplus Continue

y For remittance of surplus on completion of project  Certified copy of the final audited project account  A CAs certificate showing the manner of arriving at the

remittable surplus  Income tax assessment order or either documentary evidence showing payment of income tax and other applicable taxes, or a CAs certificate stating that sufficient funds have been set aside for meeting all Indian tax liabilities  Auditors certificate stating that no statutory liabilities in respect of the project are outstanding
62 S K Dadar, Doon University

FIRST DESERVE AND THEN DESIRE

THANK YOU

63

S K Dadar, Doon University