CTC S BASIC COURSE ON FEMA & TAXATION OF FOREIGN REMITTANCE (JOINTLY WITH THE MALAD CHAMBER OF TAX CONSULTANTS) Overview of FEMA

Transcription

1 CTC S BASIC COURSE ON FEMA & TAXATION OF FOREIGN REMITTANCE (JOINTLY WITH THE MALAD CHAMBER OF TAX CONSULTANTS) Overview of FEMA Presented by: Mr. Paresh P. Shah P.P. Shah & Associates Chartered Accountants ppshahandassociates.com 29 April 2017 P. P. Shah & Asso. 1

2 Overview Foreign Exchange Management Act Overview Important definitions under FEMA Fundamentals of FEMA FEMA Practice FEMA Current Account Transaction Rules & Case study Investments in India under Ntf. 20 FDI under Schedule 1, NRIs on non-repatriation basis under Schedule 4 and LLPs under Schedule 9 Overseas Direct investments including LRS & Case Study Immovable Property in India with Case Study Export & Import of Goods, Services & Projects with Case Study Online Payment Gateways Settlement of Import & Export 29 April 2017 P. P. Shah & Asso. 2

3 Overview Abbreviations: Authorised Dealer(AD), Capital Account transaction (CAP), Current Account Transaction(CAT), Foreign Exchange(FE), Government of India (GOI), Notification no.(notf.), Person Resident Outside India(PROI), Person Resident in India (PRII), Non Resident Indian (NRI), Person of Indian Origin (PIO), Reserve Bank of India (RBI), Non repatriable basis (NRB), Repatriable basis(rb), Subject to (SBT), Registered Foreign Portfolio Investor (RFPI), Qualified Foreign Investor (QFI), Foreign Institutional Investor (FII), Alternate Investment Fund (AIF), Foreign Venture Capital Investor (FVCI), Indian Venture Capital Undertaking (IVCU) 29 April 2017 P. P. Shah & Asso. 3

4 Overview of Foreign Exchange Management Act Applies to whole of India and all branches, offices and agencies outside India, which are owned or controlled by person resident in India Extra territorial jurisdiction Broadly, the objectives of FEMA are: (i) To facilitate external trade and payments; and (ii) To promote the orderly development and maintenance of foreign exchange market. The Act has assigned an important role to the RBI in the administration of FEMA. FEMA has total 49 sections in which sections 1 to 9 are substantive and the rest are procedural /administrative to carry out function such as Appellate, Investigation, search and authorization to various statutory bodies to make rules, regulations, amendments Section 46 of the Act grants power to Central Government to makes rules and section 47 (as amended by Finance Act, 2015) of the Act grants power to RBI to make regulations to implements its provisions and the rules made there under; also provides that earlier regulations made by RBI, for which power now vests with Central Govt. remain valid until amended / rescinded by Central Govt. Every Rule and Regulation made under this Act shall be laid before each house of parliament Section 48. Section 49 deals with Repeal and savings Finance Act, 2015 has amended Sections 2, 6, 13, 18, 46 & 47 and inserted new Section 37A 29 April 2017 P. P. Shah & Asso. 4

5 Section Overview of Foreign Exchange Description Management Act 1 Application and commencement of FEMA w.e.f. 1/6/ Definitions (amended by Finance Act, 2015 to include Authorised Officer and Competent Authority ) 3 to 9 Substantive provisions, Dealing in FE, No drawal of FE, CAT, CAP, Export & Import, Repatriation, Possession of FE etc. (Section 6 amended by Finance Act, 2015 to provide that equity flows shall be under Central Govt.) 10 to 12 Authorized person Delegation of power by RBI,ADs & Documents 13 to 15 Contraventions and penalties (Section 13 amended by Finance Act, 2015 for penalty for holding foreign exchange, security or property in excess of threshold specified in new S. 37A) 16 to 38 Adjudication, Appeal and Directorate of enforcement [new Section 37A vide Finance Act, 2015: Special provisions relating to assets held outside India in contravention of section 4] 39 to 49 Miscellaneous provisions, Power of RBI, Power of Government of India, Procedure for issue of Notification etc. Sunset clause for FERA upto 31 st May 2002, Repeal and Savings. [Section 46 & 47 amended for change in 29 April 2017 P. P. Shah & Asso. 5 powers of Govt. & RBI respectively]

6 Overview of Foreign Exchange Management Act Section Description 3 Dealing in foreign exchange by any Person in India. Receipt by PRII without Remittance, Payment in India by PRII with a right O/I 4 Holding of foreign exchange, Security and Immovable property by PRII. 5 Current account transactions, List and Restrictions 6 Capital account transactions-powers of RBI, Central Govt. and the list. 7 Export of goods and services- Declaration, Information, Direction to receive FE. 8 Realisation and repatriation of foreign exchange 9 Exemption from realization and repatriation in certain cases And possession of FE 29 April 2017 P. P. Shah & Asso. 6

7 Important Definitions under FEMA S. 2(e) capital account transaction" means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India, and includes transactions referred to in sub- section (3) of section 6 S. 2(j) current account transaction" means a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transaction includes,- (i) payments due in connection with foreign trade, other current business, services, and short- term banking and credit facilities in the ordinary course of business, (ii) payments due as interest on loans and as net income from investments, (iii) remittances for living expenses of parents, spouse and children residing abroad, and (iv) expenses in connection with foreign travel, education and medical care of parents, spouse and children 29 April 2017 P. P. Shah & Asso. 7

8 Important Definitions under FEMA S. 2(v) " person resident in India" means- (i) a person residing in India for more than one hundred and eighty- two days during the course of the preceding financial year but does not include- (A) 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 other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period; (B) a person who has come to or stays in India, in either case, 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, in such circumstances as would indicate his intention to stay in India for an uncertain period; 29 April 2017 P. P. Shah & Asso. 8

9 Important Definitions under FEMA S. 2(v) " person resident in India" means (con t) (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 S. 2(w) " person resident outside India" means a person who is not resident in India 29 April 2017 P. P. Shah & Asso. 9

10 Important Definitions under FEMA Non-Resident Indian (NRI) means an individual resident outside India who is a citizen of India or is an Overseas Citizen of India cardholder ( OCI ) within the meaning of section 7 (A) of the Citizenship Act, Persons of Indian Origin cardholders registered as such under Notification No /4/98 F.I. dated issued by the Central Government are deemed to be Overseas Citizen of India cardholders OCI is wider in scope than PIO which used to be up to 3 generations of foreign citizens. Now up to 4th generation of foreign citizens can be considered as OCI. Further, there are additional conditions in case of spouses that marriage should have subsisted for at least two years prior to application for OCI card. 29 April 2017 P. P. Shah & Asso. 10

11 Important Definitions under FEMA Following categories of foreign nationals are eligible for registration as Overseas Citizen of India (OCI) Cardholder:- (1) Who was a citizen of India at the time of, or at any time after the commencement of the Constitution i.e ; or (2) who was eligible to become a citizen of India on ; or (3) who belonged to a territory that became part of India after ; or (4) who is a child or a grandchild or a great grandchild of such a citizen; or (5) who is a minor child of such persons mentioned above; or (6) who is a minor child and whose both parents are citizens of India or one of the parents is a citizen of India; or (7) spouse of foreign origin of a citizen of India or spouse of foreign origin of an Overseas Citizen of India Cardholder registered under section 7A of the Citizenship Act, 1955 and whose marriage has been registered and subsisted for a continuous period of not less than two years immediately preceding the presentation of the application. Note : No person, who or either of whose parents or grandparents or great grandparents is or had been a citizen of Pakistan, Bangladesh or such other country as the Central Government may, by notification in the Official Gazette, specify, shall be eligible for registration as an Overseas Citizen of India Cardholder. 29 April 2017 P. P. Shah & Asso. 11

12 Issues PIO to OCI change FEMA Notification No. 5(R) relating to Deposits by non-residents still continues with definition of Person of Indian origin" as amended in-line with OCI definition. Accordingly, as per FEMA 5(R): Person of Indian Origin (PIO) means a person resident outside India who is a citizen of any country other than Bangladesh or Pakistan or such other country as may be specified by the Central Government, satisfying the following conditions: a) Who was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955); or b) Who belonged to a territory that became part of India after the 15th day of August, 1947; or c) Who is a child or a grandchild or a great grandchild of a citizen of India or of a person referred to in clause (a) or (b); or d) Who is a spouse of foreign origin of a citizen of India or spouse of foreign origin of a person referred to in clause (a) or (b) or (c) Explanation: for the purpose of this sub-regulation, the expression Person of Indian Origin includes an Overseas Citizen of India cardholder within the meaning of Section 7(A) of the Citizenship Act, April 2017 P. P. Shah & Asso. 12

13 Issues PIO to OCI change However, FEMA Notification No. 21 relating to Acquisition & Transfer of Immovable Property in India by NRIs & PIOs still continues with definition of Person of Indian origin" without any amendment. Accordingly, as per FEMA 21: A Person of Indian Origin' means an individual (not being a citizen of Pakistan or Bangladesh or Sri Lanka or Afghanistan or China or Iran or Nepal or Bhutan) who (i) at any time, held an Indian Passport or (ii)who or either of whose father or mother or whose grandfather or grandmother was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955). 29 April 2017 P. P. Shah & Asso. 13

14 Fundamentals of FEMA Foreign Exchange belongs to Govt. of India except permitted.(sec 5 about Current Account Transaction and Sec 6 about Capital Account Transactions) Dealing in Foreign Exchange by PRII as well as by PROI is regulated(section 3 of The FEMA ) Dealing between PRII and PROI in Rupees is also regulated(borrowing and Lending in Rupees, deposit in Rupees, Gifts in India by PROI except to relatives etc) Permissible Capital Account or Current Account Transaction -Drawal of Foreign Exchange are specific to purposes for which they are granted. 29 April 2017 P. P. Shah & Asso. 14

15 SEC. 3: Dealing in foreign exchange, etc. Fundamentals of FEMA Save as otherwise provided in this Act, rules or regulations made there under, or with the general or special permission of the Reserve Bank, no person shall- (a) deal in or transfer any foreign exchange or foreign security to any person not being an authorized person; (b) make any payment to or for the credit of any person resident outside India in any manner; (c) receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner. Explanation.- For the purpose of this clause, where any person in, or resident in, India receives any payment by order or on behalf of any person resident outside India through any other person (including an authorized person) without a corresponding inward remittance from any place outside India, then, such person shall be deemed to have received such payment otherwise than through an authorized person; (d) enter into any 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 by any person. Explanation.- For the purpose of this clause," financial transaction" means making any payment to, or for the credit of any person, or receiving any payment for, by order or on behalf of any person, or drawing, issuing or negotiating any bill of exchange r promissory note, or transferring any security or acknowledging any debt. 29 April 2017 P. P. Shah & Asso. 15

16 Fundamentals of FEMA SEC. 4: Holding of foreign exchange, etc. Save as otherwise provided in this Act, no person resident in India shall acquire, hold, own, possess or transfer any foreign exchange, foreign security or any immovable property situated outside India. SEC. 5: Current account transactions Any person may sell or draw foreign exchange to or from an authorized person if such sale or drawal is a current account transaction: Provided that the Central Government may, in public interest and in consultation with the Reserve Bank, impose such reasonable restrictions for current account transactions as may be prescribed. SEC. 6: Capital account transactions (before amendments by Finance Act, 2015) (1) Subject to the provisions of sub- section (2), any person may sell or draw foreign exchange to or from an authorized person for a capital account transaction. (2) The Reserve Bank may, in consultation with the Central Government, specify-. (a) any class or classes of capital account transactions which are permissible; (b) the limit up to which foreign exchange shall be admissible for such transactions: Provided that the Reserve Bank shall not impose any restriction on the drawal of foreign exchange for payments due on account of amortization of loans or for depreciation of direct investments in the ordinary courts of business. 29 April 2017 P. P. Shah & Asso. 16

17 Fundamentals of FEMA SEC. 6: Capital account transactions (con t) (3) Without prejudice to the generality of the provisions of sub- section (2), the Reserve Bank may, by regulations, prohibit, restrict or regulate the following- (a) transfer or issue of any foreign security by a person resident in India; (b) transfer or issue of any security by a person resident outside India; (c) transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India; (d) any borrowing or lending in foreign exchange in whatever form or by whatever name called; (e) any borrowing or lending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India; (f) deposits between persons resident in India and persons resident outside India; (g) export, import or holding of currency or currency notes; (h)transfer of immovable property outside India, other than a lease not exceeding five years, by a person resident in India; (i) acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India; (j) giving of a guarantee or surety in respect of any debt, obligation or other liability incurred- (i) by a person resident in India and owed to a person resident outside India; or (ii) by a person resident outside India. 29 April 2017 P. P. Shah & Asso. 17

18 Fundamentals of FEMA SEC. 6: Capital account transactions (con t) (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 currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India. Thus Asset held abroad can be inherited however for asset in India one may have to look for the concerned notification for inheritance two residents of such asset outside India (5) A person resident outside India may hold, own, transfer or invest in Indian currency, security or any immovable property situated in India if such currency, security or property was acquired, held or owned by such person when he was resident in India or inherited from a person who was resident in India. This is similar to note on 6(4) for inheritance of assets in India between two non Residents (6) Without prejudice to the provisions of this section, the Reserve Bank may, by regulation, prohibit, restrict, or regulate establishment in India of a branch, office or other place of business by a person resident outside India, for carrying on any activity relating to such branch, office or other place of business. 29 April 2017 P. P. Shah & Asso. 18

19 Fundamentals of FEMA SEC. 8: Realisation and repatriation of foreign exchange. Save as otherwise provided in this Act, where any amount of foreign exchange is due or has accrued to any person resident in India, such person shall take all reasonable steps to realize and repatriate to India such foreign exchange within such period and in such manner as may be specified by the Reserve Bank. Note: The above is dealt with by Foreign Exchange Management (Realisation, repatriation and surrender of foreign exchange) Regulations,2015 issued under Notification No. FEMA 9 (R)/2015-RB dt. December 29, April 2017 P. P. Shah & Asso. 19

20 Fundamentals of FEMA SEC. 9: Exemption from realization and repatriation in certain cases. The provisions of sections 4 and 8 shall not apply to the following, namely:- (a) possession of foreign currency or foreign coins by any person up to such limit as the Reserve Bank may specify; (b) foreign currency account held or operated by such person or class of persons and the limit up to which the Reserve Bank may specify; (c) foreign exchange acquired or received before the 8th day of July, 1947 or any income arising or accruing thereon which is held outside India by any person in pursuance of a general or special permission granted by the Reserve Bank; (d) foreign exchange held by a person resident in India up to such limit as the Reserve Bank may specify, if such foreign exchange was acquired by way of gift or inheritance from a person referred to in clause (c), including any income arising there from; (e) foreign exchange acquired from employment, business, trade, vocation, services, honorarium, gifts, inheritance or any other legitimate means up to such limit as the Reserve Bank may specify y; and (f) such other receipts in foreign exchange as the Reserve Bank may specify. Note: The above is dealt with by Foreign Exchange Management (Possession and Retention of Foreign Currency) Regulations,2015 issued under Notification No. FEMA 11 (R)/2015- RB dt. December 29, 2015 and Foreign Exchange Management (Export & Import of Currency) Regulations,2015 issued under Notification No. FEMA 6 (R)/2015-RB dt. December 29, April 2017 P. P. Shah & Asso. 20

21 Section 6 of FEMA - amendments by Finance Act, 2015 (1) Subject to the provisions of sub-section (2), any person may sell or draw foreign exchange to or from an authorized person for a capital account transaction. (2) The Reserve Bank may, in consultation with the Central Government, specify (a) any class or classes of capital account transactions which are permissible; any class or classes of capital account transactions, involving debt instruments, which are permissible; (b) the limit up to which foreign exchanges shall be admissible for such transactions: (c) any conditions which may be placed on such transaction Provided that the Reserve Bank or the Central Government shall not impose any restriction on the drawal of foreign exchange for payment due on account of amortization of loans or for depreciation of direct investments in the ordinary course of business. (2A) The Central Government may, in consultation with the Reserve Bank, prescribe (a) any class or classes of capital account transactions, not involving debt instruments, which are permissible; (b) the limit up to which foreign exchange shall be admissible for such transactions; and (c) any conditions which may be placed on such transactions. (3) Omitted; (7) For the purposes of this section, the term debt instruments shall mean, such instruments as may be determined by the Central Government in consultation with the Reserve Bank. 29 April 2017 P. P. Shah & Asso. 21

22 Section 46 of FEMA - amendments by Finance Act, 2015 Power to make rules. (1) The Central Government may, by notification, make rules to carry out the provisions of this Act (2) Without prejudice to the generality of the foregoing power, such rules may provide for, (a) the imposition of reasonable restrictions on current account transactions under section 5; (aa) the instruments which are determined to be debt instruments under subsection(7) of section 6; (ab) the permissible classes of capital account transactions in accordance with subsection(2a) of section 6, the limits of admissibility of foreign exchange, and the prohibition, restriction or regulation of such transactions; ; (gg)the aggregate value of foreign exchange referred to in subsection (1) of section 37A 29 April 2017 P. P. Shah & Asso. 22

23 FEMA Practice PRIIs PROIs Current Account Transactions Capital Account Transactions Section 3 of FEMA applicable to both PRIIs & PROIs Capital Account Transactions Schedules I, II & III of FEMA (Current Account Transactions) Rules, 2000 Schedule I of FEMA Notf. 1 Schedule II of FEMA Notf. 1 Exceptions: LRS Scheme Except some items of Sch. III, all items are subsumed with LRS - See next slide Exceptions: FEMA Notf April 2017 P. P. Shah & Asso. 23

24 FEMA Practice PRIIs- Exceptions to LRS Scheme Individuals Persons other than Individuals (iv) Emigration. (vii) Expenses in connection with medical treatment abroad. (viii) Studies abroad. Remittances in excess of specified limits towards: i. Donations to reputed technical / educational institutions; ii. Commissions to agents abroad for sale of property in India; iii. Remittances for consultancy services for infra projects; iv. Remittances by way of reimbursement of preincorporation expenses P. P. Shah & Asso. 24

25 FEMA Practice Government RBI A.D. Banks Current Account Transactions Industrial Policy Prior to Amendment-CAP Debt related CAP Rules a. Sectoral guidelines b. Public Sector AP DIR Circulars c. Hazardous d. Small Scale Master Directions / Master Circular in case where no 29 April 2017 P. P. Shah & Asso. directions are issued 25

26 Deposit- Notf.5(R) Banking Accounts of PROI plus few cases in Notf. 10(R) FEMA Practice PROI Foreign Citizen NRIs Other entities [Can open for limited purpose as mentioned in Notf.5(R) & 10(R) [Notf.5(R) ] [Notf.10 (R) ] Branch /Liaison - Notf. 22(R) NA NA Prior approval through AD [except citizen of 8 countries] Project office NA NA Auto Route with conditions except 7 citizens Immovable property in India- Notf.21 X [ For branch, office or other place of business for carrying on in India any activity, excluding a liaison office] 29 April 2017 P. P. Shah & Asso. 26

27 Partnership business in India- Notf.24 Borrowings in rupees FEMA Practice 29 April 2017 P. P. Shah & Asso. 27 PROI Foreign Citizen NRIs Other entities X (Prior approval on Repatriation basis) (Auto Route on non repatriation basis,repatriation -Prior approval Restricted only to rupee borrowings Notf 4 -From relative SBT End use restrictions.(reg 8B) -Special provision for housing loan by AD in rupee to non resident and loan against security of shares and immovable property (Reg.8 and 7) -body corporate registered or incorporated in India may grant rupee loan to its employees who is a non-resident Indian or a Person of Indian Origin(Regulation 8A) -Loan for acquiring share of Indian co. under ESOP (Reg.7) -loan granted to a non-resident by an authorised dealer, in accordance with Regulation 7, may be repaid by any relative of the borrower in India by crediting the borrower's loan account through the bank account of such relative.(reg7a) (Prior approval on repatriation basis)

28 Lending in FE Lending in rupee Lending by way of Deposits FEMA Practice PROI Foreign Citizen NRIs Other entities Close relative in Foreign exchange- Notf.3 Indian co- NCD- Notf.4 Notf.5 against fund held in account Schedule 6 & 7 of notf.5(r), Loan from NRO account, Commercial paper ECB Portfolio Investment Notf. 20 schedule 2, 2A,5,8 [Notf schedule 3 and 5 Notf. 20 schedule 2, 2A,5,8 FDI Note: Schedule 2 is for FII and its sub accounts only and Schedule 8 is for QFIs. SEBI (FII) Regn & QFI framework have been replaced by SEBI (RFPI) Regn and accordingly, RFPIs can invest under Schedule 2A RFPI route Notf schedule 1,6,9,11 Notf schedule 1,4, 6,9 Notf schedule 1,6,9,11 29 April 2017 P. P. Shah & Asso. 28

29 FEMA Practice Individual PRII Other entities Current Account transaction FE Account Export of goods and service- Notf. 23(R) PEM- A.P. Dir cir 32 dt 20/10/03 A.P. Dir cir /6/2013 & 51 dt 20/09/13; Memorandum of Instructions on Project and Service Exports (PEM) July 2014 Branch /Liaison /Project office outside India Notf. 47/2001,A.P. Dir 39 dt 20/4/2002,A.P. Dir cir 18 dt 4/12/2006; FEMA Notf. 10(R) Notification 10(R),RFC,RFC(domestic), EEFC Overseas Investment Notf April 2017 P. P. Shah & Asso. 29

30 FEMA Practice PRII Individual Other entities Borrowing in Foreign Exchange Borrowing in rupee Notf.3 From close relative, from bank outside India for execution of turnkey project outside India, foreign currency credit from o e seas supplie, Bu e s edit & ECB Notf.4 From NRI, PIO(to entities other than o s N ep B Notf.5(R) Deposit on non- repatriation basis, Repatriation basis(public) Notf.3 ECB as per Guidelines as to rate, end use, eligible lenders Notf.3 ECB as per Guidelines Notf.4 NCD(Public)(Nrep B or RB) 29 April 2017 P. P. Shah & Asso. 30

31 FEMA Practice Individual PRII Other entities Lending in FE Lending in rupee. Immovable property abroad Notf.3- Out of EEFC for trade related purpose Notf.4 to close relative ( Regulation 8B) -loan granted to a non-resident by an authorised dealer, in accordance with Regulation 7, may be repaid by any relative of the borrower in India by crediting the borrower's loan account through the bank account of such relative.(reg.7a) Notf.7(R) Notf.3 to its WOS or JV outside India, to its employee outside India Notf.4 -body corporate registered or incorporated in India may grant rupee loan to its employees who is a non-resident Indian or a Person of Indian Origin(Regulation 8A) -Special provision for housing loan by AD in rupee to non resident and loan against security of shares and immovable property (Reg.8 and 7) -Loan for acquiring share of Indian co. under ESOP (Reg.7) Notf. 120 for bonafide overseas Business activities LRS Any permitted CAT or CAP SBT restrictions & provision 29 April 2017 P. P. Shah & Asso. 31

32 FEMA Practice Structure the transaction as compliant with conditions of Automatic route Permissible transactions of every person either PRII or that of PROI are specific as to General or Specific Approval. eg. Schedule 1 to 11 of Notf20,Fema 24 and Purpose of Notf 20/21/FDI. Purpose of drawal-specific to use. Ability to structure any transaction as Current account transaction Interpretation of the provision, intention and philosophy is preferable over the literal meaning. A Circular law- Dynamics 29 April 2017 P. P. Shah & Asso. 32

33 FEMA Practice Recent issue of Master Directions Foreign Exchange Management Act was enacted in 1999 with 25 original notifications came into force with effect from June 1, Over the years the regulations framed under FEMA have had over 330+ amendments. Keeping in view the objective of promoting ease of doing business, a need was felt to consolidate the regulations and rationalise them in the light of evolving business environment and changing practices in cross-border transactions relating to external trade and payments. 17 Master Directions issued on 04 January Consolidated relevant A.P (DIR Series) Circulars issued so far All master regulations will be fully updated and placed online. Reserve Bank will issue Master Directions on all regulatory matters. The Master Directions to be issued will consolidate instructions on rules and regulations framed by the Reserve Bank under various Acts including banking issues and foreign exchange transactions. The process of issuing Master Directions involves issuing one Master Direction for each subject matter covering all instructions on that subject. Any change in the rules, regulation or policy will be communicated during the year by way of circulars. The Master Directions will be updated suitably and simultaneously whenever there is a change in the rules/regulations or there is a change in the policy. All the changes will get reflected in the Master Directions available on the RBI website along with the dates on which changes are made. Explanations of rules and regulations will be issued by way of Frequently Asked Questions (FAQs) after issue of the Master Directions in easy to understand language wherever necessary. The existing set of Master Circulars issued on various subjects will stand withdrawn with the issue of the Master Direction on the subject. 29 April 2017 P. P. Shah & Asso. 33

34 FEMA Practice - Revised Notifications & Master Directions NTF. No. Subject Revised NTF. No., if issued Master Direction, if issued 1 Permissible Capital Account Transactions Issue of Security in India by a branch, office - - or agency of a PROI 3 Borrowing and lending in Foreign currency - FED No. 5 / Borrowing and lending in Rupees - FED No. 6 / Deposits by NRs FEMA 5(R)_ FEM (Deposit) Regn dt. FED No. 14 / Export and Import of foreign currency FEMA 06(R)_ FEM (Import & Export of Currency) Regn 2015 dt Acquisition and transfer of immovable FEMA 7(R)_ FEM (Acquisition and Trnsfr of FED No. 12 / properties outside India Immovable Properties outside India) Regn 2015 dt Guarantees FE realisation, repatriation, surrender FEMA 09(R)_ FEM (Realisation, repatriation, - surrender of FX) Regn 2015 dt Foreign Currency Accounts by a PRII FEMA 10(R)_ FEM (Foreign Currency Accounts FED No. 14 / by PRII) Regn 2015 dt Possession and retention of Foreign FEMA 11(R)_ FEM (Possession and Retention of - currency FC) Regn 2015 dt Insurance FEMA 12(R)_ FEM (Insurance) Regn 2015 dt FED No. 9 / Remittance of assets in India FEMA 13(R)_ FEM (Remittance of Assets) Regn FED No. 13 / dt April 2017 P. P. Shah & Asso. 34

35 FEMA Practice - Revised Notifications & Master Directions NTF. No. Subject Revised NTF. No., if issued Master Direction, if issued 14 Manner of receipt and payment FEMA 14(R)_ FEM (Manner of Receipt and Payment) Regn 2016 dt Definition of Currency FEMA 15(R)_ FEM (Currency) Regn 2015 dt Receipt and payment to person outside India 17 Transaction in Indian rupees with resident of Nepal and Bhutan Post Office (Postal Money Orders) FEMA 18(R)_ FEM (Postal Money Order) Regn 2015 dt Overseas Direct Investment - FED No. 15 / FDI, PIS Immovable property in India - FED No. 12 / Branch etc in India FEMA 22(R)_ FEM (Branch Liaison Project FED No. 10 / office) Regn 2016 dt Export of Goods & Services FEMA 23(R)_ FEM (Export of Goods & Services) Regn 2015 dt Investment in Firm or Proprietary concern in India Foreign exchange derivative contracts April 2017 P. P. Shah & Asso FED No. 16 /

36 FEMA Practice - Revised Notifications & Master Directions Subject Master Direction Import of Goods & Services FED No. 17 / Liberalized Remittance Scheme FED No. 7 / Compounding of Contraventions FED No. 4 / Other Remittance facilities (current account) FED No. 8 / Reporting under FEMA FED No. 18 / Misc Directions that do not figure in other Master Directions (TDS on remittances, repatriation of assets abroad & under LRS, Medical expenses of NRI, Routing of funds to India, SIT - sharing of information, IFSC guidelines, FEMA & Black Money Act) FED No. 19 / Money Changing Activities FED No. 3 / Vostro Accounts by Non-Resident Exchange Houses FED No. 2 / Gold Monetisation Scheme 2015 dt _amended to DBR.IBD.No.45/ / April 2017 P. P. Shah & Asso. 36

37 FEMA (Current Account Transaction) Rules, 2000 Current account transaction means a transaction other than a capital account transaction Section 5 of FEMA: Any person may sell or draw foreign exchange to or from an authorised person if such sale or drawal is a current account transaction: Provided that the Central Government may, in public interest and in consultation with the Reserve Bank, impose such reasonable restrictions for current account transactions as may be prescribed Current account transactions are covered by Foreign Exchange Management (Current Account Transaction ) Rules,2000 ( Current Account Transaction Rules ) Current account transaction are divided into 3 schedules in current Account Transactions rules: SCHEDULE I -Transactions which are prohibited SCHEDULE II -Transactions which require prior approval of the Central Government SCHEDULE III- Transactions which require prior approval of the RBI only if the limits or conditions specified therein are exceeded or not met 29 April 2017 P. P. Shah & Asso. 37

38 Current Account Transaction (Contd..) Current account transactions are freely permitted unless prohibited they are regulated by Central Government Rule 3 of FEM (CAT) Rules, 2000 Prohibition on drawal of Foreign Exchange - Drawal of foreign exchange by any person for the following purpose is prohibited, namely:- (a) a transaction specified in the Schedule I; or (b) a travel to Nepal and/or Bhutan; or (c) a transaction with a person resident in Nepal or Bhutan; Provided that the prohibition in clause (c) may be exempted by RBI subject to such terms and conditions as it may consider necessary to stipulate by special or general order. 29 April 2017 P. P. Shah & Asso. 38

39 Current Account Transaction (Contd..) As per Rule 4 of Current Account Transaction Rules, 2000 No person shall draw foreign exchange for a transaction included in the Schedule II without prior approval of the Government of India : Provided that this rule shall not apply where the payment is made out of funds held in Resident Foreign Currency (RFC) Account of the remitter. As per Rule 5 of Current Account Transaction Rules, 2000 Every drawal of foreign exchange for transactions included in Schedule III shall be governed as provided therein : Provided that this rule shall not apply where the payment is made out of funds held in Resident Foreign Currency (RFC) Account of the remitter. 29 April 2017 P. P. Shah & Asso. 39

40 Current Account Transaction (Contd..) SCHEDULE I -Transactions which are prohibited a) Remittance out of lottery winnings. b) Remittance of income from racing/riding, etc., or any other hobby. c) Remittance for purchase of lottery tickets, banned/prescribed magazines, football pools, sweepstakes etc. d) Payment of commission on exports made towards equity investment in Joint Ventures/Wholly Owned Subsidiaries abroad of Indian companies. e) Remittance of dividend by any company to which the requirement of dividend balancing is applicable. f) Payment of commission on exports under Rupee State Credit Route, except commission up to 10% of invoice value of exports of tea and tobacco. g) Payment related to Call Back Services of telephones. h) Remittance of interest income on funds held in Non-resident Special Rupee Scheme a/c. 29 April 2017 P. P. Shah & Asso. 40

41 Current Account Transaction (Contd..) SCHEDULE II -Transactions which require prior approval of the Central Government Sl. No. Purpose of Remittance Ministry/Department of Govt. of India whose approval is required 1 Cultural Tours Ministry of Human Resources Development (Department of Education and Culture) 2 Advertisement in foreign print media for the purposes other than promotion of tourism, foreign investments and international bidding (exceeding US$ 10,000) by a State Government and its Public Sector Undertakings. Ministry of Finance, Department of Economic Affairs] 29 April 2017 P. P. Shah & Asso. 41

42 Current Account Transaction (Contd..) 3 Remittance of freight of vessel charted by a PSU 4 Payment of import [through ocean transport] by a Govt. Department or a PSU on c.i.f. basis (i.e., other than f.o.b. and f.a.s. basis) 5 Multi-modal transport operators making remittance to their agents abroad 6 Remittance of hiring charges of transponders by (a) TV Channels (b) Internet service providers Ministry of Surface Transport (Chartering Wing) Ministry of Surface Transport (Chartering Wing) Registration Certificate from the Director General of Shipping a)ministry of Information and Broadcasting b)ministry of Communication and Information Technology] 29 April 2017 P. P. Shah & Asso. 42

43 Current Account Transaction (Contd..) 7 Remittance of container detention charges Ministry of Surface Transport (Director exceeding the rate prescribed by Director General of Shipping) 8 [***] General of Shipping 9 Remittance of prize money/sponsorship of sports activity abroad by a person other than International/National/State Level sports bodies, if the amount involved exceeds US $ 100, [***] Ministry of Human Resource Development (Department of Youth Affairs and Sports 11 Remittance for membership of P & I Club Ministry of Finance (Insurance Division) 29 April 2017 P. P. Shah & Asso. 43

44 Current Account Transaction (Contd..) SCHEDULE III (As per Rule 5) Facilities for individuals 1. Individuals can avail of foreign exchange facility for the following purposes within the limit of USD 2,50,000 only. Any additional remittance in excess of the said limit for the following purposes shall require prior approval of the Reserve Bank of India. (i) Private visits to any country (except Nepal and Bhutan). (ii) Gift or donation. (iii) Going abroad for employment. (iv) Emigration. (v) Maintenance of close relatives abroad. (vi) Travel for business, or attending a conference or specialised training or for meeting expenses for meeting medical expenses, or check-up abroad, or for accompanying as attendant to a patient going abroad for medical treatment/check-up. (vii) Expenses in connection with medical treatment abroad. (viii) Studies abroad. (ix) Any other current account transaction: Provided that for the purposes mentioned at item numbers (iv), (vii) and (viii), the individual may avail of exchange facility for an amount in excess of the limit prescribed under the Liberalised Remittance Scheme as provided in regulation 4 to FEMA Notification 1/2000-RB, dated the 3rd May, 2000 (hereinafter referred to as the said Liberalised Remittance Scheme) if it is so required by a country of emigration, medical institute offering treatment or the university, respectively: 29 April 2017 P. P. Shah & Asso. 44

45 Current Account Transaction (Contd..) Provided further that if an individual remits any amount under the said Liberalised Remittance Scheme in a financial year, then the applicable limit for such individual would be reduced from USD 250,000 (US Dollars Two Hundred and Fifty Thousand Only) by the amount so remitted : Provided also that for a person who is resident but not permanently resident in 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 of a foreign company or subsidiary or joint venture in India of such foreign company, may make remittance up to his net salary (after deduction of taxes, contribution to provident fund and other deductions). Explanation : For the purpose of this item, a person resident in India on account of his employment or deputation of a specified duration (irrespective of length thereof) or for a specific job or assignments, the duration of which does not exceed three years, is a resident but not permanently resident : Provided also that a person other than an individual may also avail of foreign exchange facility, mutatis mutandis, within the limit prescribed under the said Liberalised Remittance Scheme for the purposes mentioned herein above. 29 April 2017 P. P. Shah & Asso. 45

46 Current Account Transaction (Contd..) Facilities for persons other than individual 2. The following remittances by persons other than individuals shall require prior approval of the Reserve Bank of India. (i) Donations exceeding one per cent of their foreign exchange earnings during the previous three financial years or USD 5,000,000, whichever is less, for (a) creation of Chairs in reputed educational institutes; (b) contribution to funds (not being an investment fund) promoted by educational institutes; (c) contribution to a technical institution or body or association in the field of activity of the donor Company. (ii) Commission, per transaction, to agents abroad for sale of residential flats or commercial plots in India exceeding USD 25,000 or five per cent of the inward remittance whichever is more. (iii) Remittances exceeding USD 10,000,000 per project for any consultancy services in respect of infrastructure projects and USD 1,000,000 per project, for other consultancy services procured from outside India. Explanation : For the purposes of this sub-paragraph, the expression "infrastructure" shall mean as defined in explanation to para 1(iv)(A)(a) of Schedule I of FEMA Notification 3/2000- RB, dated the May 3, (iv) Remittances exceeding five per cent of investment brought into India or USD 100,000 whichever is higher, by an entity in India by way of reimbursement of pre-incorporation expenses. 29 April 2017 P. P. Shah & Asso. 46

47 Case study I (Travel Allowance) Travel abroad Kindly advise Mr. Traveller from India to a place (other than Nepal and Bhutan) outside India, as to what is the maximum amount he can spent on his private visit to a tourist destination or a business visit outside India? Lead to the Solution: Allowance for Private Visit in Foreign Currency, Allowance for debit to the Credit Card of the PRII, RFC Account, RFC (D) Account, Export of INR. Business Visit. Payment to Indian operator Hospitality abroad Branch abroad 29 April 2017 P. P. Shah & Asso. 47

48 Overview of legal provision Case study I (Travel Allowance) Sec 2(e) of Foreign Exchange Management Act defines capital transaction as capital account transaction" means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India, and includes transactions referred to in sub- section (3) of section 6 Sec 2 (j) of Foreign Exchange Management Act defines current transaction as " current account transaction" means a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transaction includes,- (i) payments due in connection with foreign trade, other current business, services, and short- term banking and credit facilities in the ordinary course of business, (ii) payments due as interest on loans and as net income from investments, (iii) remittances for living expenses of parents, spouse and children residing abroad, and (iv) expenses in connection with foreign travel, education and medical care of parents, spouse and children 29 April 2017 P. P. Shah & Asso. 48

49 Case study I Section 5 of FEMA states that Any person may sell or draw foreign exchange to or from an authorized person if such sale or drawal is a current account transaction: Provided that the Central Government may, in public interest and in consultation with the Reserve Bank, impose such reasonable restrictions for current account transactions as may be prescribed. Accordingly restriction on current transaction is divided into three categories: Schedule I of FEM(CAT)Rules- deals with the transaction which are prohibited Schedule II of FEM(CAT)Rules- deals with the transaction which requires prior approval of Central government Schedule III of FEM(CAT)Rules- deals with the transaction which requires prior approval of RBI if amounts are exceeding the amount or conditions stated in the schedule 29 April 2017 P. P. Shah & Asso. 49

50 Case study I As per rule 5 of FEM(CAT)Rules - Prior approval of Reserve Bank. Every drawal of foreign exchange for transactions included in Schedule III shall be governed as provided therein : Provided that this rule shall not apply where the payment is made out of funds held in Resident Foreign Currency (RFC) Account of the remitter. As per rule 6 (1)Nothing contained in rule 4 or rule 5 shall apply to drawal made out of funds held in Exchange Earners Foreign Currency (EEFC) account of the remitter. Rule 6 (2) Notwithstanding anything contained in sub-rule (1), restrictions imposed under rule 4 or rule 5 shall continue to apply where the drawal of foreign exchange from the Exchange Earners Foreign Currency (EEFC) account is for the purpose specified in items 10 (omitted ) and 11 (membership of club) of Schedule II, or items 3 (gift), 4 (donation), 11 (commission), 16 (omitted ) and 17 (reimbursement of preliminary expns.) of Schedule III as the case may be.(sch. III now replaced) As per rule 7 of FEM(CAT)Rules - Nothing contained in rule 5 shall apply to the use of International Credit Card (ICC) for making payment by a person towards meeting expenses while such person is on a visit outside India. As per Master Directions on Other Remittance facilities for residents, it should be noted that Resident individuals maintaining foreign currency accounts with an Authorised Dealer in India or a bank abroad, as permissible under extant Foreign Exchange Regulations, are free to obtain ICCs issued by overseas banks and other reputed agencies. Thus, ICCs are different than the credit cards issued by domestic banks which can be used internationally by residents on their overseas travel. Such domestic cards are therefore not exempt from the overall limit of FEM (CAT) Rules. 29 April 2017 P. P. Shah & Asso. 50

51 Case study I Further in terms of Regulation 3 of Notification 6(R) - any person resident in India may take outside India (other than to Nepal and Bhutan) currency notes of Government of India and Reserve Bank of India notes upto an amount not exceeding Rs.25,000 per person; RFC Account Rules Reg 4(B)(2) of the Notf 10 states that The funds in a Resident Foreign Currency Account opened or held or maintained in terms of sub-regulation (1) shall be free from all restrictions regarding utilisation of foreign currency balances including any restriction on investment in any form, by whatever name called, outside India - Utilisation from account is free from all the restrictions EEFC account Reg 4(A) of Notf 10(R) and Schedule I [Paragraph 3(i]) permits withdrawal for any CAT without any limit RFC Domestic Reg 5A of Notf 10(R) permits withdrawal for private or business visit or for permitted CAT. 29 April 2017 P. P. Shah & Asso. 51

52 Case study I As per Regulation 7 of Notification 6(R)- any person may take or send out of India, - (Enabling provisions to take FE out of India on a private visit/s including unspent amount on vessel) Cheques drawn on foreign currency account maintained in accordance with Foreign Exchange Management (Foreign Currency Accounts by a person resident in India) Regulations, 2000; foreign exchange obtained by him by drawal from an authorised person in accordance with the provisions of the Act or the rules or regulations or directions made or issued thereunder ; currency in the safes of vessels or aircrafts which has been brought into India or which has been taken on board a vessel or aircraft with the permission of the Reserve Bank ; any person may take out of India, - foreign exchange possessed by him in accordance with the Foreign Exchange Management (Possession and Retention of Foreign Currency) Regulations, 2000 ; unspent foreign exchange brought back by him to India while returning from travel abroad and retained in accordance with the Foreign Exchange Management (Possession and Retention of Foreign Currency) Regulations, 2000 ; 29 April 2017 P. P. Shah & Asso. 52

53 Case study I Can expenditure on Current Account Transaction exceed the LRS limit of US$ 250,000 per financial year? Yes, for transactions of following nature, viz. Emigration Expenses in connection with medical treatment abroad Studies abroad proviso to Schedule III of CAT Rules permits availing exchange facility for an amount in excess of the limit prescribed under the Liberalised Remittance Scheme as provided in regulation 4 to FEMA Notification 1 if it is so required by a country of emigration, medical institute offering treatment or the university, respectively If an employee is being deputed by an entity for business visit abroad and the expenses are borne by the latter, such expenses shall be treated as residual current account transactions outside LRS and may be permitted by the AD without any limit, subject to verifying the bonafides of the transaction 29 April 2017 P. P. Shah & Asso. 53

54 Case study I Other issues FEM (CAT) Rules are applicable to persons. However, shouldn t it be referring only to persons resident in India as the restrictions can not apply to persons resident outside India? Proviso to Schedule III of FEM (CAT) Rules provides also that a person other than an individual may also avail of foreign exchange facility, mutatis mutandis, within the limit prescribed under the said Liberalised Remittance Scheme for the purposes mentioned herein above. Thus, LRS limits are made applicable also to companies which raises various practical issues whether travel for business / conferences, etc. and for all other current account transactions can be put under an artificial limit of $250,000. Obviously, this can not be the intention but the inclusion of these two categories in Schedule III raises a doubt and creates ambiguity regarding the ability of companies to undertake various business-related current account transactions. 29 April 2017 P. P. Shah & Asso. 54

55 Case study I Other issues - Remittances As per the amended Rule 37BB of the Income-Tax Rules, no information is required to be furnished in Forms 15CA & CB for any sum which is not chargeable under the provisions of the Act, if, the remittance is made by an individual and it does not require prior approval of RBI as per the provisions of section 5 of the FEMA read with Schedule III to the FEM (CAT) Rules, This gives rise to the following issues: As most of the specified remittances are in the nature of personal expenses of individuals or on capital account, how does the question of deduction of tax or submission of information to tax authorities arise at all? Amended Rule 37BB however does not give the exemption to companies. Again, most of the transactions are for its own benefit such as remittances on capital account or for business expenses, yet information in Forms 15CA & CB would nevertheless have to be submitted by companies. In most of the above nature of transactions, probably Section 195 of the IT Act does not apply, still procedure laid down by Rules to Section 195 is made applicable although only for the purposes of information. Practical aspects refer to CBDT Cir. No. 10 dt and Ntf. No dt April 2017 P. P. Shah & Asso. 55

56 Current Account vs Capital Account transactions Current Account OR Capital Account? Transaction Type Reasons Gift from NRI by transfer from NRE account in India Capital Account Change in assets in India of a person resident outside India [Sec. 2(e) of FEMA] Gift from NRI by way of remittance from abroad Current Account No change in assets in India of a person resident outside India [Sec. 2(e) of FEMA] Payments towards Import & Export of Goods Current Account Payments due in connection with foreign trade, other current business, services and short-term banking and credit facilities in the ordinary course of business [Sec. 2(j) of FEMA] 29 April 2017 P. P. Shah & Asso. 56

57 Current Account vs Capital Account transactions Current Account OR Capital Account? Transaction Type Reasons Guarantee given by PROI in favour of PRII Current Account Does not change liabilities in India of a person resident outside India [Sec. 2(e) of FEMA] Co ti ge t lia ilities in the definition of Capital account transactions is not applicable to PROIs Guarantee given by PRII in favour of PROI Capital Account Changes contingent liability outside India of a Person resident in India [Sec. 2(e) of FEMA] Recap: Sec. 2(e) of FEMA: apital a ou t t a sa tio " ea s a t a sa tio hi h alte s the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India, and includes transactions referred to in sub- section (3) of section 6 29 April 2017 P. P. Shah & Asso. 57

58 Accounts of NRIs & Foreigners in India FEMA Ntf. 5 Particulars NRE A/c. FCNR (B) A/c. NRO A/c. Who can open an account NRIs a d PIOs (Individual of Pakistan & Bangladesh require prior approval of RBI) NRIs a d PIOs (Individual of Pakistan & Bangladesh require prior approval of RBI) A pe so eside t outside India (including NRI/PIO) (Individual/Entities of Pakistan & Bangladesh require prior approval of RBI) Who is authorized to open AuthorisedDealer AuthorisedBanks (including co-op bank other than AD) AuthorisedDealer Regio al Ru al Ba k AuthorisedDealer AuthorisedBanks (including co-op bank other than AD) Currency INR Fo e A fo eig currency which is freely convertible) INR Type of Account Sa i gs Cu e t Re u i g/fd Te Deposit o l 29 April 2017 P. P. Shah & Asso. Sa i gs Cu e t Re u i g/fi ed Deposit Period From 1 3 years From 1 5 years As applicable to resident accounts (eg. Even 6 months) 58

59 Accounts of NRIs & Foreigners in India FEMA Ntf. 5 (con t) Particulars NRE A/c. FCNR (B) A/c. NRO A/c. Repatriability Repatriable Repatriable Not repatriable except for all current income. Indvl*:Balances in an NRO account of NRIs/ PIOs are remittable up to USD 1 (one) million per financial year (April-March) along with their other eligible assets. Entities: RBI permission Taxabilty E e pt E e pt Ta a le (20% tax rate under Chapter XII-A of ITA) Joint account Joi tl ith t o o o e NRIs/ PIOs Jointlywith eside t elati e o fo e o su i o asis elati e as defi ed in Companies Act, 2013) The eside t elati e a ope ate the a ou t as a Po e of Atto e holde during the life time of the NRI/ PIO account holder. 29 April 2017 P. P. Shah & Asso. 59

60 Accounts of NRIs & Foreigners in India FEMA Ntf. 5 (con t) Particulars NRE A/c. FCNR (B) A/c. NRO A/c. Change in residential status from Non-resident to resident NRE a ou ts should be designated as resident accounts or Fu ds held i these accounts may be transferred to the RFC accounts immediately upon change of residential status FCNR B deposits allowed to continue till maturity at the contracted rate of interest AD should o e t the FCNR(B) deposits on maturity into resident rupee deposit accounts or RFC account 29 April 2017 P. P. Shah & Asso. F o PROI to PRI: Immediately designated as resident accounts F o PRI to PROI*:Immediately designated as NRO account *For Foreign nationals leaving India after employment: AD a e-designate their resident account in India as NRO account on leaving India to enable them to receive their pending bonafide dues The fu ds edited to the NRO a ou t to e epat iated a oad immediately,after payment of applicable taxes. Amount repatriated abroad should not exceed USD one million per financial year De it to a ou t should e o l fo the pu pose of epat iatio to the a ou tholde s a ou t maintained abroad. A ou t should e losed i ediatel afte all dues ha e ee e ei ed a d epat iated as pe the declaration made by the account holder when the account was designated as an NRO account 60

61 Foreign Currency Accounts by Indian Residents FEMA Ntf. 10 EEFC Account vs. RFC(D) Account vs. RFC Account DDA Scheme Other Accounts by: Indian agent of foreign shipping / airline company Ship-manning / crew managing Indian agency Project Office in India Organiserof International Seminar / Conferences / Conventions in India Exporter for Project Exports and Service Exports FDI Investee Company SEZ Unit 29 April 2017 P. P. Shah & Asso. 61

62 Foreign Currency Accounts by Indian Residents FEMA Ntf. 10 (con t) Particulars Who can open the account Exchange Earners Foreign Currency (EEFC) Account E ha ge Ea e s (including individuals, companies, etc.) Resident Foreign Currency (Domestic) [RFC(D)] Account I di iduals Resident Foreign Currency (RFC) Account I di iduals Joint account Type of Account Joi tl ith eligi le persons; or With resident relative(s) on former or su i o asis Joi tl ith eligi le persons 29 April 2017 P. P. Shah & Asso. Sa e as EEFC Current only Current only Current Savings Term Deposits Interest Non-interest earning Non-interest earning De-regulated (as decided by AD Bank) A. P. (DIR Series) Circular No. 124 dated 10thMay 2012:The facility of EEFC scheme is intended to enable exchange earners to save on conversion/transaction costs while undertaking forex transactions in future. This facility is not intended to enable exchange earners to maintain assets in foreign currency, as India is still not fully convertible on Capital Account. 62

63 Particulars Permitted Credits Foreign Currency Accounts by Indian Residents FEMA Ntf. 10 (con t) Exchange Earners Foreign Currency (EEFC) Account % of fo e recd on account of export transactions Ad a e e itta e to a ds export of goods or services Repa e t of loa s gi e to foreign importers P ofessio al ea i gs like di e to s/ o sulta / lecture fees, honorarium and similar other earnings received by a professional by rendering services in his individual capacity Re-credit of unutilized foreign currency earlier withdrawn from the account Resident Foreign Currency (Domestic) [RFC(D)] Account Fo eig e ha ge received as payment for services/ gift/ honorarium while on visit abroad or from a non-resident who is on a visit to India U spe t a ou t of foreign exchange acquired from AD for travel abroad Gift f o lose elati e Ea i g th ough e po t of goods/ services, royalty, honorarium Disi est e t p o eed on conversion of shares into ADR/ GDR Resident Foreign Currency (RFC) Account Fo eig e ha ge received by him as pension/ superannuation/ other monetary benefits from overseas employer Fo eig e ha ge realized on conversion of the assets referred to in Sec 6(4) of FEMA Gift/ i he ita e received from a person referred to in Sec 6(4) of FEMA Fo eig e ha ge acquired before the July 8, 1947 or any income arising on it held outside India with RBI permission 29 April 2017 P. P. Shah & Asso. 63

64 Particulars Permitted Credits Foreign Currency Accounts by Indian Residents FEMA Ntf. 10 (con t) Exchange Earners Foreign Currency (EEFC) Account Disinvestment proceeds on conversion of ADR/ GDR I te est ea ed o the fu ds held in the account Pa e ts recd in forex by 100% EOU / unit in EPZ/STP/EHTP Pa e t recd in forex by DTA unit from SEZ unit Pa e t recd by exporter for purpose of counter trade Pa e ts e ei ed i fo e by an Indian startup arising out of sales / export made by the startup or its overseas subsidiaries Resident Foreign Currency (Domestic) [RFC(D)] Account Foreign exchange received as proceeds of LIC claims/ maturity/ surrendered value settled in forex from an Indian insurance company Resident Foreign Currency (RFC) Account Fo eig e ha ge received as proceeds of LIC claims/ maturity/ surrendered value settled in forex from an Indian insurance company Bala es i NRE/ FCNR(B) accounts on change in residential status 29 April 2017 P. P. Shah & Asso. 64

65 Foreign Currency Accounts by Indian Residents FEMA Ntf. 10 (con t) Particulars Permitted Debits Tenure Change of Residential Status Exchange Earners Foreign Currency (EEFC) Account A pe issi le u e t / apital a ou t transaction Pa e t fo Cost of goods pu hased i forex from 100% EOU / unit in EPZ/STP/EHTP Pa e t of Custo s dut Gi i g T ade elated loa s & ad a es to a ou t holde s i po te usto e Reg of FEMA Notf3) Pa e t i fo e to PRI fo ai fa e/hotel expd booking Resident Foreign Currency (Domestic) [RFC(D)] Account A pe issi le current / capital account transaction Balance to be converted into INR by end of succeeding calendar month after adjusting for utilization of the balances for approved purposes or forward commitments (A. P. (DIR Series) Circular No. 12dt.31stJuly 2012) Balances of EEFC a/c and RFC(D) a/c can be credited to NRE/FCNR(B) a/c Resident Foreign Currency (RFC) Account No est i tio s on utilization in / outside India No time limitation Balance from NRE/FCNR(B) a/c can be credited to RFC A/c 29 April 2017 P. P. Shah & Asso. 65

66 Sch. 1 FEMA NTF. 20 Schemes for Inbound Investment Sch. 2 & 2A Sch. 3 Sch. 4 Sch. 5 Sch. 6 Sch. 7 Sch. 8 Sch.9 Foreign Direct Investment FDI Scheme Purchase/Sale of shares or convertible debentures or warrants of an Indian Company by Registered Foreign Portfolio Investor (RFPI) under Foreign Portfolio Investment (FPIs) Scheme (Registered FIIs under Sch. 2 subsumed with Sch. 2A) Acquisition of Securities or Units by a Non-Resident Indian (NRI) on a Stock Exchange in India on Repatriation basis under the Portfolio Investment Scheme Acquisition of Securities or units by a Non-Resident Indian (NRI), on Non- Repatriation basis Purchase and Sale of Securities other than Shares or Convertible Debentures of an Indian company by a person resident outside India Investment by a registered Foreign Venture Capital Investor Indian depository receipts by eligible companies resident outside India Scheme for investment by Qualified Foreign Investors in equity shares (Subsumed under Sch. 2A) Scheme for Acquisition/Transfer by a person resident outside India of capital contribution or profit share of (LLPs) Depository Receipts Scheme, 2014 (DRs) Sch. 10 Sch. 11 Investment by a person resident outside India in an Investment Vehicle Composite Caps: Foreign investments, direct or indirect, under Schedule 1(FDI), 2 (FII), 2A (FPI), 3 (NRI), 6 (FVCI), 8 (QFI), 9 (LLPs) and 10 (DRs) vide PN 8 dated 30 July 2015 by DIPP 29 April 2017 P. P. Shah & Asso. 66

67 Foreign Investment in India- Schematic Representation Foreign Inbound Investments Foreign Direct Investments Foreign Portfolio Investments Foreign Venture Capital Investments Other Investments (G-Sec, NCDs, etc.) Investments on Non- Repatriable basis Company Sch. 1, 10 LLP Sch. 9 Automatic Route Govt. Route NRIs/ PIOs Sch. 3 FIIs/ QFIs/ RFPIs Sch. 2, 2A, 8 SEBI Regd. FVCIs/AIFs Sch. 6 FIIs/RFPIs, NRIs, PIO, QFIs Long Term Investors Sch. 5 NRIs, PIOs Sch. 4 Persons Resident Outside India Available to or for VCF, IVCUs 29 April 2017 P. P. Shah & Asso. 67

68 Schemes for Inbound Investment FEMA Ntf. 20 Important Regulations of FEMA Ntf. 20: Restriction on issue or transfer of Security by a person resident outside India. 3. Save as otherwise provided in the Act, or rules or regulations made thereunder, no person resident outside India shall issue or transfer any security: Provided that a security issued prior to, and held on, the date of commencement of these Regulations, shall be deemed to have been issued under these Regulations and shall accordingly be governed by these Regulations : Provided further that the Reserve Bank may, on an application made to it and for sufficient reasons, permit a person resident outside India to issue or transfer any security, subject to such conditions as may be considered necessary. Restriction on an Indian entity to issue security to a person resident outside India or to record a transfer of security from or to such a person in its books. 4. Save as otherwise provided in the Act or Rules or Regulations made thereunder, an Indian entity shall not issue any security to a person resident outside India or shall not record in its books any transfer of security from or to such person : Provided that the Reserve Bank may, on an application made to it and for sufficient reasons, permit an entity to issue any security to a person resident outside India or to record in its books transfer of security from or to such person, subject to such conditions as may be considered necessary. 29 April 2017 P. P. Shah & Asso. 68

69 Schemes for Inbound Investment FEMA Ntf. 20 I porta t Regulatio s of FEMA Ntf. 20 o t : 5. Permission for purchase of shares by certain persons resident outside India [Sch. 1 to 11]. 6. Acquisition of right shares. 6A. Acquisition of Bonus shares. 7. Issue and acquisition of shares after merger or demerger or amalgamation of Indian companies. 8. Issue of shares under Employees Stock Options Scheme to persons resident outside India. 9. Transfer of shares and convertible debentures of an Indian company by a person resident outside India. Prior permission of Reserve Bank in certain cases for transfer of security. 10. A. TRANSFER BY WAY OF GIFT OR SALE BY A PERSON RESIDENT IN INDIA B. TRANSFER BY WAY OF SALE NOT COVERED BY REGULATION 9 BY A PERSON RESIDENT OUTSIDE INDIA 29 April 2017 P. P. Shah & Asso. 69

70 Important conditions of Automatic Route of FDI Sectors Conditionalities FDI not for acquiring existing company Issue and Transfer Valuation norms Re-lending or stock market operations or prohibited activities Payments in FE Reporting as per Regulations 29 April 2017 P. P. Shah & Asso. 70

71 Foreign Direct Investment in India Regulatory & Legal Framework Industrial Development (Regulation) Act, 1951 & FEMA 1999 Overall Policy of Government, mainly focusses on Public Sector Compulsory Licensing Small Scale Sector Micro, Small & Medium Enterprises (Development) Act, Locational Restrictions Prohibitions. Consolidated FDI policy, Sector Specific Guidelines (Schedule I of FEMA Ntf. 20), Automatic route & Procedures FEMA provides for Rules/ modes of investment, manner of receipts, Valuations and reporting procedures. 29 April 2017 P. P. Shah & Asso. 71

72 Foreign Direct Investment into an Indian company Kinds of Investment Automatic Route no prior approval from the RBI/ Government Approval Route prior approval of the FIPB required (no separate RBI approval) Mode of Investment Greenfield: Setting up a new JV/ WOS (fresh issue of shares) Brownfield: Relating to existing investments/ business activities: Brownfield Investment Share Purchase Gift of shares Share swap Rights/ Bonus issue/ ESOP/ Sweat Equity Conversion of ECB/ pre-incorp payables/ import payables, royalty, other legitimate dues etc. Merger/Demerger / Amalgamation/ Reconstruction

73 Automatic Route of Investment to PROI Main Conditions of issue of Shares (Reg. 5, Schedule 1, Notification No. FEMA 20/2000-RB dated May 3, 2000). Eligible Persons: PROI other than citizen of Pakistan, entities of Pakistan. Bangladesh Citizens & entities only with prior approval of FIPB. OCB: Bonus Shares permitted, Right Shares with RBI Approval. A company, trust and partnership firm incorporated outside India and owned and controlled by NRIs can invest in India with the special dispensation as available to NRIs under the FDI Policy FII / FPI under Sch. 2 / 2A may invest in excess of PIS limits upto sectoral cap / statutory ceiling subject to prior intimation to RBI SEBI registered FVCI may contribute up to 100% of capital of Indian company under Sch April 2017 P. P. Shah & Asso. 73

74 Automatic Route of Investment to PROI Eligible Investee Entities: Indian companies Partnership Firm / Proprietorship concern (only for NRI / PIO on non-repatriation basis) Trusts in the form of SEBI regulated Venture Capital Fund Limited Liability Partnerships Investment Vehicles: SEBI registered and regulated Alternative Investment Funds, Real Estate Investment Trusts and Infrastructure Investment Trusts 29 April 2017 P. P. Shah & Asso. 74

75 Types of instruments: Capital Equity shares Fully, compulsorily & mandatorily convertible Preference Shares Fully, compulsorily & mandatorily convertible Debentures Differential voting rights shares as to dividend, voting or otherwise Non-convertible, optionally convertible or partially convertible instruments considered as debt Permitted Warrants: Upfront 25% of consideration; Conversion in 18 months Upfront pricing/ conversion formula To comply with ECB norms Partly paid Equity Shares only: Upfront 25% of consideration including premium; Full payment in 12 months; NA Listed Indian company: issue size exceeds rupees five hundred crore and the issuer complies with Regulation 17 of the SEBI (Issue of Capital and Disclosure Requirements(ICDR)) Regulations regarding monitoring agency. Listed Indian company: issue size exceeds rupees five hundred crore and the issuer complies with Regulation 17 of the SEBI (Issue of Capital and Disclosure Requirements(ICDR)) Regulations regarding monitoring agency. Optionality clauses: Buy-back of securities at the price prevailing/value determined at the time of exercise of the optionality so as to enable the investor to exit without any assured return. Minimum lock-in period of one year. 29 April 2017 P. P. Shah & Asso. 75

76 FEMA & Valuation FDI Issue of shares Transfer of shares from Resident to Non-Resident Transfer of shares from Non-Resident to Resident Listed Company Market Price as per SEBI Preferential Allotment Only Certification by SEBI registered Merchant Banker/ Chartered Accountant Unlisted Company Internationally accepted pricing Methodology for valuation of shares on arm s length basis Valuation & Certification by SEBI registered Merchant Banker/ Chartered Accountant Non-residents (including NRIs): Subscription to its Memorandum of Association: Made at face value subject to their eligibility to invest under the FDI scheme Price of shares shall not be less than the fair value worked out as per any internationally accepted pricing methodology for valuation of shares on arm s length basis Price of shares shall not be more than the fair value worked out as per any internationally accepted pricing methodology for valuation of shares on arm s length basis Convertible instruments: Based on conversion formula which has to be determined / fixed upfront. Price at the time of conversion should not be less than the fair value worked out, at the time of issuance of these instruments. NRIs on non-repatriation basis under Schedule 4 of FEMA 20: No express provision for valuation Pricing not applicable for transfers between two Non-Residents SEZs against import of capital goods into equity shares: Committee of Development Commissioner Preferential Allotment Pricing Guideline under SEBI (ICDR) Regulations 2009: Price not less than the higher of Avg. weekly high and low closing price over a trailing six month period, or a trailing two week period, from the "relevant date of transaction. Relevant Date means date thirty days prior to the date of GM of shareholders 29 April 2017 P. P. Shah & Asso. 76

77 Issue of Shares- Other modes Issue of Bonus Shares allowed. Issue of Right Shares Price offered to PROI can not be lower than that offered to PRII. Additional Shares allowed within FDI Ceiling. Existing OCB allowed with prior approval. Amalgamation / Demerger Amalgamating/ transferee company can issue shares if it is engaged in eligible sector and observes FDI ceiling. Reports the transaction to RBI within 30 days of such court order of amalgamation with percentage of capital held by PROI in transferor, transferee or new company before or after the transfer. 29 April 2017 P. P. Shah & Asso. 77

78 Issue of Shares - Other modes ESOP / Sweat Equity Indian company may issue employees stock option and/or sweat equity shares to its employees/directors or employees/directors of its holding company or joint venture or wholly owned overseas subsidiary/subsidiaries who are resident outside India, provided that : a) The scheme has been drawn either in terms of regulations issued under the Securities Exchange Board of India Act, 1992 or the Companies (Share Capital and Debentures) Rules, 2014 notified by the Central Government under the Companies Act 2013, as the case may be. b) The employee s stock option / sweat equity shares issued to non-resident employees/directors under the applicable rules/regulations are in compliance with the sectoral cap applicable to the said company. c) Issue of employee s stock option / sweat equity shares in a company where foreign investment is under the approval route shall require prior approval of the Foreign Investment Promotion Board (FIPB) of Government of India. d) Issue of employee s stock option / sweat equity shares under the applicable rules/regulations to an employee/director who is a citizen of Bangladesh/Pakistan shall require prior approval of the Foreign Investment Promotion Board (FIPB) of Government of India. 29 April 2017 P. P. Shah & Asso. 78

79 Mode of Payment (i) Inward remittance through normal banking channels (ii) Debit to NRE / FCNR account of a person concerned maintained with an AD category I bank (iii) Conversion of royalty / lump sum / technical knowhow fee/ legitimate due for payment or conversion of ECB, shall be treated as consideration for issue of shares (iv) Conversion of import payables / pre incorporation expenses / share swap can be treated as consideration for issue of shares with the approval of FIPB (v) Debit to non-interest bearing Escrow account in Indian Rupees in India which is opened with the approval from AD Category I bank and is maintained with the AD Category I bank on behalf of residents and nonresidents towards payment of share purchase consideration 29 April 2017 P. P. Shah & Asso. 79

80 Other important conditions in FDI Policy Caps in Investments: Investments can be made by non-residents in the capital of a resident entity only to the extent of the percentage of the total capital as specified in the FDI policy. The caps in various sector(s) are detailed in the Consolidated FDI Policy. E try o ditio s: Investments by non-residents can be permitted in the capital of a resident entity in certain sectors/activity with entry conditions. Such conditions may include norms for minimum capitalization, lock-in period, etc. and are specified in the Consolidated FDI Policy Other conditions: Besides the entry conditions on foreign investment, the investment/investors are required to comply with all relevant sectoral laws, regulations, rules, security conditions, and state/local laws/regulations. Foreig I est e t i to/do strea I est e t y eligi le I dia e tities: The Guidelines for calculation of total foreign investment, both direct and indirect in an Indian company/llp, at every stage of investment, including downstream investment are specified in the Consolidated FDI Policy 29 April 2017 P. P. Shah & Asso. 80

81 Reporting of FDI Offline reporting Physical filing of FC-GPR, ARF and FCTRS forms is discontinued from February 8, 2016 a d o li e fili g th ough go e e t s e-biz portal has been made mandatory. Online reporting through ebiz Portal of GOI With a view to promoting the ease of reporting of transactions under foreign direct investment (FDI), the filing of the ARF, Form FC-GPR and Form FCTRS has been enabled under the e-biz platform of the Government of India. The design of the reporting platform enables the customer to login into the e-biz portal, download the reporting forms, complete and then upload the same onto the portal using their digitally signed certificates. The Authorised Dealer Banks (ADs) will be required to download the completed forms, verify the contents from the available documents, if necessary by calling for additional information from the customer and then upload the same for RBI to process and allot the Unique Identification Number (UIN). 29 April 2017 P. P. Shah & Asso. 81

82 Reporting of FDI Inflow Form Supporting Time period Advance Reporting Form for shares / FCCD / FCPS / Warrants FIRC/s/ Debit certificate evidencing receipt of remittance KYC report on non-resident investor Not later than 30 days from the date of receipt Action by Regional Office concerned Allotment of Unique Identification Number (UIN) for the amount reported Non-compliance Contravention under FEMA Attract provisions penal In FIRC: Name of beneficiary; remitter bank; remitter; date of credit; INR equivalent; Purpose of remittance mentioned in FIRC Amount in INR/FC should match with FIRC/Bank certificate No KYC if debit to NRE/ FCNR(B) In AD Bank letter/ debit certificate for NRE/ FCNR(B) transfer: Name, account type, amount, date of debit 29 April 2017 P. P. Shah & Asso. 82

83 Reporting of Issue of Shares, etc. Reporting of Issue of Fresh Shares /Partly paid shares/bonus /Rights Shares /ESOP/ Convertible Debentures / Convertible Preference Shares /Conversion of ECB / Royalty / Lumpsum Technical Know-how Fee / Import of Capital Goods by SEZs /Pre-operative/Pre-incorporation Expenses/Legitimate dues/ Amalgamation/ Merger Form Supporting Time period Form FC-GPR duly filled up online with digital signature of Director/ Authorised Person A certificate from Company Secretary A certificate from SEBI registered Merchant Banker or Chartered Accountant for Not later than 30 days from the date of issue Action by Regional Office concerned Taking on record the shareholding pattern Non-compliance Contravention under FEMA Attract provisions penal valuation Reconciliation of shareholding pattern at RBI end (Fresh issue, transfers, reduction, merger, transfers from NR to NR etc.) Previous RBI Acks, duly approved Form FC- TRS Onus of compliance with the sectoral /statutory caps on foreign investment and attendant conditions, if any, shall be on the company receiving foreign investment 29 April 2017 P. P. Shah & Asso. 83

84 Reporting of Transfer of shares/ convertible debentures/ partly paid shares/ warrants From Resident to a Non-resident and vice versa File form FC-TRS online through ebiz Portal within 60 days of receipt of consideration (in quardruplicate) In respect of the transfer from resident to non resident, the Form has to be digitally signed by the non resident buyer, and in respect of the transfer from nonresident to resident the declaration has to be digitally signed by the non-resident seller. Onus of reporting is on transferor / transferee, resident in India Onus on reporting for purchase on recognized stock exchange will be on the Investee company Inward remittance subject to KYC norms (KYC check to be carried by remittance receiving bank) AD Bank shall certify FC-TRS as being in order Indian company can record transfer only post approval of Form-FC TRS by AD-Bank 29 April 2017 P. P. Shah & Asso. 84

85 Periodic reporting - Annual Return of Liabilities & Assets To be filed electronically by Indian Companies to enable capture of statistics relating to Foreign Direct Investment, both inward and outward Due date: by July 15 of every year to the RBI, Mumbai To be submitted by all Indian companies which have received FDI and/or made FDI abroad in the previous year(s) including the current year Coverage: Methodology for valuation of foreign liabilities and foreign assets Nature of activities principal line of business as %, with NIC code (NIC Codes in the FCGPR and FCTRS forms as per the NIC 2008 version) Name & country of non-resident investor under FDI Financial derivatives, Money market instruments Trade credits, loans, Currency & Deposits ODI and Portfolio investment overseas Contingent foreign liabilities Disinvestments in India and Abroad The filled in Excel based FLA return should be forwarded through the official id of any authorized person like CFO, Director, Company Secretary etc. Acknowledgement 29 April 2017 P. P. Shah & Asso. 85

86 Recent changes in FDI Policy Defi itio of Ma ufa ture i serted hi h is sa e as u der Se tio 2 29BA of the I o etax Act: Manufacture with its grammatical variations means a change in a non-living physical object or article or things (a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or (b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure. Key issues Does the a o e defi itio la if the positio ade uatel? Whether reliance can be placed on judicial precedents under the Income tax Act to determine the eligibility for FDI under the FDI policy? Manufacturer permitted to sell its products through whole sale and/or retail, including e- commerce Any industrial undertaking manufacturing items reserved for Micro and Small Enterprises would not require Govt. approval even when the foreign investment in such undertaking exceeds 24%. 29 April 2017 P. P. Shah & Asso. 86

87 Recent changes in FDI Policy 100% FDI in LLP put under Automatic Route vs Approval Route earlier Se to s /a ti ities to e those falli g u de Auto ati Route a d o FDI-linked performance conditions (as earlier) A I dia Co pa ith FDI a ake do st ea i est e ts i LLP ea lie the Investor Indian Company had to be engaged in 100% Automatic Route sectors) Downstream investment by LLPs in Indian Company / LLP under Automatic Route Se to s /a ti ities to e those falli g u de auto ati oute a d the e a e o FDI-linked performance conditions Defi itio of Co t ol i t odu ed right to appoint majority of Designated Partners where such designated partners, with specific exclusion to others, have control over all the policies of the LLP Defi itio of O e ship i t odu ed percentage of the investments in LLPs Key issues Whether LLP can be capitalized on non-cash basis in the same way as an Indian Company? With o t ol a d o e ship ite ia now defined, whether basis exists to deny FDI to LLP in all sectors? 29 April 2017 P. P. Shah & Asso. 87

88 Recent changes in FDI Policy NRI changes as per PN 7 of 2015 NRI defi itio hi h i ludes PIOs a e ded to i lude O e seas Citize s of I dia OCI hose a it is wider than PIOs. NRI I est e ts u de FEMA / S hedule No -Repatriation basis) deemed to be domestic investment on par with residents Benefits conferred to NRIs by PN 12 of 2015 A Co pa, T ust a d Pa t e ship Fi i o po ated outside I dia a d o ed a d o t olled NRIs can invest in India with the special dispensation as available to NRIs under the FDI Policy Se to s ele a t : S hedule Ai T a spo t NRI %/ FDI 9% ; Co st u tio -Development Si ila Be efits to i est e ts u de S hedule of FEMA Non Repatriation Basis Key Issues Is this the etu of the e st hile OCBs s he e i a e A ata? Ho does o e dete i e o e ship a d o t ol i oversea Trust and Partnership? Whethe O e seas LLPs o e ed ithi a it of Pa t e ship? Is conversion of NRI investment from Repatriable to Non-Repatriable basis possible? 29 April 2017 P. P. Shah & Asso. 88

89 Recent changes in FDI Policy Real Estate Sector changes Each phase of the construction development project to be considered as a separate project subject to the conditions Minimum area to be developed and minimum capitalization conditions deleted Exits simplified Fo eig i esto a e it efo e the o pletio of p oje t u de automatic route subject to a lock-in-period of three years (calculated with reference to each tranche of foreign investment) T a sfe of stake f o o -resident investor to another non-resident investor not involving repatriation neither subject to lock-in period nor Government approval Prohibited Real estate business ambit relaxed to exclude earning of rent /income on lease of the property not amounting to transfer and the term transfer includes: Sale, e ha ge o eli uish e t E ti guish e t of a ights o o pulso a uisitio u de la Allo i g possessio u de Se tio A of T a sfe o P ope t A t A a a ge e t i ludi g t a sfe of sha es hi h has effe t of t a sfe i g or enabling enjoyment of immovable property Key Issue: What types of arrangements qualify under above provisions? 29 April 2017 P. P. Shah & Asso. 89

90 Investment by NRIs on non-repatriation basis - Schedule 4 of FEMA Ntf. 20 NRIs, including a company, a trust and a partnership firm incorporated outside India and owned and controlled by non-resident Indians, may without any limit, acquire & hold on nonrepatriation basis, (i) shares or convertible debentures / preference shares, warrants of an Indian company issued whether by public issue or private placement or right issue (2) Units issued by an Investment vehicle Investment prohibited in chit fund or a nidhi company or company engaged in agricultural / plantation activities or real estate business or construction of farm houses or dealing in Transfer of Development Rights Investment should be by way of inward remittance through normal banking channels from abroad or out of funds held in NRE/FCNR/NRO account Investment by NRIs under Schedule 4 of FEMA 20 will be deemed to be domestic investment at par with the investment made by residents. (Press Note No.7 dated 3rd June, 2015) Non-Reside t I dia NRI ea s a i di idual eside t outside I dia ho is a itize of I dia o is a O e seas Citize of I dia a dholde ithi the ea i g of se tio 7 A of the Citize ship A t, 9. Pe so s of I dia O igi a dholde s egiste ed as su h u de Notification No.26011/4/98 F.I, dated , issued by the Central Government are dee ed to e O e seas Citize of I dia a dholde s. (Vide The Citizenship (Amendment) Act 2015 w.e.f. 06 January 2015 read PN7 dated 03 June 2015) 29 April 2017 P. P. Shah & Asso. 90

91 Investment by NRIs on non-repatriation basis - Schedule 4 of FEMA Ntf. 20 Accordingly, now Overseas NRI Entity will be eligible for investment under Schedule 4 and such investment will be deemed domestic investment at par with investment made by Residents. Similarly, under FDI policy/scheme under Schedule 1, Overseas Entity can invest in India with the special dispensation as available to NRIs, e.g. (a) Scheduled Air Transport Services/Domestic Scheduled Passenger Airlines, (b) Regional Air Transport Service, (c) Condition of lock-in period in Construction-development projects. This dispensation is not available for investment by NRIs under Schedules 3 and 11. The o ept of o ed a d o t olled NRIs has ot ee defi ed u de S hedule ; ut a e o o ed f o Regulatio. Co t ol shall i lude the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements. A company is considered as O ed NRIs if o e tha % of the apital i it is e efi iall o ed NRIs. A Partnership Firm will be considered as owned by NRIs if more than 50% of the investment in such firm is contributed by NRIs and such NRIs have majority of the profit share. 29 April 2017 P. P. Shah & Asso. 91

92 Investment by NRIs on non-repatriation basis - Schedule 4 of FEMA Ntf. 20 Implications for investments made under Schedule 4 as they are deemed domestic investments: Following restrictions which are applicable on investment made by non-residents under Schedule 1 are not applicable: Investment restrictions on sectoral/statutory cap /conditionalities, entry route, pricing guidelines; Reporting requirement (e.g. Advance Remittance Form, FC-GPR, FC-TRS, Form- ESOP, FDI- LLP (I), Form FDI- LLP (II), Annual Return on Foreign Liabilities and Assets, Downstream Investment Reporting), documentation, etc.; Investments under schedule 4 are not counted for direct and indirect foreign investment; Acquisition of Rights Shares/Bonus Shares/Shares after merger, demerger, amalgamation /ESOP/Pledge of shares: Limitations/restrictions contained in FEMA 20 may not apply to investments made under Schedule 4 However, implications under Section 56(2) of Income-Tax Act, 1961 to be kept in view regarding fair price of shares 29 April 2017 P. P. Shah & Asso. 92

93 Investment in Limited Liability Partnerships - Schedule 9 of FEMA Ntf. 20 FDI in LLPs: FDI is permitted under the automatic route in LLPs operating in sectors / activities where 100% FDI is allowed through the automatic route and there are no FDI linked performance conditions (such as No Banking Finance Co pa ies or De elop e t of Townships, Housing, Built-up infrastructure and Construction-development p oje ts, or Retail se to etc.) Eligible Investment: Contribution of foreign capital either by way of capital contribution or by way of acquisition / transfer of profit shares in the capital structure of an LLP Downstream Investment: An Indian company or an LLP, having foreign investment, will be permitted to make downstream investment in another company or LLP engaged in sectors in which 100% FDI is allowed under the automatic route and there are no FDI linked performance conditions. A company having foreign investment can be converted into an LLP under the automatic route only if it is engaged in a sector where foreign investment up to 100 percent is permitted under automatic route and there are no FDI linked performance conditions 29 April 2017 P. P. Shah & Asso. 93

94 Investment in Limited Liability Partnerships - Schedule 9 of FEMA Ntf. 20 FDI in LLPs: Citizens / Entities of Pakistan & Bangladesh, FPIs, FIIs and FVCIs not permitted to invest in LLPs Capital contribution to LLP to be made by way of inward remittance or debit to NRE / FCNR (B) account (non-cash methods of capital contribution not specifically permitted) Pricing: FDI in a LLP either by way of capital contribution or by way of acquisition / transfer of profit shares, would have to be more than or equal to the fair price as worked out with any valuation norm which is internationally accepted / adopted as per market practice and a valuation certificate to that effect shall be issued by the Chartered Accountant or by a practicing Cost Accountant or by an approved valuer from the panel maintained by the Central Government. Transfer: In case of transfer of capital contribution / profit share from a resident to a nonresident, the transfer shall be for a consideration equal to or more than the fair price of capital contribution / profit share of an LLP. Further, in case of transfer of capital contribution / profit share from a non-resident to resident, the transfer shall be for a consideration which is less than or equal to the fair price of the capital contribution / profit share of an LLP. 29 April 2017 P. P. Shah & Asso. 94

95 Investment in Limited Liability Partnerships - Schedule 9 of FEMA Ntf. 20 Reporting requirements of FDI in LLPs: Receipt of consideration for capital contribution or profit share Within 30 days Form Foreign Direct Investment LLP(I) Copies of FIRC KYC report of non-resident investor RBI will allot UIN for each remittance Transfer of capital contribution or profit share between Non-Resident and Resident Within 60 days inform Foreign Direct Investment LLP(II) Annual compliance: Filing of Annual Return on Foreign Liabilities & Assets by 15 th July every year 29 April 2017 P. P. Shah & Asso. 95

96 Overseas Direct Investments - FEMA Ntf. 120 Regn. 6 Conditions for Automatic approval Regn. 6A Investments in Agricultural operations overseas directly or through Overseas Offices Regn. 6B Investment in Equity overseas by a listed Indian company Regn. 6C Investment by Mutual Funds Regn. 7 Investment by IP in Financial Services Regn. 8 Investment by swap or exchange of shares Regn. 9 Requirements for RBI Approval Regn. 9A Overseas Investments by Regd. Trust / Society Regn. 10 Unique Identification Number Regn. 11 Investment by Capitalization Regn. 12 Export of Goods towards Equity Regn. 13 Post investment changes / additional investment in existing JV / WOS Regn. 14 Acquisition through bidding / tender Regn. 15 Obligations of IP Regn. 16 Transfer by way of sale of shares of JV / WOS Regn. 17 Transfer involving write-off Regn. 18 Pledge of shares of JV / WOS Regn. 18A Creation of charge on domestic and foreign assets 29 April 2017 P. P. Shah & Asso. 96

97 Overseas Direct Investments - FEMA Ntf. 120 Regn. 19 Prior RBI approval for Proprietory in India to accept shares Regn. 19A Overseas Investments by Proprietorships / unregistered Partnership Firm in India being recognized Star Export House Regn. 20 Investments by Individuals for acquiring shares as consideration for professional services rendered Regn. 20A - Acquisition or Setting up of a JV or WOS abroad by resident individual (w.e.f. 5th Aug. 2013) Regn. 21 Issue of foreign security (FCCB) by person resident in India Regn. 22 Purchase / acquisition by way of gift / inheritance / ESOP Regn. 23 Transfer of foreign security by way of pledge by person resident in India Regn. 24 General permission for acquiring qualification / rights shares and foreign securities under ADR/GDR linked stock options schemes Regn. 25 Prior RBI approval for qualification shares in excess of limits specified under Regn. 24 Regn. 26 Investments by Mutual Funds / Venture Cap.Funds Regn. 27 Opening of Demat Accounts with foreign depositories by Indian Clearing Corporations and Clearing Members 29 April 2017 P. P. Shah & Asso. 97

98 Auto Route-How much can be Invested? Overall ceiling of the investment: Financial Commitment plus amount in EEFC A/c plus amount raised via ADR/GDR issue Financial commitment of the IP can not be more than 400% of the Net worth of the IP; however, financial commitment exceeding USD 1 (one) billion (or its equivalent) in a financial year would require prior approval of the Reserve Bank Net worth: Regn. 2(o)-Paid up capital and free reserves What is Financial Commitment? [Reg.2(f)] 29 April 2017 P. P. Shah & Asso. 98

99 Auto Route-Financial Commitment Financial Commitment Reg.2(f): Amount of Direct Investment by way of contribution to the equity and loan and 100% of guarantees issued by an IP to or on behalf of its overseas JVC or WOS. Contribution to Equity can be by Cash contributions or Purchase of Shares or by Capitalization of Exports and Repatriable Entitlements Swap of IP s shares or ADR GDR Swap Loan to Overseas Entity Guarantees to or on behalf of overseas entity 29 April 2017 P. P. Shah & Asso. 99

100 Auto Route-Financial Commitment (con t) Guarantees to or on behalf of overseas entity Cannot be open-ended; Period & amount to be specified Corporate guarantees only In case of performance guarantees by IP, 50% is considered for financial commitment; if invocation leads to breach of ceiling of 400% of net worth of IP, prior RBI approval is required before remitting funds from India [Ref: Cir. No. 69 dt. 27/05/2011] Bank guarantee issued by a resident bank on behalf of an overseas JV / WOS of the IP, which is backed by a counter guarantee / collateral by the IP, shall be reckoned for computation of the financial commitment of the IP [Ref: Cir. No. 96 dt. 28/03/2012] 29 April 2017 P. P. Shah & Asso. 100

101 Auto Route-What is Prohibited & Exempted? Prohibitions: Portfolio Investment, Real Estate & Banking Sector Exemptions: Investment through RFC A/c Bonus issue Investment by Persons Resident in India but not permanently resident in India. 29 April 2017 P. P. Shah & Asso. 101

102 29 April 2017 Eligible Entities for Investment Important definitions as per Notification 120 Sec. 2(e): "Direct investment outside India" means investment by way of contribution to the capital or subscription to the Memorandum of Association of a foreign entity or by way of purchase of existing shares of a foreign entity either by market purchase or private placement or through stock exchange, but does not include portfolio investment Sec. 2(m): "Joint Venture (JV)" means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country in which the Indian party makes a direct investment Sec. 2(q): "Wholly Owned Subsidiary (WOS)" means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country, whose entire capital is held by the Indian party P. P. Shah & Asso. 102

103 Eligible Entities for Investment (con t) Foreign entity is not defined But from aforesaid definitions, it is one that is formed, registered or incorporated in accordance with laws of host country So can a foreign Proprietorship, Partnership Firm, LLP, Trust be considered as Foreign Entity? As per definition of Direct investment outside India, investment has to be by way of purchase of shares; hence foreign entity must have Share Capital Portfolio Investment is not defined 29 April 2017 P. P. Shah & Asso. 103

104 Is Foreign Trust an eligible Entity for ODI? Trust is not a Person as defined in Sec. 2(u) of FEMA, 1999 Trust is not a Person as defined in Sec. 2(31) of Income Tax Act, 1961 An overseas Trust may be formed or registered in accordance with laws of host country However, can it be regarded as eligible Foreign Entity for overseas direct investment? No, as it does not have shares which can be purchased by the Indian Party An Indian Trust, however, is permitted to make overseas direct investment under approval route 29 April 2017 P. P. Shah & Asso. 104

105 Other types of Entities Whether Eligible Entities or not for ODI AOP / BOI / Artificial Juridical Person: Not defined in FEMA But included as Persons in Sec. 2(u) of FEMA 1999 and in Sec. 2(31) of Income-Tax Act, 1961 AOP / BOI included in Person in General Clauses Act, 1897 Trust is not AOP / BOI Artificial Juridical Persons such as Board of Directors of a Company or Managing Committee of a Society are recognized only for the purpose of the relevant Statute/s 29 April 2017 P. P. Shah & Asso. 105

106 Overseas Direct Investment by Resident Individuals With effect from August 05, 2013, a resident individual (single or in association with another resident individual or with an Indian Party as defined in the Notification) satisfying the criteria as per Schedule V of the Notification, may make overseas direct investment in the equity shares and compulsorily convertible preference shares of a Joint Venture (JV) or Wholly Owned Subsidiary (WOS) outside India The limit of overseas direct investment by the resident individual shall be within the overall limit prescribed by the Reserve Bank of India under the provisions of Liberalised Remittance Scheme 29 April 2017 P. P. Shah & Asso. 106

107 29 April 2017 Overseas Direct Investment by Resident Individuals (con t) Important conditions in Sch. V of Ntf. 120: JV or WOS abroad should not be engaged in the real estate business or banking business or in the business of financial services activity JV or WOS abroad shall be engaged in bonafide business activity JV or WOS not to be located in the countries identified by the Financial Action Task Force (FATF) as "non co-operative countries and territories" as available on FATF website or as notified by the Reserve Bank Investment made out of the balances held in EEFC / RFC account shall also be restricted to the limit prescribed under LRS JV or WOS shall be an operating entity only and no step down subsidiary is allowed to be acquired or set up by the JV or WOS For the purpose of making investment under this Schedule, the valuation shall be as per Regulation 6(6)(a) of this Notification P. P. Shah & Asso. 107

108 Overseas Direct Investment by Resident Individuals (con t) Important conditions in Sch. V of Ntf. 120: Disinvestment (partially or fully) allowed by way of transfer / sale or by way of liquidation / merger of the JV or WOS Disinvestment by a resident individual shall be allowed after one year from the date of making first remittance for setting up or acquiring the JV or WOS abroad. Investment made out of the balances held in EEFC / RFC account shall also be restricted to the limit prescribed under LRS Disinvestment proceeds shall be repatriated to India immediately and in any case not later than 60 days from the date of disinvestment No write off shall be allowed in case of disinvestments by the resident individuals 29 April 2017 P. P. Shah & Asso. 108

109 Overseas Direct Investment by Resident Individuals (con t) Important conditions in Sch. V of Ntf. 120: The resident individual, making overseas direct investments under the provisions of this Schedule, shall submit Part I of the Form ODI, duly completed, to the designated authorised dealer, within 30 days of making the remittance The obligations as required in terms of Regulation 15 of Notification 120 shall also apply to the resident individuals who have set up or acquired a JV or WOS under the provisions of this Schedule The disinvestment by the resident individual may be reported by the designated AD to the Reserve Bank in Form ODI Part IV within 30 days of receipt of disinvestment proceeds 29 April 2017 P. P. Shah & Asso. 109

110 ODI under LRS: A Case Study II A. ODI- Investment by Individual under Liberalised Remittance Scheme Mr. A desires to make investment in shares of a foreign company. He seeks guidance on the relevant provisions and routes available to him under FEMA. Leads: Liberalised Remittance Scheme (LRS) under A.P.(Dir) Circular No. 64 dt Overseas Direct Investment under Regn. 20A read with Schedule V of FEMA Ntf April 2017 P. P. Shah & Asso. 110

111 ODI under LRS: A Case Study II Overview of legal framework: Under LRS, resident individuals can freely remit up to USD 2,50,000 per Financial Year (April-March) for any permitted current or capital account transaction or a combination of both Permissible capital account transactions by an individual under LRS includes: making investments abroad - acquisition and holding shares of both listed and unlisted overseas company or debt instruments; acquisition of ESOPs; investment in units of Mutual Funds, Venture Capital Funds, unrated debt securities, promissory notes; setting up Wholly Owned Subsidiaries and Joint Ventures (with effect from August 05, 2013) outside India for bonafide business subject to the terms & conditions stipulated in Notification No FEMA.263/RB-2013 dated March 5, 2013 which amended Notification No FEMA 120 relating to Overseas Direct Investments Under FEMA 120, "Direct investment outside India" means investment by way of contribution to the capital or subscription to the Memorandum of Association of a foreign entity or by way of purchase of existing shares of a foreign entity either by market purchase or private placement or through stock exchange, but does not include portfolio investment (emphasis applied) 29 April 2017 P. P. Shah & Asso. 111

112 ODI under LRS: A Case Study II Discussions: From the definition of Direct investment outside India, it is evident that investment in the nature of portfolio investment does not fall under the same and hence is outside the purview of provisions specified in Ntf. FEMA 120 The term portfolio investments is not defined in FEMA or in any of its regulations. The Advance Law Lexicon defines the term portfolio investment as the purchase of foreign financial asset with the purpose of deriving returns from the security without intervening in the management of the foreign operations. Hence, in common parlance, portfolio investments may be considered as hands-off investments which are made only with the intention to earn returns and do not include control/ participation in decision making of an offshore entity by the resident individual. Therefore, the route available to Mr. A depends on whether his investment in foreign company is for undertaking business with participation / control in decision making by him or is hands-off i.e. in nature of portfolio investment. Issue arises as to whether investment in unlisted securities can be considered as portfolio investment if it does not involve management participation or control because, as per common parlance, only listed investments are generally considered as portfolio investments 29 April 2017 P. P. Shah & Asso. 112

113 ODI under LRS: A Case Study II Discussions: The maximum amount of investment in foreign shares by resident individual is limited to the LRS limit of US$ 250,000 whether through LRS or through ODI route If Mr. A s case falls under ODI route, it is subject to conditions specified in Schedule V of FEMA Ntf The following conditions are more restrictive in case of ODI by individual compared to ODI by a company / registered partnership firm / LLP: The JV or WOS, to be acquired / set up by a resident individual under Schedule V, shall be an operating entity only and no step down subsidiary is allowed to be acquired or set up by the JV or WOS The financial commitment by a resident individual to / on behalf of the JV or WOS, other than the overseas direct investments as defined under Regulation 2(e) read with Regulation 20A of this Notification, is prohibited. As per said definition, investment is permissible only by way of contribution to the capital or subscription to the Memorandum of Association of a foreign entity or by way of purchase of existing shares of a foreign entity; hence it may not be possible for Mr. A to grant loan to or issue guarantee on behalf of his JV / WOS abroad In case an individual invests in JV / WOS along with Indian company as part of Indian Party, issue arises whether the above mentioned restrictive provisions relating to step down subsidiaries, loans & guarantees would apply to such ODI. 29 April 2017 P. P. Shah & Asso. 113

114 ODI under LRS: A Case Study II Other key issues arising under ODI & LRS: What is the status of investments in unlisted pvt. companies done under LRS prior to Aug. 2013? Is Form APR required to be filed? But UIN was not required earlier under LRS. So will RBI issue UIN for such old cases? Or do the above investments need to be liquidated / exited? What if investment in above company through LRS was in nature of portfolio investment? If yes, will it be outside the purview of FEMA Ntf. 120 i.e. no requirement of filing of APR / disinvestment report / valuation, etc.? What if investment in above company was made when person was resident outside India (or it was inherited from a person resident outside India) and he is now contemplating further investment in same company under LRS? In such cases, will conditions of FEMA Ntf. 120 apply pro-rata to the two methods of investment or will the entire investment be subjected to the rigors such as filing of APR / valuation / divestment report, etc.? 29 April 2017 P. P. Shah & Asso. 114

115 Immovable Property in India FEMA Ntf Important Definitions :- c) a person of Indian origin means an individual (not being a citizen of Pakistan or Bangladesh or Sri Lanka or Afghanistan or China or Iran or Nepal or Bhutan), who (i) at any time, held Indian passport; or (ii) who or either of whose father or mother or whose grandfather or grandmother was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955) d) repatriation outside India means the buying or drawing of foreign exchange from an authorised dealer in India and remitting it outside India through normal banking channels or crediting it to an account denominated in foreign currency or to an account in Indian currency maintained with an authorised dealer from which it can be converted in foreign currency 29 April 2017 P. P. Shah & Asso. 115

116 Immovable Property in India FEMA Ntf Acquisition and Transfer of Property in India by an Indian Citizen resident outside India:- A person resident outside India who is a citizen of India may - a) acquire immovable property in India other than an agricultural property, plantation, or a farm house: Provided that in case of acquisition of immovable property, payment of purchase price, if any, shall be made out of (i) funds received in India through normal banking channels by way of inward remittance from any place outside India or (ii) funds held in any non-resident account maintained in accordance with the provisions of the Act and the regulations made by the Reserve Bank. Provided further that no payment of purchase price for acquisition of immovable property shall be made either by traveler's cheque or by foreign currency notes or by other mode other than those specifically permitted by this clause b) transfer any immovable property in India to a person resident in India. c) transfer any immovable property other than agricultural or plantation property or farm house to a person resident outside India who is a citizen of India or to a person of Indian origin resident outside India. 29 April 2017 P. P. Shah & Asso. 116

117 Immovable Property in India FEMA Ntf Acquisition and Transfer of Property in India by a Person of Indian origin A person of Indian origin resident outside India may - (a) acquire immovable property in India other than an agricultural property, plantation, or a farm house; Provided that in case of acquisition of immovable property, payment of purchase price, if any, shall be made out of (i) funds received in India through normal banking channels by way of inward remittance from any place outside India or (ii) funds held in any non-resident account maintained in accordance with the provisions of the Act and the regulations made by the Reserve Bank. Provided further that no payment of purchase price for acquisition of immovable property shall be made either by traveler's cheque or by foreign currency notes or by other mode other than those specifically permitted by this clause (b) acquire any immovable property in India other than agricultural land/farm house/plantation property by way of gift from a person resident in India or from a person resident outside India who is a citizen of India or from a person of Indian origin resident outside India; (c) acquire any immovable property in India by way of inheritance from a person resident outside India who had acquired such property in accordance with the provisions of the foreign exchange law in force at the time of acquisition by him or the provisions of these Regulations or from a person resident in India; (d) transfer any immovable property in India other than agricultural land/farm house/plantation property, by way of sale to a person resident in India; (e) transfer agricultural land/farm house/ plantation property in India, by way of gift or sale to a person resident in India who is a citizen of India; (f) transfer residential or commercial property in India by way of gift to a person resident in India or to a person resident outside India who is a citizen of India or to a person of Indian Origin resident outside India. 29 April 2017 P. P. Shah & Asso. 117

118 Immovable Property in India FEMA Ntf Acquisition of Immovable Property for carrying on a permitted activity:- A person resident outside India who has established in India in accordance with the Foreign Exchange Management (Establishment in India of Branch or Office or other Place of Business) Regulations, 2000, a branch, office or other place of business for carrying on in India any activity, excluding a liaison office, may a) acquire any immovable property in India, which is necessary for or incidental to carrying on such activity; Provided that i) all applicable laws, rules, regulations or directions for the time being in force are duly complied with; and ii) the person files with the Reserve Bank a declaration in the form IPI annexed to these regulations, not later than ninety days from the date of such acquisition; b) transfer by way of mortgage to an authorised dealer as a security for any borrowing, the immovable property acquired in pursuance of clause (a). 29 April 2017 P. P. Shah & Asso. 118

119 Immovable Property in India FEMA Ntf Repatriation of sale proceeds:- (a) A person referred to in sub-section (5) of Section 6 of the Act, or his successor shall not, except with the prior permission of the Reserve Bank, repatriate outside India the sale proceeds of any immovable property referred to in that sub-section; (b) In the event of sale of immovable property other than agricultural land/farm house /plantation property in India by a person resident outside India who is a citizen of India or a person of Indian origin, the authorised dealer may allow repatriation of the sale proceeds outside India, provided the following conditions are satisfied, namely: (i) the immovable property was acquired by the seller in accordance with the provisions of the foreign exchange law in force at the time of acquisition by him or the provisions of these Regulations; (ii) the amount to be repatriated does not exceed (a) the amount paid for acquisition of the immovable property in foreign exchange received through normal banking channels or out of funds held in Foreign Currency Non-Resident Account or (b) the foreign currency equivalent, as on the date of payment, of the amount paid where such payment was made from the funds held in Non-Resident External account for acquisition of the property; (iii) in the case of residential property, the repatriation of sale proceeds is restricted to not more than two such properties. (c) In the event of failure in repayment of external commercial borrowing availed by a person resident in India under the provisions of the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000, (Notification No. FEMA 3/2000-RB, dated ) a bank which is an authorised dealer may permit the overseas lender or the security trustee (in whose favour the charge on immovable property has been created to secure the ECB) to sell the immovable property on which the said loan has been secured only to a (by the) person resident in India and to repatriate the sale proceeds towards outstanding dues in respect of the said loan and not any other loan 29 April 2017 P. P. Shah & Asso. 119

120 Immovable Property in India FEMA Ntf Prohibition on acquisition or transfer of immovable property in India by citizens of certain countries No person being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Macau or Hong Kong without prior permission of the Reserve Bank shall acquire or transfer immovable property in India, other than lease, not exceeding five years. 29 April 2017 P. P. Shah & Asso. 120

121 Immovable Property in India FEMA Ntf. 21 Summary of the provisions applicable to NRIs and PIOs under FEMA 21: Particulars NRI PIO Purchase (other than agricultural land/ farmhouse/ plantation etc) from Acquire as gift (other than agricultural land/ farmhouse/ plantation etc) from Resident/ NRI Resident / NRI/ PIO Resident/ NRI Resident/ NRI/ PIO Acquire (any IP) as inheritance from (a) Any person who has acquired it under laws in force (b) under section 6(5) of FEMA Sell (other than agricultural land/ farmhouse/ plantation etc) to Sell (agricultural land) to Resident / NRI/ PIO Resident Resident Resident who is a citizen of India Gift (other than agricultural land) to Resident / NRI/ PIO Resident / NRI/ PIO Gift (agricultural land) to Resident Resident who is a citizen of India Gift residential/ commercial property to Resident / NRI/ PIO Resident / NRI/ PIO 29 April 2017 P. P. Shah & Asso. 121

122 Immovable Property in India Case study III-A Investment in Real estate by NRI in India. Discuss the various alternative available to Mr. NRI in India to explore real estate business/ Purchase and sale of Immovable property in India Discuss these opportunity in the back ground of various provision under FEMA 29 April 2017 P. P. Shah & Asso. 122

123 Case study III-A (con t) Overview of legal provision: 1. As per FDI POLICY 2016 FDI means - Investment by non-resident entity/person resident outside India in the capital of an Indian company under Schedule 1 of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, As per schedule 4 of FEMA Notf.20 a NRI including a company, a trust and a partnership firm incorporated outside India and owned and controlled by non-resident Indians may purchase and sale shares/convertible debentures, warrants or units on Non- repatriation basis which will be deemed to be domestic investment at par with the investment made by residents. However, no purchase of shares or convertible debentures, etc of an Indian company shall be made under this Scheme if the company concerned is a Nidhi company or is engaged in agricultural/plantation activities or real estate business or construction of farm houses or dealing in Transfer of Development Rights. Explanation: For the purpose of this paragraph, "Real estate business" means dealing in land and immovable property with a view to earning profit therefrom and does not include development of townships, construction of residential commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships. Further, earning of rent income on lease of the property, not amounting to transfer, will not amount to real estate business. Investment in units of Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) regulations 2014 shall also be excluded from the definition of real estate business 29 April 2017 P. P. Shah & Asso. 123

124 Case study III-A (con t) 3.As per para of FDI policy % FDI under automatic route is allowed in Construction Development projects (which would include development of townships, construction of residential/commercial premises, roads or bridges, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure, townships) subject to conditions specified in the policy. Conditions relating to lock-in period of 3 years do not apply to investment by NRIs. 4.Further as per Regulation 3 of Foreign Exchange Management (Acquisition and transfer of Immovable property in India) Notf.21 A person resident outside India who is a citizen of India may - a) acquire immovable property in India other than an agricultural property, plantation, or a farm house: Provided that in case of acquisition of immovable property, payment of purchase price, if any, shall be made out of (i) funds received in India through normal banking channels by way of inward remittance from any place outside India or (ii) funds held in any non-resident account maintained in accordance with the provisions of the Act and the regulations made by the Reserve Bank. Provided further that no payment of purchase price for acquisition of immovable property shall be made either by traveller's cheque or by foreign currency notes or by other mode other than those specifically permitted by this clause'. b) transfer any immovable property in India to a person resident in India. c) transfer any immovable property other than agricultural or plantation property or farm house to a person resident outside India who is a citizen of India or to a person of Indian origin resident outside India 29 April 2017 P. P. Shah & Asso. 124

125 Case study III-A (con t) Repatriation of sale proceeds In the event of sale of immovable property other than agricultural land/farm house /plantation property in India by a person resident outside India who is a citizen of India or a person of Indian origin, the authorised dealer may allow repatriation of the sale proceeds outside India, provided the following conditions are satisfied, namely: (i) the immovable property was acquired by the seller in accordance with the provisions of the foreign exchange law in force at the time of acquisition by him or the provisions of these Regulations; (ii) the amount to be repatriated does not exceed (a) the amount paid for acquisition of the immovable property in foreign exchange received through normal banking channels or out of funds held in Foreign Currency Non-Resident Account or (b) the foreign currency equivalent, as on the date of payment, of the amount paid where such payment was made from the funds held in Non- Resident External account for acquisition of the property; (iii) in the case of residential property, the repatriation of sale proceeds is restricted to not more than two such properties. 29 April 2017 P. P. Shah & Asso. 125

126 Immovable Property in India Case study III-B Acquisition of Immovable property An Indian citizen resident in Iran gets immovable property in India by way of inheritance from his parents resident in India. Can he hold such property? What if above property is agricultural land? Can he carry out agricultural activities? 29 April 2017 P. P. Shah & Asso. 126

127 Immovable Property in India Case study III-B (con t) Overview of legal framework As per sec. 6(5) of Foreign Exchange Management Act - A person resident outside India may hold, own, transfer or invest in Indian currency, security or any immovable property situated in India if such currency, security or property was acquired, held or owned by such person when he was resident in India or inherited from a person who was resident in India According to regulation 7 of Foreign Exchange Management (Acquisition and transfer or immovable property in India) - No person being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Macau or Hong Kong without prior permission of the Reserve Bank shall acquire or transfer immovable property in India, other than lease, not exceeding five years. (Notf 21) Reg 3 A person Resident out side India who is citizen of India a)acquire.other than Agricultural/plantations/farm house and b)transfer any immovable property in India to a PRII. c)transfer any immovable property other than Agricultural.to a PROI who is citizen of India or to a PIO resident outside India.(Notf 21) 29 April 2017 P. P. Shah & Asso. 127

128 Immovable Property in India Case study III-B (con t) Question of the India Citizen: Sec 6(4) permits inheritance from Resident Indian. Notification prohibits it - what will prevail? Normally inheritance is a Right under other Law, Can FEMA override such a law? Answer could be yes for all three questions, However India citizen may approach RBI for the clarity. 29 April 2017 P. P. Shah & Asso. 128

129 Export of Goods & Services SEC.7 of FEMA: Export of goods and services.- (1) Every exporter of goods shall- (a) furnish to the Reserve Bank or to such other authority a declaration in such form and in such manner as may be specified, containing true and correct material particulars, including the amount representing the full export value or, if the full export value of the goods is not ascertainable at the time of export, the value which the exporter, having regard to the prevailing market conditions, expects to receive on the sale of the goods in a market outside India; (b) furnish to the Reserve Bank such other information as may be required by the Reserve Bank for the purpose of ensuring the realization of the export proceeds by such exporter. (2) The Reserve Bank may, for he purpose of ensuring that the full export value of the goods or such reduced value of the goods as the Reserve Bank determines, having regard to the prevailing market conditions, is received without any delay, direct any e porter to comply with such requirements as it deems fit. (3) Every exporter of services shall furnish to the Reserve Bank or to such other authorities a declaration in such form and in such manner as may be specified, containing the true and correct material particulars in relation to payment for such services 29 April 2017 P. P. Shah & Asso. 129

130 Case study IV-A Export of goods Branch Outside India A Ltd. is engaged in export of goods to branch outside India. A Ltd is informed of various circular, Notification 47/2001, A.P. Dir cir 39 dt 20/4/2002, A.P. Dir cir 18 of 4/12/2006 dealing with Initial remittance for set up (15% of TO of last two financial year or 25% of Net worth whichever is higher) and recurring expense (10% of TO of last two financial year ) Question arose as to A. Whether branch is required to receive export proceeds in accordance with Notf. 23 for all the exports made. B. Whether A Ltd. is required to receive net of expenses or gross amount of export from its branch C. Export of software with on site development are allowed to bring in Foreign Exchange net of expense on completing the project Whether in similar manner A Ltd. Can also plan its transaction? Leads: Residential status, Sec.7 of FEMA read with applicability of sec. 2(j)(i)- CAT, Notf. 23 regulates CAT to ensure documentation and FE entitlement and its receipt by PRII 29 April 2017 P. P. Shah & Asso. 130

131 Case study IV-A Nature and Status of a Branch of an Indian company and its export Section 2(l) Export with all it s grammatical variations and cognate expressions, means i)the taking out of India to place outside India any goods, ii)provision of services from India to any person outside India Sec 2 (v) Person Resident in India means- (i) a person residing (ii) any person or body corporate. (iii)an office, branch or agency in India. (iv)an office, branch or agency outside India owned or controlled by a person resident in India. All the provisions applicable to PRII will therefore be applicable to overseas branch unless stated otherwise 29 April 2017 P. P. Shah & Asso. 131

132 Case study IV-A Thus sec. 7 authorises RBI to make regulation in respect of PRII who is exporter. Notf. 23 is issued to regulates activity of the exporter who is PRII so far as export value and its repatriation is concerned. Regulation 8 deals with the realisation period of export and states that- Full Export value of goods or software exported shall be realised and repatriated in India within 6 months from the date of export. Thus : a) Goods taken out by a PRII is to be treated as export irrespective of the fact that it is exported to Branch. However it may not be so in case of service as in that case what is required is provision of service from India to any person outside India.[Branch is person resident in India] b) Since it is export full value to be realised within 6 months unless period is extended by RBI. c) Full value is referred to be repatriated. So, sale value net of expense can not be considered. 29 April 2017 P. P. Shah & Asso. 132

133 Case study IV-B Export of Project Project export Turnkey Project Ltd. an Indian company has bagged a contract to set up a sugar mill in Uganda for a lumpsum price of US $ 10 mn. The contract includes supply of Plant & Machinery from India, services of Indian company in installation and commissioning of plant at site. A part of machinery is also to be outsourced from third country for about US $ 2,00,000 to be installed at site. It also requires various local services for installation estimated at US $ 8,00,000. Indian company has been funded by the nationalised bank to execute the turnkey project including the provision of services. Indian company seeks your advise to execute the transaction from stand point of FEMA 1999 and secure arrangement to receive payment from foreign customer, who is willing to deal through the banker. 29 April 2017 P. P. Shah & Asso. 133

134 Case study IV-B Export of Project Issue: Deferred payment contract Purchase of goods without import into India Purchase of Overseas service Payment through bank Leads : Documents for Export of goods: Delivery of title to the goods can be exchanged by overseas Bank on acceptance of Letter of credit by the overseas customer Service export: Title to the design, drawings, could be a milestone to ensure payment mobilisation, advance, Performance guarantee, Neutral Certification agency approved by Bank Other issue: Income tax on provision of service Service tax on provision of service Comprehensive solution: Project export through AD/Exim bank, Form DPX and the procedure 29 April 2017 P. P. Shah & Asso. 134

135 Case study IV-A&B Export of Project Branch Office outside India: Under FEMA Notf. 10(R), an Indian entity is permitted to open, hold and maintain in the name of its office (trading or non-trading) or its branch set up outside India or its representative posted outside India, a foreign currency account with a bank outside India by making remittances from India for the purpose of normal business operations of the office/ branch or representative, provided that - (a) the overseas branch/ office has been set up or representative is posted overseas for conducting normal business activities of the Indian entity; (b) the total remittances made under this sub-regulation by the Indian entity, to all such accounts in an accounting year shall not exceed (i) 15 per cent of the average annual sales/ income or turnover of the Indian entity during the last two financial years or up to 25 per cent of the net worth, whichever is higher, where the remittances are made to meet initial expenses of the branch or office or representative; and (ii) 10 per cent of such average annual sales/ income or turnover during the last financial year where the remittances are made to meet recurring expenses of the branch or office or representative 29 April 2017 P. P. Shah & Asso. 135

136 Case study IV-A&B Export of Project Project Office vs Branch Office outside India: A Branch office is permitted to conduct all normal business activities of the Indian entity; yet various restrictions on the amount of remittances that can be done to fund the same have been stipulated as discussed in earlier slide However, a Project Office is permitted to be set up overseas under Project Exports and there are no stipulations or restrictions on funding thereof Both, Project Office and Branch Office are similar extensions of the Indian entity i.e. both are PRII yet different set of rules prevail What are the implications arising out of above dichotomy? How may an Indian entity base its decision on whether to set up Project office or Branch office abroad? 29 April 2017 P. P. Shah & Asso. 136

137 Online Payment Gateways Processing and settlement of import and export related payments facilitated by Online Payment Gateway Service Providers ( OPGSP ) vide A.P.Dir Cir 16 dt : Import Transactions: Only the import of goods and software (as permitted under the prevalent Foreign Trade Policy) whose value does not exceed USD 2,000 are eligible to avail this facility. Immediately upon receipt of funds from the importer and in no event, later than two (2) days from the date of credit to the collection account, the sale / import proceeds in the import collection account is required to be remitted to the respective overseas exporter s bank account. The permitted credits in the OPGSP Import Collection account will be: a) collection from Indian importers for online purchases from overseas exporters electronically through credit card, debit card and net banking and b) charge back from the overseas exporters. The permitted debits in the OPGSP Import Collection account will be: a) payment to overseas exporters in permitted foreign currency; b) payment to Indian importers for returns and refunds; c) payment of commission at rates/frequencies as defined under the contract to the current account of the OPGSP; and d) bank charges 29 April 2017 P. P. Shah & Asso. 137

138 Online Payment Gateways (cont d) Export Transactions: The framework governing the export payment transactions remains largely as was prescribed in the earlier circulars issued by the RBI, namely, Circular No. 109 dated June 11, 2013 and Circular No. 17 dated November 16, 2010 Only the exports of goods and services (as permitted under the prevalent Foreign Trade Policy) whose value does not exceed USD 10,000 are eligible to avail this facility. AD Category-I banks providing such facilities shall open a NOSTRO collection account for receipt of the export related payments facilitated through such arrangements. Where the exporters availing of this facility are required to open notional accounts with the OPGSP, it shall be ensured that no funds are allowed to be retained in such accounts and all receipts should be automatically swept and pooled into the NOSTRO collection account opened by the AD Category-I bank. The balances held in the NOSTRO collection account shall be repatriated to the Export Collection account in India and then credited to the respective exporter's account with a bank in India immediately on receipt of the confirmation from the importer and, in no case, later than seven days from the date of credit to the NOSTRO collection account. 29 April 2017 P. P. Shah & Asso. 138

139 Online Payment Gateways (cont d) Export Transactions (cont d): The permitted debits in the OPGSP Export Collection account will be: a) payment to the respective Indian exporters accounts b) payment of commission at rates/frequencies as defined under the contract to the current account of the OPGSP; and c) charge back to the overseas importer where the Indian exporter has failed in discharging his obligations under the sale contract. The only permitted credit in the OPGSP Export Collection account will be repatriation from the NOSTRO collection accounts electronically. 29 April 2017 P. P. Shah & Asso. 139

140 Thank You 29 April 2017 P. P. Shah & Asso. 140