INBOUND INVESTMENT- FEMA PROVISIONS 23 rd October 2008 CA Manoj Shah Shah & Modi Phone :+ 91 22 2512 6399 E-Mail :[email protected] Visakhapatnam Branch

INBOUND INVESTMENT- FEMA PROVISIONS

23rd October 2008

CA Manoj Shah

Shah & Modi

Phone :+ 91 22 2512 6399

E-Mail :[email protected]

Visakhapatnam Branch of SIRC

“If you learn only methods you will be tied to

your methods, but if you learn principles you can

device your own methods.”

CA Manoj Shah - Shah & Modi 3

FEMA Overview

STRUCTURE OF THE FEMA (ACT)

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

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.

Thus RBI is entrusted with the administration and

implementation of FEMA


Difference in implementation of Income Tax Act & FEMA

Under Income Tax, issue is of taxability of income which is determined for the full year, therefore generally amendments are annual.

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.


Current & Capital A/c Transactions

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. It’s a economic definition rather than accounting or legal definition

Current A/c transaction - transaction other than a current a/c transaction


Current & Capital Account Transaction Difference between concept of Capital Assets and

Capital A/c transaction 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)


Current & Capital A/c transactions

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

prohibited whereas Capital A/c transactions are prohibited unless generally permitted.

Current A/c transactions are regulated by Central Government whereas Capital A/c transactions are regulated by RBI

Sec. 6(3) of FEMA, prescribes the class of capital a/c transactions which are regulated.


Sec. 6(4) & 6(5)

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

Sec. 6(5)- Similar provisions for Persons Resident Outside India and assets held in India


Inbound InvestmentsFEMA Provisions


“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”


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 world’s perception about India’s 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”.


Background of Inbound Investment

FDI policy is formulated by Government of India.

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.


Inbound Investment – Check Points

Investor(Other than citizen & entity of Pakistan)

Proposed Activity in India

NRI

Non-Resident

Prohibited Activities

Approval Route

Automatic Route

Mode of Remittance

Procedural Compliance at the time of Investment

Annual Compliance

NRE

Inward Remittance


Non C orporate E ntity(Notification 24)

T o Non R esident(R egulation 10A)

By Non R esident(R egulation 9 & 10B)

T ransfer of existing Shares

C orporate E ntity(Notification 20)

J / V, WOS

E stablishm ent of Branch /L iaison offi ce/ Project Offi ce

(Notification 22)

Inbound Investm ents

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)

Overview of Inbound

Investments


Foreign Direct Investment

(Schedule I - Notification 20)

Automatic Route

Approval Route:

• Annexure A activities.

• Annexure B activities beyond sectoral cap.

Activities Prohibited:

• Retail Trading.

• Automatic Energy.

• Lottery Business.

• Gambling & Betting.

• Housing & Real Estate Business.


Provisions of Notification No.20

Important Definitions: Capital - equity, Preference shares, Convertible Preference,

Convertible debentures Entity incorporated outside India - entity incorporated or

registered under the relevant statutes Govt. Approval - from SIA - DIPP or FIPB Investment on repatriation basis- sale proceeds net of taxes

eligible for repatriation out of India


Notification No.20..

Regulation 4- An Indian entity shall not issue any security to 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/de-merger

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


Basic Framework

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

(Repatriable) Schedule 4 : Investment Scheme for NRI (Non-repatriable) Schedule 5 : Investment Scheme for securities other than

share / convertible debentures Schedule 6 : Investment Scheme for Foreign Venture

Capital Investment


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


FDI Scheme

FDI Scheme can be categorized in following 3 segments: Sectors/activities where FDI is prohibited Sectors/activities which require Approval from Govt.-

Approval Route Sectors/activities which require procedural compliance and

intimation to RBI without any approval- Automatic Route of RBI


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) 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)


FDI Prohibition…continued..

Other activities prohibited are-Business of chit fund and Nidhi company, trading in TDRs, Construction of farm houses (in terms of Notification No.1- Permissible Capital Account Transactions)


Automatic Route for FDI

Available in following cases:

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)

Shares are issued up to the limits specified in Annexure B (prescribes Sectoral cap) to Schedule I (provided activity doesn’t require industrial license under Industries (Development & Regulation Act) or under the locational policy under Industrial Policy of 1991


Automatic Route for FDI (Continue..)

Shares are not issued by the Indian company with a view to acquire existing shares of any Indian Company

Shares can be issued to provider of technology, or against royalty payment or against ECB, subject to sectoral guidelines


Approval Route for FDI

Activities/Sectors requiring prior approval of

Government:

Proposals in which foreign collaborator has an existing financial or technical collaboration in the same field (Press Note 1 of 2005)

Proposals falling outside sectoral policy/cap

Activities listed in part A of Annexure A

Investment in SSI unit manufacturing items reserved for small scale sector


Provisions for Certain Specific Sectors

_________________________


FDI in SSI units

SSI unit can’t have more than 24% from any industrial undertaking either foreign or domestic

More than 24% FDI requires Government approval if items are reserved for small scale sector, it will also require industrial license.

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.

An EOU can have more than 24% equity participation from Non Resident


Trading Sector

Investment can be made under Automatic route for

Up to 100% in Wholesale/ cash & carry trading (PN 7/2008) Up to 100% in Trading for exports (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.

Up to 100% for Items sourced from small scale sector Up to 100% for Test marketing of such product for which

company has approval for manufacture


Construction Sector

100% FDI permitted under Automatic route in – 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.


Construction Sector.. Continued..

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

of 10 hectares Construction-development projects, a minimum built-up area

of 50,000 sq.mts Combination project, any one of the above two conditions

Capitalization and lock-in requirements: Minimum capitalization of UDS 10 million for wholly owned

subsidiaries and USD 5 million for joint ventures with Indian partners

The funds would have to be brought in within six months of commencement of business of the company

Original investment cannot be repatriated before a period of three years from completion of minimum capitalization

Investor may be permitted to exit earlier with prior approval of the Government through FIPB


Construction Sector .. Continued..

50% of the project to be developed within 5 years

Investors not allowed to sell undeveloped plots*

The project to conform to norms and standards as laid down in applicable regulations

Obtain all necessary approvals

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.


Construction Sector.. Continued..

Exclusion from the applicability of Press Note 2 of 2005: Hotel & Tourism (Press Note 4 of 2001) Hospitals (Press Note 2 of 2000) Special Economic Zones (Special Economic

Zones Act, 2005) Industrial Parks (PN 3/ 2008)


Construction sector for NRIs

100% investment permitted under Automatic Route in following: Development of serviced plots and construction of built-up

residential premises Investment in real estate covering construction of residential

and commercial premises including business centers and offices

Development of townships City and regional level urban infrastructure facilities,

including both roads and bridges Investment in manufacture of building materials Investment in participatory ventures in (a) to (e) above Investment in housing finance institutions which is also

opened to FDI as an NBFC.


NBFC Sector- 100% under Automatic Route in 18 activities

Minimum Capitalization Norms

Fund based NBFC Non-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.

Minimum US$ 0.5 million


FDI Scheme- General Provisions

Issue Price Listed Company- As per SEBI guidelines Unlisted Company-CCI Valuation Dividend balancing requirement abolishedRate of dividend on Preference shares Cannot exceed 300 basis points over the PLR of SBIMode of payment for inbound investment Inward remittance through banking channels Debit to NRE/FCNR A/c Capitalization of lumpsum fee, royalty and ECBs (other than

import dues deemed as ECB or Trade Credit)


Acquisition of Right Shares

NR may acquire equity/preference or CDs offered on right 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


Acquisition of shares after merger/de-merger

In case the percentage of shareholding likely to increase on account of merger/de-merger, Govt., approval & RBI approval needed

New company should not carry on agricultural, plantation or real estate business or trading in TDRs.

To file a report in 30 days with RBI


Issue of shares under ESOP

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

The scheme should be approved by SEBI

Face value of the shares to be allotted under scheme to the non resident employees not to exceed 5% of the paid up capital


PIS by NRIs

Limit of 5% by single NRI, 10% by all NRIs (this can be increased to 24%) to be maintained

Payment to come from NRE/FCNR or NRO (in case of non repatriable investment)

Delivery based purchase and sale permitted Shares purchased under PIS cannot be transferred under

private arrangements to person resident in India or outside India without prior approval of RBI

OCBs are not permitted after 29/11/2001 to invest in PIS


Investment in Shares/CDs on non repatriation basis by NRIs

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

private placement or right issue Central Govt., approval needed if investor has previous JV or

technical collaboration or trade mark agreement in the same or allied field

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


Investment in securities other than shares or CDs by Non Resident

Scheme available to FIIs & NRIs 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

NRIs can also invest in shares of Public Sector enterprise in disinvestment process

Investment on Non Repatriation basis by NRIs in – units of money market funds in India or National Plan/Saving Certificates.


Procedure under Automatic RouteIntimation to Authorized Dealer within 30 days from receipt of funds in

Annexure II to Form FC-GPR

Intimation to be filed along with KYC Report (Annexure III to Form FC-GPR gives KYC Report)

To file report in form FC-GPR (Part A of Annexure I) within 30 days from the date of issue of shares

Annual Return in FC-GPR (Part B of Annexure I) by 31st July


Procedure under Approval Route Applications for NRI investment, EOU

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

Applications for FDI other than above should be submitted to FIPB unit, DEA, MoF

Application in Form FC-IL


Time Limit for issue of shares/CDs

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


Transfer of Shares- without RBI approval/ or any procedure

Transferor Transferee Mode of Transfer

PROI- other than NRI & OCB

PROI (including NRI)

Sale or gift (prior approval of Govt., by transferee, in case transferee has previous J/V or technical collaboration in same field)

NRI/OCBs NRI Sale or gift (conditions same as above)

Note: above conditions not to apply to IT sector & certain international financial institutions/bank.


Transfers without any permission/procedural compliance

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

PROI Person Res. in India

Gift

PROI Sell on Recognized Stock Exchange

PROI Indian Company

Under buy back/ capital reduction scheme (other than financial serv sector)


Transfer of security with prior permissionTransferor Transferee Mode

Person Resident in India

NRI

Person Resident Outside India (Not being erstwhile OCBs)

Non Resident

Gift

Sale


Transfer of Shares/CDs by way of Sales From Resident to Non Resident Applicable to industries of Annexure B to FDI

schedule, except Banking, NBFC & Insurance and Financial Services sector.

Transfer doesn’t 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)


Pricing, documentation & reporting for transfer by way of sale Transfer between resident & non resident Parties involved Seller (non resident/ resident) Buyer (non resident/ resident) Duly authorized agents of seller/ buyer AD Branch Indian Company


Pricing Guidelines

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

guidelines for unlisted shares


Pricing Guidelines

For transfer from NR (including OCBs) to Resident- In case of listed shares

At prevailing price & sale effected through merchant banker or registered stock broker

In other cases- avg. (avg of daily high and low) quotations of one week preceding the date of appln with 5% variation

Price could be higher up to a ceiling of 25% as arrived above, if shares are sold to Indian promoters for passing management control


Pricing Guidelines (NR TO R). Contd..

For thinly traded shares 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

2- for consideration exceeding INR 20 lacs-at seller’s 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


Pricing Guidelines (NR TO R). Contd..

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

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


Documentation

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

(PoA in case signing by agent) Share holding pattern after investment by Non

Resident CA cert for valuation/ broker’s 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


Documentation

For sale by person resident outside India Consent letter from both seller & buyer or their agent

(PoA in 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.


Reporting by AD

R return for actual inflow/ outflow of forex Two copies of FC-TRS to FED Recording of transfer in Indian company On submission of A.D. certified copy of FC-

TRS Note- Shares purchased under PIS cannot be

transferred by way of sale under private arrangement


Investment in Firm or Proprietary Concern

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

Lanka Firm should not undertake- Print Media, Agricultural/

Plantation & dealing in land and immovable property Capital invested can’t be repatriated Income can however be repatriated


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

Permitted activities for a branch in India of a person resident outside India:

Export/Import of goods. Rendering professional or consultancy services. Carrying out research work, in which the parent company

is engaged. Promotional technical of financial collaborations between

Indian companies and parent or overseas group company. Representing the parent company in India and acting as

buying/selling agent in India. Rendering services in IT and development of software in

India.


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: Rendering technical support to the product supplied by

parent/group companies. Foreign airline/shipping company. For Liaison Office Representing in India the parent company/group company. Promoting export import from/to India. Promoting technical/financial collaborations between

parent/ group companies and companies in India. Acting as a communication channel between the parent

company and Indian company.


Application to RBI for opening branch or liaison office

A person resident outside India desiring to establish a branch or liaison office in India shall apply to RBI, in form FNC 1.


Remittance of profit or surplus

A person resident outside India shall produce following documents to the authorised dealer through whom the remittance is effected

For remittance of profit of a branch: Certified copy of the audited balance sheet and profit and

loss account for the relevant year A CA’s 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


Remittance of profit or surplus Continue…

For remittance of surplus on completion of project Certified copy of the final audited project account A CA’s 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 CA’s certificate stating that sufficient funds have been set aside for meeting all Indian tax liabilities

Auditor’s certificate stating that no statutory liabilities in respect of the project are outstanding


FIRST DESERVE AND THEN DESIRE

THANK YOU

Documents

INBOUND INVESTMENT- FEMA PROVISIONS 23 rd October 2008 CA Manoj Shah Shah & Modi Phone :+ 91 22 2512 6399 E-Mail :[email protected] Visakhapatnam Branch