CTC s INTENSIVE STUDY COURSE ON FEMA

Transcription

1 CTC s INTENSIVE STUDY COURSE ON FEMA Case Studies, Practical Issues & FAQs on FEMA Presented by: Mr. Paresh P. Shah P.P. Shah & Associates Chartered Accountants ppshahandassociates@gmail.com 22 Dec 2017 P. P. Shah & Asso. 1

2 Overview Foreign Exchange Management Act Overview Fundamentals of FEMA FEMA Practice FEMA Case studies FEMA FAQs (RBI) 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), Reserve Bank of India (RBI), Non repatriable basis (NRB) Repatriable basis(rb) Subject to (SBT) 22 Dec 2017 P. P. Shah & Asso. 2

3 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 remain valid until amended / rescinded by Central Govt.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 22 Dec 2017 P. P. Shah & Asso. 3

4 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 22 Dec 2017 P. P. Shah & Asso. 4 May 2002, Repeal and Savings

5 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 22 Dec 2017 P. P. Shah & Asso. 5

6 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. 22 Dec 2017 P. P. Shah & Asso. 6

7 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 22 Dec 2017 P. P. Shah & Asso. 7

8 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 22 Dec 2017 P. P. Shah & Asso. 8

9 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; 22 Dec 2017 P. P. Shah & Asso. 9

10 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 22 Dec 2017 P. P. Shah & Asso. 10

11 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 now deemed to be Overseas Citizen of India cardholders w.e.f 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. 22 Dec 2017 P. P. Shah & Asso. 11

12 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. 22 Dec 2017 P. P. Shah & Asso. 12

13 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, Dec 2017 P. P. Shah & Asso. 13

14 Issues PIO to OCI change (con t) 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). 22 Dec 2017 P. P. Shah & Asso. 14

15 Issues PIO to OCI change (con t) However, as per the latest definition mentioned in new FEMA 20(R) dt , a Non-resident Indian (NRI) is a person resident outside India who is a citizen of India. OCI is now defined separately in new FEMA 20(R) as: Overseas Citizen of India (OCI) means an individual resident outside India who is registered as an Overseas Citizen of India Cardholder under Section 7(A) of the Citizenship Act, Thus, with the latest amendment vide FEMA Ntf. 20(R), NRI and OCI are defined separately and there is no reference to PIO ; hence a PIO is required to take OCI card before undertaking the permitted investments. 22 Dec 2017 P. P. Shah & Asso. 15

16 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. 22 Dec 2017 P. P. Shah & Asso. 16

17 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. 22 Dec 2017 P. P. Shah & Asso. 17

18 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. 22 Dec 2017 P. P. Shah & Asso. 18

19 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. 22 Dec 2017 P. P. Shah & Asso. 19

20 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. 22 Dec 2017 P. P. Shah & Asso. 20

21 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, Dec 2017 P. P. Shah & Asso. 21

22 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, Dec 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. 13(R) 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 22 Dec 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] 22 Dec 2017 P. P. Shah & Asso. 26

27 Partnership business in India- Notf.24 [Now subsumed under Ntf. 20(R) w.e.f ] Borrowings in rupees FEMA Practice 22 Dec 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 FEMA Practice PROI Foreign Citizen NRIs Other entities Lending in FE Lending in rupee Lending by way of Deposits 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(R) schedule 2, 5,8 [Notf. 20(R) - schedule 3 and 5] Notf. 20(R) schedule 2, 5,8 FDI Notf. 20(R) - schedule 1,6,7,8 Notf. 20(R) - schedule 1,4, 6,7 Notf. 20 (R)- schedule 1,6,7,8 22 Dec 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) Notification 10(R),RFC,RFC(domestic), EEFC 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) Overseas Investment Notf Dec 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) 22 Dec 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 22 Dec 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 10 of Notf20(R) 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 22 Dec 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. 22 Dec 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 Dec 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 FEMA 20(R)_ (Transfer or Issue of Security by a - Person Resident Outside India) Regulations, 2017 dt 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 SUBSUMED IN FEMA 20(R) w.e.f Foreign exchange derivative contracts Dec 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/ / Dec 2017 P. P. Shah & Asso. 36

37 Sch. 1 FEMA NTF. 20 (old) Schemes for Inbound Investment Foreign Direct Investment FDI Scheme Sch. 2 & Purchase/Sale of shares or convertible debentures or warrants of an Indian 2A Company by Registered Foreign Portfolio Investor (RFPI) under Foreign Portfolio Investment (FPIs) Scheme (Registered FIIs under Sch. 2 subsumed with Sch. 2A) Sch. 3 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 Sch. 4 Acquisition of Securities or units by a Non-Resident Indian (NRI), on Non- Repatriation basis Sch. 5 Purchase and Sale of Securities other than Shares or Convertible Debentures of an Indian company by a person resident outside India Sch. 6 Investment by a registered Foreign Venture Capital Investor Sch. 7 Indian depository receipts by eligible companies resident outside India Sch. 8 Scheme for investment by Qualified Foreign Investors in equity shares (Subsumed under Sch. 2A) Sch.9 Scheme for Acquisition/Transfer by a person resident outside India of capital contribution or profit share of (LLPs) Sch. 10 Depository Receipts Scheme, 2014 (DRs) 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 22 Dec 2017 P. P. Shah & Asso. 37

38 FEMA NTF. 20(R) Schemes for Inbound Investment (New) Sch. 1 Sch. 2 Sch. 3 Sch. 4 Sch. 5 Sch. 6 Sch. 7 Sch. 8 Sch.9 Sch. 10 Purchase / Sale of capital instruments of Indian company by PROI (i.e. Foreign Direct Investment FDI Scheme) Purchase/Sale of capital instruments of listed Indian company on recognised stock exchange in India by Foreign Portfolio Investor (i.e. Portfolio Investment Scheme) Purchase/Sale of capital instruments of listed Indian company on recognised stock exchange in India by Non-Resident Indian (NRI) or Overseas Citizen of India (OCI) on repatriation basis (i.e. Portfolio Investment Scheme) Purchase/Sale of capital instruments or convertible notes of an Indian company or Units or contribution to capital of an LLP by Non-Resident Indian (NRI) or Overseas Citizen of India (OCI) on non-repatriation basis Purchase and Sale of Securities other than capital instruments by a person resident outside India Investment in a Limited Liability Partnership (LLP) Investment by a Foreign Venture Capital Investor (FVCI) Investment by a person resident outside India in an Investment Vehicle Investment in Depository receipts by a person resident outside India Issue of Indian Depository Receipts (IDRs) 22 Dec 2017 P. P. Shah & Asso. 38

39 FDI Policy Select sectors Definition of Ma ufacture i serted hich is sa e as u der Sectio 2 29BA of the I co e-tax 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 As the definition of Manufacture is wide in scope and no norms are prescribed for minimum investment or value-addition, etc., this may give rise to interpretation issues. Therefore, can reliance be placed on judicial precedents under the Income tax Act to determine the eligibility for FDI under the FDI policy? Moreover, the earlier provisions for FDI in sectors reserved for Micro, Small & Medium enterprises is also dropped. It therefore implies that FDI exceeding 24% is now permitted without Govt. approval even in such reserved sectors. 22 Dec 2017 P. P. Shah & Asso. 39

40 FDI Policy Select sectors(con t) Single Brand Retail Trading ('SBRT') and 'Manufacture' With the addition of 'Manufacture' sector, when read with the existing provisions relating to FDI in SBRT, these recent changes raises the following issues: If a Single Brand owner qualifies as 'Manufacturer' by undertaking processing in India (norms of which are not specified), then it may fall outside the purview of SBRT norms and undertake effectively the same retail business including through all routes - wholesale, retail, brick & mortar stores, ecommerce. When an SBRT seeks FDI beyond 51%, it is required to source 30% of the goods purchased from MSMEs in India and such brand is the one of manufacturer only. But SBRT means retail trading in single brand only, and it does not seem to imply manufacture (due to recent inclusion of 'manufacture' sector), so the question is what can it out-source from India for trading purposes, especially since it can engage only in single-brand retail trading of the goods branded during manufacturing such goods? Also, if the brand owner licenses the same to a third party for undertaking retail trading in India, how can such third party source 30% of the goods from India when it is not undertaking any part in the manufacture of the branded goods in the first place? Or does this sourcing requirement imply that a third party retailer should at least source 30% of the goods from India other than the branded goods which it is sourcing from the foreign brand ownermanufacturer? 22 Dec 2017 P. P. Shah & Asso. 40

41 FDI Policy Select sectors (con t) Other Fi a cial Ser ices' FEMA Notification no.fema.375/2016-rb dated September 9, 2016 amended the sectoral cap for othe financial se i es thereby doing away with the minimum capitalization norms. Instead of specifying various activities, the provision has been simplified to mean Financial Services activities regulated by financial sector regulators, viz., RBI, SEBI, IRDA, PFRDA, NHB or any other financial sector regulator as may be notified by the Government of India. Financial service activities governed by aforesaid regulators will be permitted to bring 100% FDI under automatic route. FDI in unregulated/ partly regulated financial sector activities or where there is doubt regarding the regulatory oversight, FDI will be permitted under approval route subject to conditions including minimum capitalization requirement, as may be decided by the Government. Key issue: A number of financial services (e.g. non-fund based services) are now inadvertently brought under Govt. approval route as such services do not have any Regulator / Govt. agency monitoring the activities. 22 Dec 2017 P. P. Shah & Asso. 41

42 FDI Policy Select sectors (con t) Defe se Sector' As per Consolidated FDI Policy, in Defence Industry subject to Industrial license under the Industries (Development & Regulation) Act, 1951 and Manufacturing of small arms and ammunition under the Arms Act, 1959, FDI is permitted upto 49% in automatic route and upto 100% through Govt. route if it is likely to result in access to modern technology or for other reasons to be recorded. Licence applications will be considered and licences given by the Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, in consultation with Ministry of Defence and Ministry of External Affairs. Foreign investment in the sector is subject to security clearance and guidelines of the M/o Defence. Key issues: In case of items related to Defense sector but not falling under Industrial Licensing or Arms Act such as electronic components used in defense products as well as in other industries, how will the FDI Policy apply? In such cases, will security clearance from M/o Defense still be required? 22 Dec 2017 P. P. Shah & Asso. 42

43 FDI Policy Select sectors Real Estate Real Estate Sector 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 Issues: What types of arrangements qualify under above provisions? Earlier, such conditionalities did not apply to investment by NRIs. Now, with the removal of this exception, provisions have become more stringent for NRIs. Was this the intention? 22 Dec 2017 P. P. Shah & Asso. 43

44 FDI Policy Select sectors Real Estate (con t) 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 22 Dec 2017 P. P. Shah & Asso. 44

45 FDI Policy Select sectors Real Estate (con t) Overview of legal provision: 1. As per FDI POLICY 2017 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(R) 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 22 Dec 2017 P. P. Shah & Asso. 45

46 FDI Policy Select sectors Real Estate (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 22 Dec 2017 P. P. Shah & Asso. 46

47 Real Estate Select sectors (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. 22 Dec 2017 P. P. Shah & Asso. 47

48 Real Estate Select sectors(con t) 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 22 Dec 2017 P. P. Shah & Asso. 48

49 FDI Policy Select sectors(con t) Broadcasting Sector and Print Media Sector FDI Policy on Broadcasting Sector applies to Broadcasting Carriage Services (such as Cable Networks, DTH, Mobile TV, etc.) and Broadcasting Content Services being FM Radio, Up-linking of Ne s & Cu e t Affai s a d No -Ne s & Cu e t Affai s TV Cha els / Do li ki g of TV Channels FDI Policy on Print Media Sector applies to Publishing of newspaper and periodicals dealing with news and current affairs, Publication of Indian editions of foreign magazines dealing with news and current affairs, Publishing/printing of scientific and technical magazines/specialty journals, etc. and Publication of facsimile edition of foreign newspapers Detailed conditions including sectoral cap, entry route, etc. are specified for these sectors. Operational conditions seek to regulate the activities of the journalists through sector-specific laws & guidelines. It can be observed that both sectors deal with different methods of dissemination of information which may be News & Current Affairs or non-news & Current Affairs. However, Internet-based journalism and online dissemination of information through portals which is rapidly proliferating is not specifically covered under the FDI Policy under the above Sectors Key Issue: Can an Indian company proposing to engage in collection of news & current affairs, analysis & reporting / publishing of same through internet online portals invite FDI under automatic route? Is this a loop-hole in the law as the intention of the FDI Policy is to regulate foreign investment in sensitive sectors which deal with matters of national interest? 22 Dec 2017 P. P. Shah & Asso. 49

50 Practical Issues - FDI Policy 100% FDI in LLP under Automatic Route 100% FDI in LLP is permitted under Automatic Route provided the sectors /activities are falling under Automatic Route and there are no FDI-linked performance conditions. Further, downstream investment by LLPs in Indian Company / LLP under Automatic Route is also permitted provided sectors /activities are falling under automatic route and there are no FDI-linked performance conditions. Definition of Control is introduced 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 Definition of Ownership is introduced percentage of the investments in LLPs Key issues Whether LLP can be capitalized on non-cash basis (against import of goods, services, etc.) 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 / activities even with performance conditions? 22 Dec 2017 P. P. Shah & Asso. 50

51 Practical Issues - FDI Policy (con t) Acquisition by NRIs on non-repatriation basis 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 a change in policy to now allow erstwhile OCBs for FDI and other investments in India?? Ho does o e dete i e o e ship a d o t ol i oversea Trust and Partnership? Is conversion of NRI investment from Repatriable to Non-Repatriable basis possible? 22 Dec 2017 P. P. Shah & Asso. 51

52 Practical Issues - FDI Policy (con t) Direct & Indirect Foreign Investment (IFI) by Resident Foreign citizens: FEMA rules generally do not apply based on citizenship but applies only when a transaction is between a resident and a non-resident. In case an Indian resident invests in an Indian company, FEMA Notification no. 20(R) also does not apply as the provisions are applicable only to PROIs. However, when it comes to downstream investments by IC, the regulations make a clear difference between Indian Company (IC) owned and controlled by resident Indian citizens or owned / controlled by non-residents. Key Issues: If a foreign citizen who is resident in India is making direct investment in an Indian Company (i.e. first level IC), it appears that such a transaction shall not be regulated by FEMA (or FEMA Notification No. 20(R)). Is this the intention of the law and regulations? If the IC is considered as Indirect Foreign Investment (as it is not owned and controlled by resident Indian citizen but by foreign citizen resident in India), then it gives rise to a situation where investment in IC is not regulated, whereas downstream investment is regulated. Is that the intention? 22 Dec 2017 P. P. Shah & Asso. 52

53 Practical Issues - FDI Policy (con t) FDI for earning rent / income on lease of property: The Consolidated FDI Policy of 2016 clarifies in Paragraph relating to FDI in Construction Development that FDI in Real Estate business is not permitted but earning of rent / income on lease of property will not amount to real estate business. It is reproduced for convenience as under: i It is la ified that FDI is ot pe itted i a e tit hi h is e gaged o p oposes to e gage i real estate business, construction of farm houses and trading in transferable development rights (TDRs). Real estate usi ess ea s deali g i la d a d i o a le p ope t ith a ie to ea i g profit there from 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 p ope t, ot a ou ti g to t a sfe, ill ot a ou t to eal estate usi ess. Key Issues: As against construction and subsequent lease of the property by the FDI recipient Indian Company, if FDI is instead made directly by FDI recipient Indian Company by way of investments in constructed property such as townships / residential / commercial premises, etc. with a view to lease the same in order to earn rent / income, would it be permissible under the FDI guidelines? The economic benefits to the country would be the same as local developers would have exit route of sale of constructed property to PROIs under FDI route. 22 Dec 2017 P. P. Shah & Asso. 53

54 Practical Issues - FDI Policy (con t) Pricing of Compulsorily Convertible Debentures: As per the prevalent pricing guidelines of instruments under FDI, the pricing of shares / convertible debentures / preference shares should be decided / determined upfront at the time of issue of the instruments. The price for the convertible instruments can also be a determined based on the conversion formula which has to be determined / fixed upfront, however the price at the time of conversion should not be less than the fair value worked out, at the time of issuance of these instruments, in accordance with the extant FEMA regulations. Key Issues: If the o e sio fo ula is spe ified upf o t as sa e.g. o e sio shall e ased o the price / earnings ratio at the time of conversion to be decided by the management subject to minimum issue price of Rs. 50/- per share being the fair value worked out at the time of issua e of these i st u e ts, ould it e i o plia e ith the p i i g guideli es? The price for conversion into shares may be determined based on future profits. Hence till the FCDs are converted into shares, the exact foreign shareholding in the company cannot be determined. How can this be resolved when the Indian company is undertaking downstream investments in order to determine indirect foreign holding? 22 Dec 2017 P. P. Shah & Asso. 54

55 Practical Issues Escrow mechanism in FDI transactions Escrow mechanism has been permitted to facilitate FDI transactions in cases where parties to the share purchase agreement desire to complete the due diligence process before they finalize the agreement for the same and accordingly, there is a time lag between payment of purchase consideration and the receipt of the shares. AD Category I banks have been given general permission to open and maintain non-interest bearing Escrow account in Indian Rupees in India on behalf of residents and non-residents, towards payment of share purchase consideration. Also, SEBI authorised Depository Participant are permitted to open and maintain, without approval of the Reserve Bank, Escrow account for securities. The detailed stipulations relating to opening of Escrow account are specified in Regulation 5(5) read with Schedule 5 of FEMA Ntf. 5(R) Regulation 5(5) of FEMA Ntf. R stipulates that Reside t o o -resident acquirers may, subject to the terms and conditions specified in Schedule 5, open, hold and maintain Escrow Account with Authorised Deale s i I dia. Key Issues: If the FDI transaction involves opening of Escrow account, is there a compulsion to open the same only in India? Can a Cash Escrow account be opened abroad in which the Indian resident is not undertaking any transaction of remittance but it is only going to receive remittance in India as and when the transaction is finally consummated on completion of due diligence procedures? 22 Dec 2017 P. P. Shah & Asso. 55

56 Practical Issues - ODI Policy Foreign Entity for ODI: As per Regn. 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. As per Regn. 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 As per Regn. 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 Key Issues: Fo eig e tit is ot defi ed. But f o afo esaid defi itio s, it is o e that is fo ed, egiste ed o incorporated in accordance with laws of host country. So can a foreign Proprietorship, Partnership Fi, LLP, T ust e o side ed as Fo eig E tit? What a out AOP / BOI hi h a e fo ed o registered as per local laws? As pe defi itio of Di e t i est e t outside I dia, i est e t has to e a of pu hase of shares; hence foreign entity must have Share Capital. Therefore, does it exclude investment in Firm, LLP or Trust as such entities do not have Share Capital even though they fall within the definition of Fo eig e tit as the a e fo ed o egiste ed i a o da e ith la s of host ou t? Dec 2017 P. P. Shah & Asso.

57 Practical Issues - ODI Policy (con t) Overseas Direct Investment under LRS: With effect from 5th Aug. 2013, a resident is permitted to make Overseas Direct Investment in JV / WOS by utilizing the overall limit prescribed by RBI under LRS provided the conditions specified in Schedule V to FEMA Ntf. 120 are complied with. However, prior to this amendment, residents have incorporated and invested in foreign companies for various purposes based on the language of the LRS Circulars from time to time as it appeared. It is learnt that these matters of investment in the overseas companies are subject matter of Compounding. Key Issues: What is the status of investments in unlisted pvt. companies done under LRS prior to Aug. 2013? Is Form APR required to be filed for all the past periods? But UIN was not required earlier under LRS. So will RBI issue UIN for such old cases? 22 Dec 2017 P. P. Shah & Asso. 57

58 Practical Issues - ODI Policy (con t) Overseas Direct Investment under LRS: Key Issues co t : Portfolio Investment is not defined in FEMA or in any of its regulations. The Advance Law Le i o defi es the te po tfolio i est e t as the pu hase of fo eig fi a ial asset ith the purpose of deriving returns from the security without intervening in the management of the fo eig ope atio s. He e, issue a ises as to hethe i est e t i u listed se u ities 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. 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. as portfolio investment is outside the purview of FEMA Ntf. 120? 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 regulatory process such as filing of APR / valuation / divestment report, etc.? Dec 2017 P. P. Shah & Asso.

59 Practical Issues - ODI Policy (con t) Overseas Direct Investment for purpose of attracting FDI: Often, when structuring foreign direct investment into India, the Indian co-promoters realize that their foreign co-promoters desire to route the FDI through a holding company in a suitable international jurisdiction due to various reasons such as efficient shareholder control, brand image, licensing of Intellectual Property, etc. As a result, the Indian co-promoters are required to contribute to the equity of the foreign holding company by way of ODI which then, in turn, makes FDI into India. Although, there is no specific bar in the FEMA regulations against such a structure, regulators have raised concerns over re-routing of funds to India / round-tripping. However, FEMA regulations have recognized that overseas direct investments may be made in JV / WOS in order to attract FDI into India as is evidenced from the old Form APR (point J.(v)) as well as the current one (point V(iv)). Key Issues: While the concerns of the regulators can be appreciated, if the foreign holding company is utilizing its profit reserves to make FDI, would it still amount to re-routing / round-tripping? What if amount is borrowed by the foreign holding company and invested in India? 22 Dec 2017 P. P. Shah & Asso. 59

60 Practical Issues Overseas Branch / Office by Residents Provisions under FEMA relating to overseas Branch / office by Residents: If a person resident in India desires to enter into overseas market, he can enter either (i) by establishing the branch or liaison office outside India or (ii) by forming an independent company outside India in the nature of wholly owned subsidiary (WOS) or a joint venture (JV). Investment in JV / WOS abroad is governed by FEMA Ntf. 120 but there are no specific regulations governing the opening of branch office/representative office by Indian residents outside India except under FEMA Ntf. 10(R) which gives general permission to open of bank account in name of overseas branch / office / representative posted abroad for conducting normal business activities of the Indian entity and specifies limits for remittance to such bank accounts. As stipulated in Regn. 5(B)(c) of FEMA Ntf. 10(R), the overseas branch/ office/ representative shall not enter in any contract or agreement in contravention of the FEMA Act, Rules or Regulations. Se tio of the Fo eig E ha ge a age e t A t, 999 defi es pe so eside t i I dia. As per sub- lause i, a offi e, a h o age outside I dia o ed o o t olled a pe so eside t i I dia is said to e eside t i I dia. The efo e fo the pu pose of FEMA, a a h offi e outside India of a company established in India is said to be person resident in India. Key Issues: Whether overseas branch can undertake all transactions, including borrowings that a foreign JV / WOS can do? Or whether overseas branch can only undertake such transactions as an Indian company can do? 22 Dec 2017 P. P. Shah & Asso. 60

61 Practical Issues Export of Goods & Services to overseas Branch Provisions under FEMA relating to realization of export proceeds for export of goods and services by Indian company to overseas Branch: As defined in Section 2(l) of FEMA, Export with all its 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 In terms of definition of person resident in India as per Section 2(v) of FEMA, a branch office outside India of a company established in India is said to be person resident in India. When an Indian company exports to its overseas branch, it is a transaction between two residents. Yet, due to the defi itio of E po t hi h diffe e tiates et ee goods a d se i es, the follo i g implications emerge: i. Goods e po ted f o I dia a e take out of I dia a d is to e t eated as e po t i espe ti e of the fa t that it is exported to Branch ii. However, se i es e po ted to a h is ot e po t as p o isio of se i es f o I dia is ot ade to any person outside India Key Issues regarding applicability of various provisions under FEMA Ntf. 23: As the transaction is between two residents, are the export proceeds to be realized and repatriated within the specified time limit counted from the date of export from India or from the date of sale by overseas branch? As full export value of goods and software is required to be realized and repatriated to India, is the Indian Company required to receive gross amount from its overseas branch or can it receive the net amount after expenses of branch? 22 Dec 2017 P. P. Shah & Asso. 61

62 Practical Issues Current Account Transaction Rules Foreign Exchange Management (Current Account Transactions) Rules, 2000 specifies egulatio s of u e t a ou t t a sa tio s hi h a e appli a le to pe so s. Fu the, p o iso to S hedule III of these Rules p o ides also that a pe so other than an individual may also avail of foreign exchange facility, mutatis mutandis, within the limit prescribed under the said Liberalized Remittance Scheme for the purposes mentioned herein above. Key Issues: These Rules a e appli a le to all pe so s. Ho e e, est i tio s elati g to u e t account transactions cannot apply to persons resident outside India and hence the Rules a e efe i g o l to pe so s eside t i I dia. Further, LRS limits are made applicable also to companies which raises various practical issues hethe t a el fo usi ess / o fe e es, et. a d fo all othe u e t a ou t t a sa tio s a e put u de a a tifi ial li it of $,. O iousl, this a ot e 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 businessrelated current account transactions which are far beyond the LRS limit of $ 250, Dec 2017 P. P. Shah & Asso. 62

63 Practical Issues Capital Account Transactions Provisions under FEMA relating to transfer of foreign securities / assets by way of Gift from Resident to Resident: Relevant definitions in FEMA: As pe Se tio 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 As per Section 6(4) of FEMA, 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. As per Section 6(5) of FEMA, 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. Under Regulation 22 of FEMA Ntf. 120, a person resident in India has general permission to acquire foreign securities as a gift from person resident outside India. However, in case of inheritance, a resident can acquire foreign securities from both resident as well as nonresident. 22 Dec 2017 P. P. Shah & Asso. 63

64 Practical Issues Capital Account Transactions (con t) Provisions under FEMA relating to transfer of foreign securities / assets by way of Gift from Resident to Reside t co t : Key Issues: In case of a gift of foreign securities by a resident to another resident, there is no foreign exchange implication for the country. Even though such a transaction of gift may fall ithi the defi itio of Capital A ou t T a sa tio fo oth the eside ts, o l the holding of foreign security is altered and not the quantum of assets in India; hence should t gift f o PRII to PRII also e ge e all pe issi le? Can a resident inherit foreign property from another resident who had originally acquired it when he was resident outside India or inherited it from a person resident outside India? Similarly, can a non-resident inherit Indian property from another non-resident who had originally acquired it when he was resident in India or inherited from a person who was resident in India? 22 Dec 2017 P. P. Shah & Asso. 64

65 Practical Issues Sale of Immovable Property in India As provided by FEMA Notification 21, a PIO has to sell immovable property only to Resident (commercial and residential), but FAQs on immovable property (no.12) says that PIO can sell to other NRI and that only PIO to PIO requires prior approval. Probably FAQs need an amendment pending clarification. Presently, Regulation 6(b) of Notification No. FEMA 21/2000-RB stipulates that in the event of sale of immovable property by a PROI who is Indian citizen or of Indian origin, the authorized dealer may permit repatriation outside India subject to the conditions specified therein. As per sub-clause (iii), in the case of residential property, such repatriation of sale proceeds is restricted to not more than two such properties. Key Issues: What is the time period for which such restriction of two properties is applicable as it could be interpreted as two properties at any point of time or two properties sold within a year or only two properties during the life-time. Note: As per the scheme of investments by non-residents under FEMA, current income may be repatriated without any limits. In addition, remittance upto US$ 1 million per financial year is permitted from NRO Accounts subject to specified conditions. In view thereof, it may harmoniously be concluded that the aforesaid limit of two properties may apply to the lifetime of a non-resident. Transfer: As per section 2(ze) of FEMA transfer means, sale, purchase, exchange, mortgage, pledge, gift, loan or any other form of transfer of right, title, possession or lien. 22 Dec 2017 P. P. Shah & Asso. 65

66 Practical Issues Sale of Immovable Property 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? 22 Dec 2017 P. P. Shah & Asso. 66

67 Practical Issues Sale of Immovable Property 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) 22 Dec 2017 P. P. Shah & Asso. 67

68 Practical Issues Sale of Immovable Property 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. 22 Dec 2017 P. P. Shah & Asso. 68

69 Practical Issues Guarantees by Person Resident outside India S. e of FEMA defi es apital a ou t t a sa tio " as: 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. Guarantees are in the nature of contingent liabilities. One would note that only in the case of PRII, contingent liabilities are included as capital account transactions whereas it is not made applicable for PROI. Key Issues: Despite the above definition, FEMA Ntf. 8 which deals with issue of Guarantees seeks to regulate a contingent liability of a PROI in favor of Indian corporate seeking credit enhancement. 22 Dec 2017 P. P. Shah & Asso. 69

70 FAQs - FDI Whether extension of compulsorily convertible preference shares (CCPS) or compulsorily convertible debentures (CCDs) requires RBI approval? 22 Dec 2017 P. P. Shah & Asso. 70

71 FAQs - ODI What is the concept of a designated Authorised Dealer? Can there be more than one designated Authorised Dealer for the same JV/WOS in case the JV/WOS has more than one Indian promoter? What if one Indian promoter has more than one JV in either the same country or in different countries? Who are eligible to make overseas direct investment under the Automatic Route? Who is an Indian Party? Is investment in agriculture permitted? Is development/construction (and thereafter, sale) of residential /commercial premises by an overseas Joint Venture (JV) or Wholly Owned Subsidiary (WOS) treated as real estate business under ODI regulations? 22 Dec 2017 P. P. Shah & Asso. 71

72 FAQs LRS What is the Liberalised Remittance Scheme (LRS) of USD 2,50,000? What are the purposes under FEM Current Account Rules under which a resident individual can avail of foreign exchange facility? Under LRS are resident individuals required to repatriate the accrued interest/dividend on deposits/investments abroad, over and above the principal amount? 22 Dec 2017 P. P. Shah & Asso. 72

73 Thank You 22 Dec 2017 P. P. Shah & Asso. 73