C N K Knowledge Tracker..Be a Step Ahead

Transcription

1 C N K Knowledge Tracker..Be a Step Ahead January 2018 C N K & Associates LLP

2 Contents Particulars Page No. Notifications 3 Circulars 16 Disclaimer and Statutory Notice 18 C N K & Associates LLP Page 2 of 18

3 Reserve Bank of India (RBI)/Foreign Exchange Management Act, 1999 (FEMA) Notifications Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 Notification- FEMA 20/ RB dated 7 th November 2017 The RBI vide the above Notification on Foreign Exchange Management (Transfer and Issue of Security by a Person Resident outside India) Regulations, 2017 (New FEMA) has come out with consolidated FDI policy in supersession of Notification No. FEMA 20/2000-RB (Old FEMA) and Notification No. FEMA 24/2000-RB both dated 3 rd May 2000, as amended from time to time. The New FEMA eliminates several redundancies and has clarified host of interpretational issues that had plagued the Old FEMA regulations. a. Definition The New FEMA has consolidated definitions in one place that were not there in the Old FEMA. Some of these key definitions are as follows; The definitions consolidated in New FEMA are; Authorized Bank; Authorized Dealer; Convertible Note; Escrow Account; Foreign Direct Investor; Foreign Investment; Foreign Portfolio Investment; Foreign Portfolio Investor; NRE / NRO / SNRR Account, FDI Linked Performance, etc. Definitions newly introduced: New Definition (1) Capital Instruments (CI) means equity shares, debentures, preference shares and share warrants issued by an Indian company; Explanation: (a) Equity shares issued in accordance with the provisions of the Companies Act, 2013 shall include equity shares that have been partly paid-up. The expression Our Opinion The said definition has replaced the word Securities used in the erstwhile Old FEMA and has bought the same in line with Companies Act, Capital means equity shares, preference shares and convertible debentures. The main definition of capital vis-à-vis. Old FEMA has remained intact. The new definition of Capital Instruments under New FEMA expressly provides that C N K & Associates LLP Page 3 of 18

4 New Definition Debentures means fully, compulsorily and mandatorily convertible debentures. Preference shares means fully, compulsorily and mandatorily convertible preference shares. Share Warrants are those issued by an Indian Company in accordance with the Regulations issued by the SEBI Capital instruments can contain an optionality clause subject to a minimum lock-in period of one year or as prescribed for the specific sector, whichever is higher, but without any option or right to exit at an assured price. (b) Partly paid-up shares that have been issued to a person resident outside India shall be fully called-up within 12 months of such issue. 25% of the total consideration amount (including share premium, if any), shall be received upfront. (c) In case of share warrants, at least 25% of the consideration shall be received upfront and the balance amount within 18 months of issuance of share warrants. (d) Capital instruments shall include non-convertible/ optionally convertible/ partially convertible preference shares issued as on and up to 30 th April 2007 and optionally convertible/ partially convertible debentures issued up to 7 th June 2007 till their original maturity. Non-convertible/ optionally convertible/ partially convertible preference shares issued after 30 th Our Opinion warrants can be issued to a person resident outside India only in accordance with the Regulations issued by SEBI i.e. ICDR Regulations. Therefore, unlisted companies/ debt listed companies cannot issue warrants to person resident outside India. Further, as the provision related to issue of share warrants was not inserted by Companies Act, 2013 vis-à-vis Companies Act Accordingly the said definition of Warrants provided in Old FEMA under Regulation 2(ixb) has been deleted and merged with the present definition of Capital instrument. C N K & Associates LLP Page 4 of 18

5 New Definition April 2007 shall be treated as debt and shall conform to External Commercial Borrowings guidelines regulated under Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, (2) Foreign Direct Investment (FDI) means investment through capital instruments by a person resident outside India in an unlisted Indian company; or in 10% or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company; (3) Foreign Portfolio Investment (FPI) means any investment made by a person resident outside India through capital instruments where such investment is less than 10% of the post issue paid-up share capital on a fully diluted basis of a listed Indian company or less than 10% of the paid up value of each series of capital instruments of a listed Indian company; (4) Convertible Note (CN) means an instrument issued by a startup company evidencing receipt of money initially as debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of such startup company, within a period not exceeding 5 years from the date of issue of the convertible note, upon occurrence of specified events as per the other terms and conditions agreed to and indicated in the instrument; Our Opinion The definition of FDI as per New FEMA has bought in the distinction between investment made in unlisted Indian company and listed Indian company. Therefore, Investment of 10% or more on fully diluted basis in the post issue paid-up equity capital of a listed Indian company shall be regarded as FDI and anything less than that will be regarded as Foreign Portfolio Investment With the said definition, investment in capital instruments less than 10% of the post issue paid up share capital on a fully diluted basis or paid up value of a listed Indian company. The said definition is not applicable to unlisted Indian Company. The convertible note is an instrument issued by the startup companies as debt with the provision of converting the instrument in equity share within in period of 5 year at the option of startup companies on fulfilment of certain conditions. C N K & Associates LLP Page 5 of 18

6 Following definitions have been aligned with Companies Act, 2013, SEBI and erstwhile DIPP: Employee Stock Option, Startup; Capital instruments Startup Company; Sweat Equity Shares Following definitions have been deleted Foreign Institutional Investor (FII); Qualified Foreign Investor (QFI) and Warrant b. Transfer of capital instruments of an Indian company by or to a person resident outside India (NR) under Regulation 10 of New FEMA has been consolidated at one place: The conditions attached with the transfer of capital instruments between a person resident outside India to another person resident outside India or to a person resident in India under New FEMA has more or less remained same, subject to minor amendment/insertion vis-à-vis Old FEMA. No. Transfer between Conditions attached to transfer 1 NR (other than NRI and OCI) to NR 2 NRI or OCI to NR (on repatriation basis) 3 NR to R (Sale/Gift) or selling on recognized Stock exchanges as per SEBI guidelines. a) Transfer is subject to Sectoral specific conditions and government approval attached to the sector in which Company operates. b) If the aggregate of FPI and capital instruments held exceed the limits it will not result in breach of Sectoral limit provided the sale is within the prescribed limit a) Transfers are subject to Sectoral specific conditions and government approval attached to the sector in which Company operates. b) If the aggregate of capital instruments held exceed the limits envisaged in Schedule 3, it will not be reckoned as contravention provided the excess holding is sold within the prescribed time limit stipulated by RBI to a person Resident in India. a) Subject to compliance of pricing guidelines, documentation and reporting requirements of RBI. b) If held on non-repatriable basis then condition (a) above shall not apply. C N K & Associates LLP Page 6 of 18

7 No. Transfer between Conditions attached to transfer 4 R or NRI or OCI or an eligible investor to NR (on non-repatriation basis) 5 R or NR or OCI or eligible investor under Schedule 4 to NR (by way of gift on prior approval) 6 NRI or OCI or eligible investor to another NRI or OCI or eligible investor (by way of gift on non-repatriation basis) 7 NR holding Capital instrument with optionally clause. a) Subject to compliance of entry routes, Sectoral caps/investment limits, pricing guidelines and reporting requirements of RBI as specified in Schedule 4. b) The above condition shall not apply If the sale is between R to NRI or OCI a) Donee is eligible to hold such security b) Does not exceed 5% of paid up capital (on cumulative basis from single person to another single person) c) Sectoral cap is not breached d) Donor and the donee shall be a relative e) Transaction of gift does not exceed USD 50,000 during the year. f) Any other conditions as prescribed by RBI NRI /OCI or eligible investor can hold the investment on non-repatriation basis under schedule 4. Allowed to exit without the assured returns subject to: a) Pricing guidelines; and b) Minimum lock-in period of 1 year or minimum lock-in period as prescribed by in these regulations, whichever is higher. 8 Erstwhile OCB Allowed to transfer subject to RBI direction from time to time. 9 R to NR RBI has now allowed payments of 25% of total consideration of following basis: a) Defer payments or Escrow Arrangement up to period not exceeding 18 months from the date of the transfer agreement; or b) Indemnified by the seller for a period not exceeding 18 months from the date of the payment of the full consideration, if consideration paid by buyer. Provided total consideration finally paid shall be complaint with the applicable pricing guidelines. C N K & Associates LLP Page 7 of 18

8 No. Transfer between Conditions attached to transfer 10 R to NR a) Transaction of payment can be by way of an Escrow account through banking channel as per FEM (Deposit) Regulation 2016; or a) By way of guarantee as per FEM (guarantee) Regulation Transfer of Capital instrument or units of Investment vehicle by way of pledge Creation of pledge in favour of recognized lender in case of ECB, bank in India, overseas bank, NBFC registered with RBI, subject to the conditions as per Regulation 10(12) of New FEMA. Note: NR -Person Resident outside India NRI-Non-resident Indian R-Person Resident in India OCI-Overseas Citizens of India OCB- Overseas corporate body c. Rights issue or a bonus issue: The provisions in relation to rights issue and bonus issue are broadly similar to those, as under Old FEMA, the same have been bought in line with the provisions of the Companies Act Further, pursuant to the terms of the rights issue, a Non-Resident can now acquire capital instruments (other than share warrants) that are renounced by residents. The said Rights issues are now permitted to be issued at a price as determined by the company in case of a listed Indian company; and in case of unlisted Indian company at price, not less than the price it is offered to R d. Employees Stock Options Scheme (ESOP) to NR: In case of ESOP, all the provisions are similar to the Old FEMA except that, an individual who is a NR exercising an option which was issued when he/she was a R shall be allowed to hold the shares so acquired on exercising the option on a non-repatriation basis. e. Issue of Convertible Notes by an Indian startup company: A NR (other than an individual, who is citizen of Pakistan or Bangladesh or an entity which is registered/ incorporated in Pakistan or Bangladesh), may purchase Convertible Notes, issued by an Indian startup company for an amount of Rs. 25 lakh or more in a single tranche, by normal banking channels, in accordance with the Foreign Exchange Management (Deposit) Regulations, The said convertible notes are transferable subject to the entry routes and extant pricing guidelines as prescribed for capital instruments. Further, NRI or an OCI can acquire convertible notes on non-repatriation basis in accordance FEMA Regulations. C N K & Associates LLP Page 8 of 18

9 f. Merger, demerger or amalgamation of Indian companies: In case of Merger, demerger, or amalgamation of Indian companies all the provisions are similar to that of the Old FEMA except that, the word Court has been replaced with NCLT in line with the Companies Act, Further, the Indian company may issue non-convertible redeemable preference shares or nonconvertible redeemable debentures out of its general reserves by way of distribution as bonus to the shareholder s resident outside India, subject to; The Original Investment made in the Indian company by a NR is in accordance with these Regulations and the conditions specified in the relevant Schedule; The said issue is in accordance with the provisions of the Companies Act, 2013 and the terms and conditions, if any, stipulated in the scheme approved by NCLT/Competent Authority have been complied with. Indian company shall not engage in any activity/sector in which investment by a NR is prohibited. g. Prohibited activities for investment by a NR: The prohibited activities under New FEMA are same as that of Old FEMA except for 2 explanations added under the head Chit funds and Real Estate business: Explanation to Chit Funds states that FDI on non-repatriation basis form NRI and OCI will be permitted provided permission from the registrar of Chit funds is taken and subject to condition stipulated by RBI from time to time. Explanation to Real Estate business or construction of Farm House has clarified that the development of townships, construction of residential /commercial premises, roads or bridges and Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) Regulations 2014 does not form part of real estate business as the same is covered in Sectoral cap. h. Reporting requirements Delays in reporting : The person/ entity responsible reporting in forms ARF,FC-GPR,FLA, FC-TRS, ESOP, DRR, LLP(I), LLP(II), LEC(FII), LEC( NRI), CN etc. shall now be liable to pay for late submission fee, as may be decided by the RBI, in consultation with the Central Government. Downstream Investment (DI) : In New FEMA, the provisions for DI remain similar to that provided in Old FEMA except the following insertion which has been made under New FEMA: The DI should have the approval of the Board of Directors as also a Shareholders Agreement, if any; The definition of DI shall include investment by an Indian company or Limited Liability Partner (LLP) or investment vehicle in another DI Indian company or LLP In case of LLP, provision stated above would be constructed accordingly as stated in New FEMA. C N K & Associates LLP Page 9 of 18

10 The New FEMA has provided Guidelines for calculating total Foreign Investment (FI) in Indian companies. The following shall be a part of calculating total foreign investment in India: Particulars Any equity holding by a NR resulting from conversion of any debt instrument FCCBs and DRs having underlying of instruments in the nature of debt The portfolio investment held as on 31 st March 31 the previous financial year in the Indian company making the DI Forming Part or Not Yes No Yes The above method will be used for calculating foreign investment in India and would apply at every stage of investment in Indian companies and the indirect foreign investment received by a wholly owned subsidiary of an Indian company will be limited to the total foreign investment in India received by the company making the DI. i. Pricing Guidelines: The pricing of Capital Instruments ( CI ) of an Indian company, unless otherwise specified in these Regulations or the relevant Schedules shall be determined as under: FDI transaction Pricing Guidelines CI issued by Indian company to a person resident outside India Entity Listed companies Company going into delisting process Unlisted Company Convertible CI Price to be not be less than the price As per SEBI guidelines As per SEBI(Delisting of Equity Shares) Regulation,2009 The valuation of CI shall be determined as per any internationally accepted pricing methodology on an arm s length basis duly certified by CA, Merchant Banker, practicing Cost Accountants. The price should not be less than, the price/ conversion formula determined at the time of issue of CI. C N K & Associates LLP Page 10 of 18

11 FDI transaction Pricing Guidelines a) Transfer of CI from Resident to Non Resident; or b) Transfer of CI from Resident to Non Resident In case of swap of capital instruments Issue of shares to NR subscriber to Memorandum of Association under the Companies Act, In case of share warrants Entity Price to be not be less than the price Listed companies Price at with preferential allotment can be made as per SEBI guidelines Company going into delisting process Unlisted Company Price at with preferential allotment can be made as per SEBI(Delisting of Equity Shares) Regulation,2009 The valuation of CI shall be determined as per any internationally accepted pricing methodology on an arm s length basis duly certified by CA, Merchant Banker, practicing Cost Accountants. Irrespective of the amount or valuation involved in swap arrangement, the price has to be determined by a Merchant Banker registered with SEBI or Investment Banker outside India registered with appropriate authority of host country. The issue price will be the face value of the shares, subject to entry route and Sectoral caps. Their pricing and the price/ conversion formula shall be determined upfront Note: The above pricing guidelines shall not be applicable for transaction of the CI on nonrepatriable basis. j. Taxes and Remittance of sale proceeds; All transaction under these regulations shall be undertaken through banking channels in India and subject to payment of applicable taxes and other duties/ levies in India. Further, the remittances of sale proceeds of a security are to be made subject to: Net of applicable taxes to the seller of shares resident outside India; and In compliance with the pricing guidelines or the RBI s approval has been obtained for sale; C N K & Associates LLP Page 11 of 18

12 k. FDI Reporting requirements under New FEMA are as under: Form Purpose To be filed with Timeline Advance Remittance Form (ARF): Form Foreign Currency- Gross Provisional Return (FC- GPR): Annual Return on Foreign Liabilities and Assets (FLA): Form Foreign Currency- Transfer of Shares (FC- TRS) Reporting if inward remittances. Reporting of capital instruments issued to a NR person and such an issue is reckoned as FDI. Issue of participating interest/ rights in oil fields shall be reported Form FC- GPR Annual reporting by Indian company / LLP which has received FDI in the previous year(s) including the current year Following transfers need to be reported between: NR (Repatriation basis) to NR on non repatriation basis; R to NR on repatriation basis; Transfer of capital instrument on recognized stock exchange Jurisdictional Regional Office of RBI. Filling through ebiz System of RBI. Jurisdictional Regional Office of RBI. Filling through ebiz System of RBI. RBI (done vide ) Authorized Dealer Bank ( the Onus of reporting is with resident transferor / transferee) Within 30 days from date of receipt Within 30 days from date of issue of capital instruments/ participating interest/ rights in oil fields On or before the 15 th July of each year. Within 60 days of transfer of capital instruments or receipt / remittance of funds whichever is earlier. In case of transfer as per Regulation 10 (9), reporting to be done on receipt of every tranche of payment. C N K & Associates LLP Page 12 of 18

13 Form Purpose To be filed with Timeline Form Employees Stock Option (ESOP): Form Depository Receipt Return (DRR): Form (I): Form (II): LLP LLP by NR; Transfer under Regulation 10 (9) of New FEMA; Following transfers need NOT be reported NR to R on non repatriation basis Transfer of Participating interest/ rights in oil fields An Indian company issuing employees stock option to NR Reporting of issue/ transfer of depository receipts issued in accordance with the Depository Receipt Scheme, 2014 by the Domestic Custodian. LLP receiving amount of consideration for capital contribution and acquisition of profit shares Disinvestment/ transfer of capital contribution or profit share between a resident and a nonresident (or vice versa) Jurisdictional Office of RBI. RBI Jurisdictional Office of RBI. Regional Regional Within 30 days from the date of issue of ESOP. Within 30 days of close of the issue Within 30 days from the date of receipt of the amount of consideration Authorized Dealer Bank Within 60 days from the date of receipt of funds C N K & Associates LLP Page 13 of 18

14 Form Purpose To be filed with Timeline LEC(FII): (FPI transaction) LEC(NRI): (NRI /OCI Transactions) Downstream Investment (Form DI) Form Convertible Notes (CN): Purchase/ transfer of capital instruments by FPIs to be reported by Authorized Dealer Category I banks Purchase/ transfer of capital instruments by NRI or OCI to be reported by Authorized Dealer Category I banks An Indian company making DI in another Indian company, which is considered as indirect foreign investment for the investee company. Issue of CN to a NR by an Indian startup company or Transfer of CN to or from NR. RBI RBI Secretariat for Industrial Assistance, DIPP Authorized Dealer bank No timeline specified. No timeline specified. Within 30 days of such investment and, even if capital instruments have not been allotted along with the modality of investment in new/existing ventures (with/without expansion program) Within 30 days of such transfer Note: For reporting, the format, periodicity and manner of submission of such reporting shall be as prescribed by the RBI in this regard. Further, unless otherwise specifically stated in these regulations all reporting shall be made through or by an Authorized Dealer bank, as the case may be. For details refer: C N K & Associates LLP Page 14 of 18

15 Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2017 Notification -FEMA.369/2017-RB dated 14 th November 2017 The RBI vide the above Notification has amended Regulation 15 of Notification No. FEMA 120/RB-2004 dated 7 th July The amendments are as follows- In case of laws of the host, country does not require auditing of the books of accounts of Joint Venture (JV) / Wholly owned Subsidiary (WOS) in that condition. The Indian Party to obtain a certificate from the Statutory Auditors of the Indian Party certifying that law of the host country does not mandatorily require auditing of the books of accounts of JV / WOS and the figures in the APR are as per the un-audited accounts of the overseas JV / WOS. The above exemption, from filing the APR based on unaudited Balance Sheet will not be available, in respect of JV/WOS in a country/jurisdiction which is either under the observation of the Financial Action Task Force (FATF) or in respect of which enhanced due diligence is recommended by FATF or the any other country / jurisdiction as prescribed by the RBI. For details refer: Return to Contents C N K & Associates LLP Page 15 of 18

16 Circulars Section 24 and Section 56 of the Banking Regulation Act, 1949 Maintenance of Statutory Liquidity Ratio (SLR) and holdings of SLR in Held to Maturity (HTM) category Circular- RBI/ /70 dated 4 th October 2017 The RBI has decided to reduce the SLR requirement of banks from 20% of their Net Demand and Time Liabilities (NDTL) to 19.5% in a phased manner, i.e., 20% by 31 st December 2017 and 19.5% by 31 st March In order to enable banks to shift their excess SLR securities from the HTM category to Available for sale (ASF)/ Held for Trading (HFT) to comply with instructions, it has been decided to allow such shifting of the excess securities and direct sale from HTM category. This would be in addition to the shifting permitted at the beginning of the accounting year i.e. April 2017 as per Master Circular on Prudential Norms for Classification, Valuation and Operation of Investment Portfolio by Banks. For details refer: Deendayal Antyodaya Yojana - National Rural Livelihoods Mission (DAY- NRLM) - Aajeevika - Interest Subvention Scheme Circular -RBI/ /80 dated 18 th October 2017 The RBI has hosted on its website revised guidelines on Deendayal Antyodaya Yojana - National Rural Livelihoods Mission (DAY-NRLM) - Aajeevika - Interest Subvention Scheme (scheme) issued by the Ministry of Rural Development (MoRD) for implementation by public and private sector banks. Among other matters, the scheme requires that: The claims submitted by banks should be accompanied by a claim certificate (in original) certifying the claims for subvention as true and correct in the format annexed to the scheme. The claims of any bank for the quarter ending March 2018 will be settled by the MoRD only on receipt of the statutory auditor s certificate for the complete Financial Year (FY) from the bank. Any remaining claim pertaining to the disbursements made during the year and not included during the year may be consolidated separately and marked as an additional claim and submitted latest by 30 th June 2018 duly audited by the statutory auditor certifying the correctness. No claims from banks pertaining to interest subvention for FY will be admissible after 30 th June Any corrections in claims by banks will be adjusted from later claims based on the auditor s certificate, and corrections must be made on the Nodal Bank s portal accordingly. For details refer: C N K & Associates LLP Page 16 of 18

17 Directions on managing risks and code of conduct in outsourcing of financial services of NBFCs Circular -RBI/ /87 dated 9 th November 2017 The RBI has advised NBFCs to conduct a self-assessment of their existing outsourcing arrangements and bring these in line with the aforesaid Directions within 2 months from the date of this circular. For details refer: Conversion of debt into equity- Review Circular -RBI/ /101 dated 23 rd November 2017 The RBI has decided to exempt Asset Reconstruction Companies (ARCs) from the cap of maintaining shareholding of 26% of post-converted equity of the borrower company subject to compliance with certain conditions For details refer: Return to Contents C N K & Associates LLP Page 17 of 18

18 DISCLAIMER AND STATUTORY NOTICE This e-publication is published by C N K & Associates, LLP Chartered Accountants, India, solely for the purposes of providing necessary information to employees, clients and other business associates. This publication summarises the important statutory and regulatory developments. Whilst every care has been taken in the preparation of this publication, it may contain inadvertent errors for which we shall not be held responsible. The information given in this publication provides a bird s eye view on the recent important select developments and should not be relied solely for the purpose of economic or financial decision. Each such decision would call for specific reference of the relevant statutes and consultation of an expert. This document is a proprietary material created and compiled by C N K & Associates LLP. All rights reserved. This newsletter or any portion thereof may not be reproduced or sold in any manner whatsoever without the consent of the publisher. This publication is not intended for advertisement and/or for solicitation of work. Our Offices in India Ahmedabad Bengaluru Hrishikesh, 96, 7th Cross, 2 nd Floor, Vasantbaug Society, Domlur, Opp Water Tank, Gulbai Tekra Bengaluru Ahmedabad Tel. No Tel. No Chennai Mumbai Kochu Bhavan Mistry Bhavan, 3rd Floor, Ground Floor, Old No 62/1, New No 57, Dinshaw Vachha Road, Churchgate McNichols Road, Chetpet Mumbai Chennai Tel No Tel No Mumbai (Suburban Office) New Delhi 501/502, Narain Chambers, Suite 1101, M.G. Road, Vile Parle ( East) KLJ Towers,NSP Mumbai New Delhi Tel No /01/02 Tel No /7030 Pune Vadodara 4, Kumar Panorama, 1 st Floor C-201/202, Shree Siddhi Vinayak Complex, 45/18 Shankerseth Road Faramji Road, Alkapuri, Pune Vadodara Tel No /52 Tel. No Our Overseas Office Dubai Suite#17.06 Dubai World Trade Centre Shaikh Zayed Road, Dubai, P.O.Box Tel. No C N K & Associates LLP Page 18 of 18