FEMA - An Overview of relevant provisions for DTAA

BCAS - 15th intensive study course on DTAA

17 January 2015CA Shabbir Motorwala

Contents

1

• FEMA – Overview

• Important provisions

• Definitions

• Capital & Current Account Transactions

• Other provisions

• Important Regulations :

• LRS

• Inbound Investments

• Outbound Investments

• LO / BO / PO of Foreign Companies

• ECB

• Q & A

• Object - “facilitating external trade and payments and promoting orderly development and maintenance of foreign exchange market in India”

• Civil law

• Only specified transactions fully regulated [capital account transactions ]

• Citizenship not relevant - Residence criteria emphasized

• Restricted power of search, seizure, etc.

• No presumption of Mens-rea

• Contravention attracts penalty / fine and not imprisonment (except in some cases)

• Provision for compounding

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New era under FEMA

The Foreign Exchange Regulation Act, 1973 (FERA) The Foreign Exchange Management Act 1999 (FEMA)

• Object - Conservation of foreign Exchange resources”

• Criminal law type provisions

• Severe penal provisions

• All acts controlled and regulated

• Applied to Indian Citizens in/outside India and Foreign Citizens in India.

• Blanket powers of search, seizure, imprisonment, etc.

• Presumption of Mens-rea

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Overview

FEMA 1999

Appointed date 1 June 2000

FEMA Rules / Regulations

Rules notified by Central Government (E.g. Current Account Rules)

Regulations notified the RBI (Capital Account)

Consultation between the RBI and the Government

RBI (website www.rbi.org.in)

A.P. (Dir Series) – issued from time to time

Master Circulars – Released once in a year –July – but now updated periodically

F.A.Qs

• AD Bank’s Role

• Powers / responsibilities delegated to AD-Banks – their Role / concurrence very critical

• Many other statutes impact / enshrined in FEMA

• FDI Policy

• Foreign Trade Policy

• Sectoral Regulation

• NBFC

• Insurance

• Portfolio Investments Regulations - SEBI, etc.

• Income Tax

• Companies Act

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Extent, Application and Commencement

Extends to whole of India

Applies to all branches, offices and agencies outside India owned and

controlled by persons resident in India

Applies to contravention committed outside India by any person to

whom the Act applies

Section 1 of FEMA – Scope

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Definitions – Person

Includes

a) an individual,

b) a Hindu Undivided Family,

c) a Company,

d) a firm,

e) an association of persons or a body of individuals, whether

incorporated or not,

f) every artificial juridical person, not falling within any of the preceding

sub-clauses, and

g) any agency, office or branch owned or controlled by such persons

Section 2(u) – Person

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Definitions – Residents

(i) Person residing in India > 182 days during preceding financial year but does not include –

(A) Person who has gone out of India or who stays outside India, in either case

a) For or on taking up employment outside India, or

b) For carrying on outside India a business or vocation outside India, or

c) For any purpose, indicating intention to stay outside India for an uncertain period

(B) Person who has come to or stays in India, otherwise than

a) For or on taking up employment in India, or

b) For carrying on in India a business or vocation in India, or

c) For any other purpose, indicating intention to stay in India for an uncertain period

Cont’d..

Section 2(v) Person resident in India (PRI) means

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Definitions – Residents / Non-Residents

(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.

In view of above, the residential status of a Liaison office in India owned or controlled by a person resident

outside India is a Person resident in India

In view of above, the residential status of a branch outside India owned or controlled by a person resident in India

(say ICICI Bank) is a Person resident in India

Section 2(v) Person resident in India means (cont’d.)

Section 2(w) - Person resident outside India (PROI)

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

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Examples on Resident definition (1 of 2)

Mr. Johny Walker leaves India on 21.12.2014 for taking up employment

abroad.

Mr.Johny Walker will be non-resident with effect from

21.12.2014, irrespective of the fact that he was residing in India

for more than 182 days in the preceding financial year

Mrs Dixit leaves India on 15 June 2014 for USA to help her daughter

during her second pregnancy and stay with her for one to two years till

she settles down after the delivery. She will then come back to India.

Mrs. Dixit’s Residential status would be as under:

F.Y.2014-2015: Resident

F.Y.2015-2016: Non-Resident provided she does not come

back

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Examples on Resident definition (2 of 2)

Ms. Katrina Kaif comes to India on 1st June, 2014

with her husband and sets up her modeling /

business activity.

One View / practical view

Ms. Kaif would be treated as a person

resident in India with effect from her arrival

irrespective of the fact that she has not

stayed in India for more than 182 days in

preceding financial year.

Second view / more legally correct view

Ms Kaif has not fulfilled the larger condition

of staying in India for more than 182 days in

the preceding financial year and therefore

she should be treated as a non-resident.

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Definitions – NRI / PIO

NRI has been defined under FEMA Regulation 2(vi) of the FEMA - 5 (Deposit) Regulations 2000 as follows:

“An NRI is a person resident outside India who is a citizen of India or is a Person of Indian Origin”

Thus, NRI under FEMA may still be a resident under the Income tax laws.

Non Resident Indian (NRI)

Person of Indian Origin (PIO)

• PIO is defined differently in:

• Regulation 2 of FEMA 5 (Deposit) Regulations, 2000

• Regulation 2(c) of FEMA- 21 (Acquisition and Transfer of Immovable Property in India) Regulations, 2000

• Most other notifications follow the FEMA 5 definition of PIO

(Cont’d..)

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Definitions – PIO

Person of Indian Origin (PIO) (cont’d)

Regulation 2 of FEMA- 5 (Deposit) Regulations, 2000 Regulation 2(c) of FEMA 21(Acquisition and Transfer of

Immovable Property in India) Regulations, 2000

A citizen of any country other than Bangladesh or

Pakistan, if

a) he at any time held Indian passport; or

b) he or either of his parents or any of his

grand-parents was a citizen of India by virtue

of the Constitution of India or the Citizenship

Act, 1955 (57 of 1955); or

c) the person is a spouse of an Indian citizen or

a person referred to in sub-clauses (a) / (b)

above.

An individual (not being a citizen of Pakistan or

Bangladesh or Sri Lanka or Afghanistan or China or Iran

or Nepal or Bhutan), who

a) at any time held Indian passport; or

b) who or either of whose father or mother or

whose grandfather or grand mother was a

citizen of India by virtue of the Constitution of

India or the Citizenship Act, 1955 (57 of 1955).

(Until 5 Oct 2009 either father or grand father )

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Definitions – Capital Account Transactions

Means a transaction which alters the assets or liabilities -

Outside India of persons resident in India, (including Contingent Liabilities);

In India of persons resident outside India; and

Includes transactions specified in Section 6(3)

- Investments in foreign security by resident;

- Investments in any Indian security by non-residents;

- Transfer / issue of any security or foreign security by any branch, office or agency in India of a non-resident;

- Borrowing / Lending in Foreign Exchange;

- Borrowing / Lending in rupees between residents and non-residents;

- Deposits between residents and non residents;

- Holding of currency or currency notes;

- Acquisition / transfer of immoveable property in India / outside India (except on lease for = <5 years);

- Giving of guarantee / surety by resident / non-residents.

Every transaction listed above is regulated by a corresponding notification

Section 2(e) – Capital Account Transaction :

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Definitions – Current Account Transaction

Means a transaction other than a capital account transaction and includes:

Payments due in connection with foreign trade, other current business, services, short- term banking

and credit facilities in the ordinary course of business;

Payments due as interest on loans and as net income from investments;

Remittances for living expenses of parents, spouse and children residing abroad; and

Expenses on foreign travel, education and medical care of parents, spouse and children.

Section 2(j) - Current Account Transaction

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Distinction – Capital v. Current Account

• Every Transaction is either Capital or Current Account Transaction

• Rule of Thumb

- Capital Account Transaction generally prohibited unless permitted (generally or specifically)

- Current Account Transaction generally permitted unless prohibited

• Taxation and Accounting Terms not relevant

• Balance of payments based criteria

• In case of doubts refer FEMA Rules / Notifications / Circulars

• Examples:

- Import of machinery in cash – current account transactions

- Loan for investment in machinery – capital account transaction

- Import of machinery for extended credit – capital account transaction

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Section 3 – Dealing in Foreign Exchange, etc.

General or Special permission of RBI required to:

Deal in or transfer of foreign exchange or foreign securities to

person other than authorized person.

Make any payment to or for the credit of a non-resident

Receive otherwise than through authorized person any payment

by order or on behalf of a non-resident without a corresponding

inward remittance.

Enter into a financial transaction in India as consideration for or

in association with acquisition or creation or transfer of a right to

acquire any asset outside India.

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Other Provisions

Section 4 – Holding of Foreign Exchange, etc

Restricts person resident in India to hold, own or possess or transfer any foreign exchange, foreign security or immovable property situated outside India.

Section 5 – Current Account Transaction

Permits drawal of foreign exchange from authorized dealers for a Current Account Transaction

Central Government empowered to impose reasonable restrictions

Section 6 – Capital Account Transaction

Permits drawal of foreign exchange for permissible Capital Account Transactions

RBI to regulate Capital Account Transactions in consultation with Central Government or generally

General permission to PRI to hold foreign exchange assets, etc. (ss. 4)

General permission to NR to hold Indian assets, etc (ss. 5)

RBI to regulate to BO / Office / other place of business in India of PROI (ss. 6)

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Other Provisions

Section 7 – Export of goods and services

Exporter of goods under obligation to furnish to RBI:

Detailed declaration of exports in prescribed form

Required information to ensure realization of export proceeds

Directions by RBI to Exporter of goods for ensuring receipt of export proceeds.

Exporter of services obliged to furnish to RBI or other authority prescribed declaration.

Section 8 – Realization and repatriation of foreign exchange

Person resident in India obliged to take all reasonable steps to realize and repatriate to India all foreign exchange due or accrued.

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Other Provisions

Section 9 – Exemption from realization and repatriation in certain cases:

Possession of foreign currency or coins upto limits

Specified foreign currency accounts upto limits by specified persons

Foreign exchange acquired before 8th July, 1947

Donees to hold foreign exchange upto limits

Foreign exchange acquired from employment, business, trade, vocation, services, honorarium, gifts, inheritance or other legitimate means upto limits

Other specified foreign exchange receipts

Section 10, 11 and 12 – Authorized Person (AP)

RBI to authorize persons to act as authorized dealer, money changer or off-shore banking unit or in any other manner

Control / Penalty on Authorized Person

Power of RBI to inspect AP

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Other Provisions

Section 13 – Penalties

Upto thrice the amount involved in cases of quantifiable contraventions

Upto Rs. Two lakhs for non-quantifiable contraventions plus Rs. 5,000 per day

Section 14 – Orders of Adjudicating Authority

Section 15 – Power to compound contravention

Section 16 – Appointment of Adjudicating Authority

Section 17 – Appeal to Special Director (Appeals)

Section 19 – Appeal to Appellate Tribunal

Section 20 to 35 – Adjudication and appeal related provisions

Section 36 to 38 – Provisions relating to Enforcement Directorate

Section 39 to 41 – Miscellaneous provisions

Section 42 – Contravention by Companies – persons in charge / responsible covered

Section 43 to 49 – Other provisions

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Important Rules / Regulations in FEMA

Regulations Issued By RBI Sections Master Circular Reference dated 1 July 2014

Capital Account Transactions:

FEMA 120 – Outbound Investment

Section 6(3)

Master Circular No. 11/2014-15

FEMA 20 – Inbound Investment Master Circular No. 15/2014-15*

FEMA 21 – Acquisition / Transfer of Immovable Property in India Regulations

Master Circular No. 4/2014-15

FEMA 22 – Establishment in India of Branch or Office or Other place of business Section 6(6)

Master Circular No. 7/2014-15

Current Account Transactions:

FEMA 23 – Export of Goods and Services

Section 7 Master Circular No. 14/2014-15

Import of Goods and Services Section 5 Master Circular No. 13/2014-15

* One also needs to refer Consolidated FDI policy (effective 1 April 2014)

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FEMA - Current Account Transactions Rules 2000

Transactions expressly prohibited – Schedule I read with Rule 3

Transactions which require prior approval of Government of India

– Schedule II read with Rule 4

Transactions which require prior approval of RBI – Schedule III

read with Rule 5

Relaxations from Rule 4 and 5 for many items paid from Resident

Foreign Currency (RFC) Account and Exchange Earners Foreign

Currency (EEFC) Accounts.

Payments by International Credit Card also possible

FEMA Current Account Transaction Rules

The relevant Master circular for Current Account Transaction is Miscellaneous Remittances from India- Facilities for Residents- Master Circular No- 06/2014-15

dated 1 July 2014

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Sr. No. Transaction Limits without any RBI approval

7 Maintenance of close relatives abroad (also refer Note below)

(i) net salary (after deduction of taxes, contribution to provident fund andother deductions) of a person who is resident but not permanently residentin India and –

(a) is a citizen of a foreign State other than Pakistan; or

(b) is a citizen of India, who is on deputation to the office or branch orsubsidiary or joint venture in India of such foreign company.

(ii.) exceeding USD 100,000 per year, per recipient, in all other cases.

Explanation: For the purpose of this item, a person resident in India onaccount of his employment or deputation of a specified duration(irrespective of length thereof) or for a specific job or assignments, theduration of which does not exceed three years, is a resident but notpermanently resident.

Current Account Transactions--Schedule III read with Rule 5

Note:

• Foreign Citizen / NRI employed in India can also receive salary (net of tax) overseas if on deputation to office / branch / JV / Subsidiary in India under FEMA 10

• Foreign Citizen employed in India can also remit his salary (net of tax) to his foreign currency account maintained outside India

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Sr. No. Transaction Limits without any RBI approval

15 Consultancy services

'infrastructure project‘ are those related to –

(i) Power,

(ii) Telecommunication,

(iii) Railways,

(iv) Roads including bridges,

(v) Sea port and air port,

(vi) Industrial parks, and

(vii) Urban Infrastructure (water supply, sanitation and sewage)

For Infrastructure Projects - USD 10,000,000 per project

For other – USD 1,000,000 per project

Current Account Transactions--Schedule III read with Rule 5

Note:

• Erstwhile limits on payment of Royalty for Know-how transferred done away with and no rigor exits for availing know-how services from outside India

• Payment for software, data-access and various type of services freely permissible

• On behalf payments by Overseas Entities for Residents may not be treated as Current Account Transactions

LRS available to all Resident individuals (RI) including minors

Each RI can invest / remit overseas up to USD 1,25,000 per financial year for any permissible current / capital account transaction or combination of both – family members can consolidate and remit

RI can acquire and hold shares, ESOP, Mutual Fund, VCF or any other asset outside India including immovable property without prior approval of RBI using the LRS.

RI can open, hold and maintain foreign currency accounts with a bank outside India for remittances under the scheme without the prior approval of RBI.

With effect from August 5, 2013 RI’s are permitted to set up Joint Ventures (‘JV’) or Wholly Owned Subsidiaries (‘WOS’) outside India for bonafide business activities only (as stipulated) within the overall LRS ceiling

Income and sum remitted need not be brought back into India and can be reinvested overseas

Remittances inter alia not permitted for:

Remittance directly or indirectly to Bhutan, Nepal, Mauritius or Pakistan;

Remittances to countries identified by the Financial Action Task Force as ‘non-co-operative Countries or Territories’

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Liberalized Remittance Scheme (‘LRS’) – An Overview

An Overview of Inbound Investment - FEMA 20 – Schedules (2/2)

Schedule 1

FDI Scheme for Foreign Investors including NRIs

Automatic Route or Approval Route i.e. prior approval from the Foreign Investment Promotion Board

Negative lists

Schedule 2 / 2A

FII including sub-account / Registered Foreign Portfolio Investors (RFPI) Investments under PIS

RFPI = FIIs + QFIs

Schedule 3

NRIs Investment on Indian Stock Exchange on repatriation / non-repatriation basis under PIS

Schedule 4

NRI Investment on non-repatriation basis

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Schedule 5

Purchase and sale of securities other than shares or convertible debentures by Non-Resident (FIIs, QFI and NRIs)

Schedule 6

Foreign Venture Capital Investors Investment Scheme (SEBI registered)

Schedule 7

IDR by eligible foreign companies in India

Schedule 8

Investment by QFI in shares (old regime)

Schedule 9

FDI in LLPs – prior approvall of the FIPB

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Inbound Investments – Schedule 1 - FDI in an Indian Company

• Key regulatory matrix

• Automatic Route i.e. General permission v. Approval Route i.e. prior FIPB and / or RBI approval

• Includes downstream investments and calculation of indirect equity

• Sectoral / performance related conditions e.g. minimum capitalization norms for NBFCs,

• Instrument related conditions – Plain Equity v. CCPS / CCDs

• Valuation for issue / transfer of shares – Any Internationally accepted method of valuation for unlisted company(statutory auditor/ any CA / merchant banker)

• Timelines within which shares / convertible instruments are issued (180 days criteria)

• Special cases – mergers, bonus, rights issue, esop, etc.

• Key Filings with RBI through AD Banks

• Receipt of share application with KYC of investor – 30 days (UIN allotted by RBI)

• Issue of Shares / convertible instruments within 180 days - Form FC GPR within 30 days (RIN allotted by RBI)

• Annual Return of Foreign Liabilities and Assets - 15 July

• Other filings with AD Banks for transfer of shares between Rs and NRs

• Form FC-TRS (60 days)

• Government / DIPP Intimation for downstream investments within 30 days

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Inbound - LO, BO and PO in India of Foreign Company

Key regulatory matrix

• No foreign company can set-up a place of business without general permission or specific approval of RBI

• Specified activities and conditions for Liaison Office (LO) / Branch Office (BO) / Project Office (PO)

• LO – primarily only communication channel and representation activities

• BO – specified permitted activities such as Export –Import / Professional & Consultancy / Research /Technical Services / Ites & software / Airline and Shipping

• PO – project specific work

• Set-up of LO / BO in India by Foreign Company needs prior RBI approval and is subject to conditions

• Application to RBI through AD Banks + eligibility norm (NBFC: only LO allowed for limited time)

• PO set-up under General Permission i.e. AD Bank’s approval subject to eligibility framework

• Each option comes with its own set of regulatory complexity and compliance requirements

• LO / BO / PO winding up power with AD Banks and also LO’s period extension power is also with AD Banks

• Foreign Bank’s LO and BO governed not by FEMA but by Banking Regulation Act

• Other cases – setting up by BO in SEZ by Foreign Companies, LOs of Foreign Insurance Companies, etc.

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Outbound Investments – i.e. Indian Company / Party investing Overseas

• Key regulatory matrix for investing in overseas JV / WOS

• Automatic Route (file Form ODI with AD Bank at remittance stage) v. Approval Route (RBI)

• An upper cap on aggregate overseas investments in all ventures with fair valuation and filing obligation

• 400% of net-worth as per last audited B/Sh for Indian Company/ Partnership Firm / LLP

• Equity, loan and specified percentage of guarantees covered in financial commitment ceiling

• Additional conditions for overseas investments in Financial Services Sector

• Several other parameters and complexities exists including for write-offs / divestments

• Individuals investing in operating single layer JV / WOS within overall LRS ceiling covered

• Most common issues: Target investment / acquisition through multiple layer SPVs + Round Tripping +Bonafide business activity v. Financing / Portfolio Investments

• Statutory Auditor’s certificate for each limp of overseas investment

• All the terms and conditions of Outbound Investment complied with

• Each case / certificate is likely to be unique and time sensitivity adds to the difficulties

• RBI allots UIN for each overseas JV / WOS against Form ODI required at investment stage

• Annual filings with RBI – Form APR (30 June / earlier six months from year end)

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Outbound Investments – i.e. Indian Company LO / BO outside India

• Regulatory Framework

• Indian Company / residents allowed to set-up following overseas

• LO

• BO

• PO

• Warehouse

• Agents / consignment agents

• Setting up LO / BO/ PO, etc treated as a current account transactions

• In general, no immovable property can be acquired overseas except on lease for less than five years

• Foreign currency account can be maintained overseas with permission of AD-Banks

• Limits specified for remittances to these bank accounts and realization of incomes.

• Detail guidelines for projects / onsite work outside India

• PEM

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ECBs…. The Dream girl

• Very Rigid regulatory framework and un-clarity exists on several fronts

• Automatic Route (i.e. prior RBI registration – Loan Registration Number ) v. Approval Route (prior approval)

• Eligible borrower and Recognized Lender

• Amount and Minimum Average Maturity Period (MAMP)

• All-in-cost ceilings

• End-use

• No guarantee by Banks / NBFCs in India

• Security

• Parking of ECB proceeds and interim utilization

• Prepayment and Refinancing

• Compliances - Initial Registration, Monthly filings and certification by AD Bank + CA

• Special cases – Conversion of ECB into Equity, FCCB, FCEB, etc

• Several powers delegated to AD Banks

• Changes in drawdown / repayment schedule subject to maintenance of original MAMP

• CAs / CS to certify ECB Compliance in LRN application (Form 83) and Monthly Form ECB 2

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Questions

Answers

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Thank You !

The views in this presentation are personal views of the Presenter. Further, the information contained is of a general natureand is not intended to address the circumstances of any particular individual or entity. Although, the endeavor is to provideaccurate and timely information, there can be no guarantee that such information is accurate as of the date it is received orthat it will continue to be accurate in the future. No one should act on such / this information without appropriateprofessional advice which is possible only after a thorough examination of facts / particular situation.