Scheme of Presentation

Transcription

1 FEMA ODI, LRS, FC A/CS S. Sathiyanarayanan Partner 23 DEC 2014 ICAI Beyond the boundary Scheme of Presentation Current Vs. Capital Acct Transactions ODI Statutory Basis ODI by Company, Firms, LLPs & Residents With issues ODI when Restructuring, Merger happens LRS FC Deposit Regulations 1

2 Current and Capital Account Transaction Capital Account transaction means a transaction which alters assets or liabilities including contingent liabilities outside India of person resident in India and vice-versa. It s an economic definition rather than an accounting or legal definition. Current Account transaction is transaction other than a capital account transaction. Current Account transactions are freely permitted unless prohibited - they are regulated by Central Government. Capital Account transactions are prohibited unless generally permitted - they are regulated by RBI. OVERSEAS DIRECT INVESTMENTS (ODI) 2

3 Significance of ODI Promoting global business by Indian entrepreneurs. Promote economic and business co-operation between India and other countries. Transfer of technology and skill, share R & D. Access to global market and promote brand image. Increase in exports of Plant & Machinery and goods and services Source of Foreign Exchange Earnings dividend, royalty, technical know-how and other entitlements. ODI Statistics Source: 6 3

4 Statutory Basis Section 6(3)(a) of FEMA, 1999 read with FEM (Permissible Capital Account Transactions), Regulations, FEMA 120 Master Circular AP (DIR Series) Circulars issued by RBI from time to time FAQs on ODI released by RBI (as updated from time to time) FAQs on Liberalised Remittance Scheme applicable for resident individuals. Meaning of ODI Investment by an Indian party, either under Automatic or Approval route, by way of contribution to capital or subscription to the MOA of foreign entity or by way of purchase of existing shares of foreign entity either by Investment through stock exchange; or Private placement; or Market purchase; or Investment in a Joint Venture or Wholly Owned Subsidiary abroad. But does not include Portfolio Investment. 4

5 Eligible Investor An Indian Party who is A company incorporated in India; or A body created under act of Parliament: or A partnership firm registered under the Indian Partnership Act, 1932 Limited Liability Partnership incorporated under LLP Act, 2008 (permitted vide Circular No. 131 dated /FEMA 299 dated ) Eligible Investor (Contd ) Special Cases (primarily under approval route) Proprietary Firm Trust / Society Un-incorporated Entities Issue: Resident Individual is also permitted to invest in companies abroad under ODI scheme. But the definition above does not include resident individual as Indian Party. 5

6 Financial Commitment Financial Commitment means the amount of direct investments outside India by an Indian party - By way of contribution to equity shares or CCPS of the JV/WOS abroad Contribution to the JV/WOS as preference shares (for reporting to be treated as loan) As loan to its JV/WOS abroad 100% of the amount of corporate guarantee issued on behalf of its overseas JV/WOS and 50% of the amount of performance guarantee issued on behalf of its overseas JV/WOS Financial Commitment (Contd ) Bank guarantee/standby letter of credit issued by a resident bank on behalf of an overseas JV/WOS of the Indian party, which is backed by counter guarantee / collateral by the Indian party Creation of charge (pledge/ mortgage/ hypothecation) on the movable / immovable property or other financial assets Indian party / its group concern (Note: the amount and period of guarantee should be specified upfront). 6

7 Routes Automatic Route No prior RBI approval required for making direct investment in JV/WOS abroad. Overseas JV/WOS to be engaged in bonafide business. Investment in Financial sector should comply additional conditions Indian party not on RBIs Exporters Caution list/list of defaulters/under investigation by an Authority such as ED, SEBI etc. Submission of Form Annual Performance Report in respect of all overseas investments. 7

8 Automatic Route (contd ) 3 June 14 onwards(circular No. 138 of 2013) LRS limit enhanced to USD 1,25, July 14 onwards (Circular No. 1 of 2014) Financial Commitment limit restored to 400% Net WorthofIndianParty subjecttousd1billion per FY. Approval Route Cases Not covered under Automatic route. Specific application to RBI with necessary documents in Form ODI through AD Bank. RBI would consider following factors: Prima facie viability of JV/WOS outside India Contribution to external trade and other benefits which will accrue through such investment. 8

9 Approval Route Financial position and business track record of Indian Party and foreign Entity, and Expertise and experience of the Indian party in the same and related line of activity of the JV/WOS outside India. Overseas Investment Resident Individuals ODI route introduced by FEMA 263 dated for resident individuals JV/WOS to be engaged in bonafide business activities except real estate / banking / financial services ODI in non-co-operative countries and territories as per FATF not permitted. Resident individual not to be on RBI cautions list/defaulters list 9

10 Overseas Investment Resident Individuals Limit of investment in JV/WOS as per LRS limit (currently USD 1,25,000 per annum). Investment made by EEFC/RFC account also included in prescribed LRS limit JV/WOS to be operating company No step down subsidiary to be acquired or set up by JV/WOS Valuation as applicable to ODI by companies. Overseas Investment Resident Individuals Reporting and Post investment conditions write off not permitted in cases of disinvestments. Issue When ODI? When LRS? LRS for portfolio investments listed as well as unlisted shares /Cir No. 32 dated

11 Overseas Investment by LLPs Select Issues Net Worth Whether both current and capital account of partners to be considered for calculating Net Worth? How to apply concept of Free Reserves? Whether benefit of Net Worth a holding/subsidiary company available? RBI FAQ Qn. No. 27 this benefit not available to partnership firms Overseas Investment by LLPs Reasons for this exclusion? Whether also for LLP? Indian party definition includes partnership firm / LLP Conversion of Indian investing Company into LLP Implications of conversion after 7 May 2014 ODI compliant with regulations Implications on conversion before 7 May 2014 ODI non compliant regulations? 11

12 ODI in Financial Services Sector Indian company in Financial Service Sectors can make investment in JV/WOS abroad in the financial services sector only if: It has earned net profit during three preceding financial years from financial services sector It is registered with appropriate regulatory authority in India It has obtained approval for undertaking such activities Has fulfilled the prudential norms relating to capital adequacy ODI - Core Investment Companies RBI DNBS Notification No. DNBS (PD) CC. No. 311/ / dated 6 th December 2012 CICs desirous of making investment in Financial Service Sector (FS) are required to obtain and hold Certificate of Registration and comply with CIC framework for prior RBI approval (applies even to exempted CICs) Exempted CICs making overseas investment in non FS sector do not require registration or prior DNBS approval. Only reporting within 30 days to be done. Whether exempted CICs are regulated FS sector or Unregulated FS sector especially when they are investing in non FS sector whether RBI DNBS approval required or RBI ODI approval required? 12

13 Modes of Funding - ODI Proceeds raised through ADR/GDR Balance in EEFC account Drawal of foreign exchange from AD bank Funding Modes Swap of shares Capitalizatio n of export dues In exchange of ADR / GDR Proceeds of ECB/FCCB Compliances Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Board Resolution for Investment in overseas entity Valuation of shares only if it is acquisition of existing company Reporting in Form ODI within 30 days from the remittance RBI will allot UIN for investment in entity. Second remittance to the JV/WOS cannot be made unless UIN for the first remittance is received. Filing of share certificate with AD bank within 6 months Post investment changes need to be reported within 30 days 13

14 Transfer of shares of JV/WOS - No Write Off An Indian Party may transfer by way of sale to another Indian Party who complies with the provision of Regulation 6, or to a person resident outside India without prior RBI approval if: Sale does not result in write off of investment Sale is through stock exchange In case of non listed entity, transfer is not happening at price less than determined by CPA/CA No outstanding dues from overseas entity Overseas entity is in operation for a period of more than one year and has filed APR Indian party is not under investigation by CBI/ED/SEBI/ERDA or any other regulatory authority. Transfer of shares of JV/WOS - Write Off An Indian Party may transfer by way of sale to another Indian Party where disinvestment is less than the investment amount and: where the JV/WOS is listed overseas whereindianpartyislistedonstockexchangeinindiaand hasnetworthlessthaninr100crore where Indian party is not listed and investment is less than USD 10 million whereindianpartyislistedwithnetworthlessthaninr 100 crore but investment does not exceed USD 10 million. 14

15 Restructuring of Balance sheet of JV/WOS Write off of capital (equity/preference shares) and other receivables such as loans, royalty, technical fee etc. upto 25% of equity investment in JV/WOS is allowed under Automatic route provided: Indian party is listed and has set up WOS or holds 51% shares in JV Copy of Balance sheet showing loss in overseas JV/WOS and projections for next five years indicating benefits accruing to Indian party is submitted to AD. This needs to be reported within 30 days to RBI In case of unlisted Indian party holding more than 51% shares, write off to the extent of 25% of equity investment is allowed under Approval route. Case Study Indian Company merges with another Indian company: I Co 1. has existing investment in F Co. I Co 1. got merged with other Indian company I Co. 2 Existing investment percentage of new net worth of merged I Co. is more than 100% I Co. 1 Holds investment in F Co. Gets merged into I Co. 2 15

16 Case Study Issue: I Co. 1 has validly carried on ODI process and has been allotted UIN by the RBI. If I Co. 1 gets merged into another Indian company I Co. 2, do we just have to intimate RBI about the merger or a new UIN would be allotted in this case? Also, whether this intimation is to be routed through Authorized Dealer or we could directly submit it to the regional office? Case Study Procedure: I Co. 1 has to report the disinvestment (from the WOS by way of merger) in Form ODI Part IV. I Co. 2 has to report the investment (in the WOS by way of merger) in Form ODI Part I & II. All the reporting to be done to RBI through the designated AD bank. 16

17 Liberalized Remittance Scheme (LRS) LRS for Resident Individuals A resident individual (including minors) is allowed to remit up to USD 1,25,000 (w.e.f June 3, 2014) per financial year (April-March) for any permitted current or capital account transactions or a combination of both. With effect from July 7, 2013, the scheme is available for remittances for acquisition of immovable property directly or indirectly outside India The permissible transactions under this scheme include acquisition of shares- both listed and unlisted of an overseas company/ debt instrument/ mutual funds/ any other asset outside India, etc. For undertaking transactions under this Scheme, resident individuals may use the prescribed application-cum-declaration form. PAN number is mandatory to make remittances under the Scheme. 17

18 LRS for Resident Individuals The limit of USD 1,25,000 under the Scheme also includes remittances towards gift and donation by a resident individual. A resident individual is permitted to gift in rupee to his NRI/PIO close relative under the LRS and credit the same to his NRO A/c. [A.P.(DIR Series) Circular No.17 dated September 16, 2011] A.P. (DIR Series) Circular No. 90 dated March 06, 2012: Remittances under the facility can be consolidated in respect of family members subject to individual family members complying with the terms and conditions of the scheme; Remittances under the scheme can be used for purchasing objects of art subject to the provisions of other applicable laws such as the extant Foreign Trade Policy of the Government of India. Deposit Regulations 18

19 What is the framework under FEMA? Regulations FEMA 5/2000-RB on Foreign Exchange Management (Deposit) regulations, 2000 amended from time to time Other Notifications Circulars issued by RBI from time to time. What are the types of deposits accepted by AD Banks? Non-resident (External) Account Scheme ( NRE account ) from a nonresident Indian Foreign Currency (Non-Resident) Account Banks Scheme ( FCNR B account ) from a non-resident Indian Non-Resident (Ordinary) Account Scheme ( NRO account ) from any person resident outside India 19

20 What are the key Features of various deposit schemes Particulars FCNR (B) Account NRE Account NRO Account Type of Account Who can open? Joint Account? Currency? Term Deposit only NRIs - individuals/ entities of Bangladesh/ Pakistan nationality / ownership require prior approval of RBI Two or more non-resident individuals - provided all are persons of Indian nationality or origin; Any freely convertible currency Savings, Current, Recurring, Fixed Deposit NRIs - individuals/ entities of Bangladesh/Pakistan nationality / ownership require prior approval of RBI Two or more non-resident individuals - provided all are persons of Indian nationality or origin; Indian Rupees Savings, Current, Recurring, Fixed Deposit Any person resident outside India (other than a person resident in Nepal and Bhutan). Individuals / entities of Pakistan nationality / ownership, entities of Bangladesh ownership and erstwhile Overseas Corporate Bodies require prior approval of the RBI. May be held jointly with residents Indian Rupees Queries? 20

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