Shah & Modi CHARTERED ACCOUNTANTS

Transcription

1 INTRODUCTION TO FEMA May, 2011

2 Preamble to FEMA Post liberalization (i.e. New Industrial policy of 1991) there was need to remove shackles of regulatory and legal provisions Need to consolidate and amend the law relating to foreign exchange with the objectives of facilitating external trade and payments and for promoting the orderly development and maintenance of foreignexchangemarketinindia. g Need to take various steps to make New Industrial Policy - workable and meaningful. Industrial licensing was made pragmatic and objective- oriented It was decided to review provisions of Foreign Exchange Regulation Act, 1973 (FERA) 2

3 Preamble to FEMA Intention was to bring provisions of FERA so as make it fall in line with emerging trends of liberalization so as to remove obstacles in the inward flow of foreign exchange and foreign investment Accordingly, on June 1, 2000, the Foreign Exchange Management Act, 1999 (FEMA) brought in force to replace the then existing FERA. It is an act to manage the foreign exchange of India as opposed to FERA which was enacted to regulate/control the foreign exchange. 3

4 Structure of FEMA Applies to the whole of India and all branches, offices and agencies outside India which are owned or controlled by a person resident in India. FEMA has 49 sections of which 9 (section 1 to 9) are substantive and the rest are procedural/ administrative Section 46 of FEMA grants power to Central Government to makes rules to carry out the provision of FEMA Section 47 of FEMA grants power to RBI to make regulations to implement its provisions and the rules made there under RBI is entrusted with the administration and implementation of FEMA 4

5 Substantive Provision Section1 application and commencement of FEMA Section 2 Important definitions like Authorized Person, Person, Person Resident in India etc. Section 3 Power to RBI for giving general or special permission for transactions involving foreign exchange or any receipt or payments between resident and non- resident Section 4 Prohibits a person resident in India to acquire, hold, own, possess or transfer any foreign exchange, foreign security or immovable property situated outside India except as provided in the Act Section5-Permitsanypersontosellorbuyforeignexchange to or from an authorized person on account of any current account transaction 5

6 Substantive Provision contd Section 6 Selling or drawing foreign exchange toorfroman authorized dealer for capital account transactions Section 7 Exporter of goods and services shall furnish declaration to RBI or to any other authority Section 8 Realization and repatriation of foreign exchange Section 9 Exemption from realization and repatriation of foreign exchange in certain cases 6

7 Some of the important definitions Authorised Person Capital Account Transaction Current Account Transaction Export Foreign Exchange Person Person Resident in India Person resident outside India Repatriate to India Security Transfer 7

8 Implementation - IT Act vis a vis i FEMA Under Income Tax, issue is of taxability of income which is determined for the full year, therefore generally amendments are annual Whereas FEMA regulations are for undertaking transaction (generally between Resident & Non Resident) itself & therefore clarity at the time of undertaking transaction is a must Therefore amendments keep pace with changes taking place in economy 8

9 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 a economic definition rather than accounting or legal definition. Current Account transaction is transaction other than a capital account transaction. ti 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. 9

10 Current and Capital Account Transaction FEMA looks transaction from Balance of payment py position of Country Examples - Import of machinery on payment of cash - Current A/c transaction Machinery is purchased on hire - Capital A/c transaction. There is anobligated to make future payment to the non-resident Consideration for goods & Services Current A/c transaction Transaction represents a creation or acquisition of wealth shares, loans or immovable properties Capital A/c transaction 10

11 Capital Account Transaction RBI has been empowered under section 6(2) of FEMA to specify, in consultation with the Central Government, any class or classes of Capital account transactions which are permissible [i.e. the transactions which are not included under section 6(3)]. Section 6(3) of FEMA specifies the class of capital account transactions which are regulated by RBI. Every transaction listed in this section is regulated by a corresponding notification 11

12 Capital Account Transaction contd Sr. Transactions specified under section 6(3) No. 1 Transfer or issue of any foreign security by a person resident in India Corresponding Notification Notification No. 120 dated July 7, 2004 Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, Transfer or issue of any security by a Notification No. 20 dated May 3, Foreign person resident outside India Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, Transfer or issue of any security or foreign Notification No. 2 dated May 3, Foreign security by any branch, office or agency in Exchange Management (Issue of Security in India by a India of a person resident outside India branch, office or agency of a person resident outside India) Regulations, Any borrowing or lending in rupees in Notification No. 3 dated May 3, Foreign whatever form or by whatever name Exchange Management (Borrowing or Lending in called Foreign Exchange) )Regulations, 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 Notification No. 4 dated May 3, Foreign Exchange Management (Borrowing and Lending in Rupees) Regulations,

13 Capital Account Transaction contd Sr. Transactions specified under section 6(3) No. 6 Deposits between persons resident in India and persons resident outside India Corresponding Notification Notification No. 5 dated May 3, Foreign Exchange Management (Deposit) Regulations, Export, import or holding of currency or Notification No. 6 dated May 3, Foreign Exchange currency notes Management (Export and Import of Currency) Regulations, Transfer of immovable property outside India, other than a lease not exceeding five years, by a person resident in India 9 Acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India Notification No. 7 dated May 3, Foreign Exchange Management (Acquisition and Transfer of Immovable Property outside India) Regulations, 2000 Notification No. 21 dated May 3, Foreign Exchange Management (Acquisition and transfer of Immovable Property in India) Regulations, Givingi of a guarantee or surety in respect Notification No. 8 dated d May 3, Foreign Exchange of any debt, obligation or other liability Management (Guarantees) Regulations, 2000 incurred - (i) by a person resident in India and owed to a person resident outside India (ii) by a person resident outside India 13

14 Other important sections of FEMA Section 6(4) a person resident in India may hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such 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 Section 6(5) aperson 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 14

15 Notification under FEMA RBI had initially issued 25 notifications, covering capital account transactionti prescribed in Sec 6(3) & certain miscellaneous provisions 15 related to capital account transactions, 1 on Export of goods and services and 9 for other regulations The same term may be defined differently in different notifications For eg. Person of Indian Origin (PIO) is defined differently in 3 notifications namely: FEMA 13/2000-RB pertaining to remittance of assets FEMA 21/2000-RB pertaining to the acquisition and transfer of immovable property in India FEMA 24/2000-RB pertaining to investment in a firm or proprietary concern in India 15

16 Definition of PIO Under FEMA 13/2000 (Remittance of Assets):- 'Person of Indian Origin' means a citizen of any country other than Bangladesh or Pakistan if a) Heat anytime hldi held Indian passport; or b) He or either of his parents or any of his grand-parents was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955); or c) The person is a spouse of an Indian citizen or a person referred to in sub-clause (a) or (b); 16

17 Definition of PIO Under FEMA 21/2000 (Acquisition and transfer of immovable property in India):- '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 a) At any time, held India passport; or b) 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)." (Recently included vide Notification No.200 dated October 5, 2009) 17

18 Definition of PIO Under FEMA 24/2000 (Investment in Firm or proprietary p concern in India):- 'Person of Indian Origin' means a citizen of any country other than Bangladesh or Pakistan or Sri Lanka, if a) He at any time held India passport; or b) He or either of his parents or any of his grandparents was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955); or c) The person is a spouse of an Indian citizen or a person referred to in sub-clause (a) or (b); 18

19 Notification under FEMA contd Notification FEMA 1/2000-RB dated : Relates to permissible capital account transaction Capital account transactions of a person may be classified under the following heads, namely- A. Transaction, specified in Schedule I, of a person resident in India B. Transactions, specified in Schedule II, of a person resident outside India Subject to the provisions of the Act or the rules or the regulations or directions or orders made or issued thereunder, any person may sell or draw foreign exchange to or from an authorized person for a capital account transaction specified in the Schedules 19

20 Notification under FEMA contd Schedule I: Classes of capital account transactions of persons resident in India a) Investment by a person resident in India in foreign securities b) Foreign currency loans raised in India and abroad by a person resident in India c) Transfer of immovable property outside India by a person resident in India d) Guarantees issued by a person resident in India in favour of a person resident outside India e) Export, import and holding of currency/currency notes f) Loans and overdrafts (borrowings) by a person resident in India from a person resident outside India 20

21 Notification under FEMA contd g) Maintenance of foreign currency accounts in India and outside India by a person resident in India h) Taking out of insurance policy by a person resident in India from an insurance company outside India. i) Loans and overdrafts by a person resident in India to a person resident outside India. j) Remittance outside India of capital assets of a person resident in India. k) Sale and purchase of foreign exchange derivatives in India andabroadandcommodity derivatives abroad by a person resident in India. 21

22 Notification under FEMA contd With effect from September 26, 2007, a resident individual may draw foreign exchange up to USD 2,00,000 per financial year, for a capital account transaction specified in this Schedule I (Proviso to Reg. 4(a)). If the drawal of foreign exchange by the resident individual exceeds USD 2,00,000 per financial year, then the limits specified in the particular regulations lti which h are relevant to thatt particular transaction, shall apply to such drawal. (Proviso to Reg. 4(a)) Note: No part of the foreign exchange drawn as per this proviso shall be remitted to countries notified as non- cooperative countries and territories by Financial Action Task Force (FATF). 22

23 Notification under FEMA contd Schedule II: Classes of capital account transactions of persons resident outside India. a) Investment in India by a person resident outside India, that is to say, i. Issue of security by a body corporate oranentity in India and investment therein by a person resident outside India; & ii. Investment by way of contribution by a person resident outside India to the capital of afirmoraproprietorship p p concern or an association of persons in India. b) Acquisition and transfer of immovable property in India by a person resident outside India. c) Guarantee by a person resident outside India in favour of, or on behalf of, a person resident in India. d) Import and export of currency/currency y notes into/from India by a person resident outside India. 23

24 Notification under FEMA contd e) Deposits between a person resident in India and a person resident outside tid India. f) Foreign currency accounts in India of a person resident outside India. g) Remittance outside India of capital assets in India of a person resident outside India. 24

25 Prohibited Capital Account Transactions No person resident outside India shall make investment in India, in any form, in any Company or partnership firm or proprietary concern or any entity, whether incorporated or not, which is engaged g or proposes p to engagei. In the business of chit fund, or ii. As Nidhi Company, or iii. In agricultural or plantation activities, or iv. In real estate business, or construction of farm houses, or For the purpose p of this regulation real estate business shall not include development of townships, construction of residential/commercial premises, roads or bridges v. In trading in Transferable Development Rights (TDRs) 25

26 Current Account Transaction Current account transaction is a transaction other than a capital account transaction Current account transactions are governed by Foreign Exchange Management (Current Account Transaction) Rules, 2000 ("Current Account Transactions Rules"). Current account transactions are divided into 3 schedules in Current Account Transactions Rules:- Schedule I Prohibited Transactions Schedule II Transactions requiring prior approval of Government of India Schedule III Transactions requiring prior approval of RBI 26

27 Current Account Transaction contd Some examples are: Schedule I : 1. Remittance out of lottery winnings 2. Remittance of income from racing/riding etc., or any other hobby 3. Remittance for purchase of lottery tickets, banned/prescribed magazines, footballpools pools, sweepstakesetc etc. Schedule II: 1. Cultural tours 2. Remittance of container detention charges exceeding the rate prescribed by Director General of Shipping 27

28 Current Account Transaction contd Schedule III: 1. Gift remittance exceeding US$ 5,000 per remitter/donor per annum 2. Donation exceeding US$ 10, per remitter/ donor per annum 3. Release of exchange for meeting expenses for medical treatment abroad exceeding the estimate from the doctor in India or hospital or hospital/doctor abroad. Note: Drawal of foreign exchange by resident individuals towards remittance of gift or donations as per this Schedule III shall be within the limit specified under the proviso of Reg. 4 (i.e. US$ 2,00,000) 28

29 Residential Status under FEMA Under FEMA residential status is of two types: Person resident in India Person resident outside India Under FERA citizenship was considered as deciding factor FEMA lays emphasis on 'residing' which denotes permanency 29

30 Definition - Person Resident in India and Person Resident outside India Section 2(v) of FEMA defines 'person resident in India' as: (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, p in such circumstances as would indicate his intention to stay outside India for an uncertain period; 30

31 Definition - Person Resident in India and Person Resident outside India (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; (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 Section 2(w) defines person resident outside India to mean a person who is not resident in India 31

32 Definition - Person Resident in India and Person Resident outside India Person to be resident in India, has to reside in India for more than 182 days during the previous financial year Exclusion to this is - if a person stays outside India for employment, for vocation or for any other purpose for uncertain period, then even if he has resided in India for more than 182 days he will become a person resident outside India Moreover a person to be treated as person resident in India he has to satisfy not only the condition of period of stay (i.e. 182 days) but has to also comply with the conditions of the 'purpose' of stay i.e. for taking up employment, carrying on business or vocation in India or for any other purpose which would indicate his intention to stay in India for an uncertain period 32

33 Definition - Person Resident in India and Person Resident outside India RBI may ignore the arithmetic condition (i.e. of 182 days) and treat the person who comes to or stays in India for any of the three purposes set out in section 2(v)(i)(B) as person resident in India even though he may not have resided in India for a period of 182 days or more during the preceding financiali year. However legal tenability of such a view cannot be said to be free from doubt. RBI has a very narrow approach towards non resident acquiring immovable property in India. It gives a weighted significance to the arithmetic condition of staying in India for more than 182 days during the preceding financial year. (FAQs on Acquisition and Transfer of Immovable Property in India by a person resident outside India issued by RBI) 33

34 FAQs on acquisition of Immovable Property in India Q.37- What is meant by a person resident in India? A.37 - Under FEMA, a person resident in India is defined as a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year (April-March) and who has come to or stays in India either for taking up employment, carrying on business or vocation in India or for any other purpose, that would indicate his intention to stay in India for an uncertain period. In other words, to be treated as `a person resident in India' under FEMA, a person has not only to satisfy the condition of the period of stay (being more than 182 days during the course of the preceding financial year) but has also to comply with the condition of the purpose / intention of stay Q.39 - who can determine whether a person is resident in India or not? A.39 - Reserve Bank does not determine the residential status. Under FEMA, residential status is determined by operation of law. The onus is on an individual to prove his / her residential status, if questioned by any authority 34

35 Deposits By Non-residents Deposit, a capital account transaction referred to in section 6(3)(f) and sub-section (2) of sec. 47 of FEMA, includes deposit of money with a bank, company, proprietary p concern, partnership p firm, corporate body, trust or any other person. Acceptance of deposits by an authorized dealer/bank from persons resident outside India would be as under: - Non-resident (Ordinary) Account Scheme (NRO Account) - Non-resident (External) Account Scheme (NRE Account) - Foreign Currency (Non-resident) Account Banks Scheme (FCNR(B) Account) 35

36 Deposits By Non-residents contd PARTICULARS FCNR(B) ACCOUNT NRE ACCOUNT NRO ACCOUNT Who can open an account? NRI (Individuals of NRI (Individuals of Person resident outside India Bangladesh / Pakistan Bangladesh / Pakistan [other than a person resident nationality / ownership nationality / ownership in Nepal and Bhutan] requires prior approval requires prior approval (Individuals / entities of of RBI) of RBI) Bangladesh / Pakistan nationality / ownership as well as erstwhile Overseas Corporate Bodies requires prior approval of RBI) Repatriable / Nonrepatriable Repatriable Repatriable Non-Repatriable (Except (i) current income and (ii) under USD 1 million scheme per financial year) Type of account Term deposits only Current, Savings, Recurring or Fixed Deposit Accounts Joint accounts nationality or origin nationality or origin Current, Savings, Recurring or Fixed Deposit Accounts 2 or more NRI of Indian 2 or more NRI of Indian Jointly with residents 36

37 Deposits By Non-residents contd PARTICULARS FCNR(B) ACCOUNT NRE ACCOUNT NRO ACCOUNT Nomination Permitted Permitted Permitted Currency in which account denominated GBP, USD, JPY, EURO, CAD and AUD Indian Rupees Indian Rupees Operations by Power of Attorney (POA) in favour of a resident by the non-resident account holder Operation in the account in terms of POA is restricted to withdrawals for permissible local payments or remittance to the account holder himself through normal banking channels. Operation in the account in terms of POA is restricted to withdrawals for permissible local payments or remittance to the account holder ode himself through normal banking channels. Operations in the account in terms of POA is restricted to withdrawals for permissible locall payments in rupees, remittance of current income to the account holder outside India or remittance to the account holder ode himself through normal banking channels. Remittance is subject to the ceiling of USD 1 million per financial year. 37

38 Deposits By Non-residents contd PARTICULARS FCNR(B) ACCOUNT NRE ACCOUNT NRO ACCOUNT Permissible Credits Permissible Debits Remittance in permitted foreign currency, proceeds of foreign currency / bank notes tendered during temporary visit to India, transfer from other NRE / FCNR account etc. Local disbursements, remittance outside India, transfer to other NRE / FCNR account etc. Remittance in permitted foreign currency, proceeds of foreign currency / bank notes tendered during temporary visit to India, transfer from other NRE / FCNR account etc. Local disbursements, remittance outside India, transfer to other NRE / FCNR account etc. Remittance in permitted foreign currency, Deposit by account holder during temporary visit to India, Transfer from rupee account of non-resident banks, Dues in India of accountholder Local rupee payments, Remittance outside India of current income in India (net of taxes) 38

39 Deposits By Non-residents contd PARTICULARS FCNR(B) ACCOUNT NRE ACCOUNT NRO ACCOUNT Loan to the Rupee Loan - Rupee Loan - Rupee Loan - account India - Upto Rs. 10 India - Upto Rs. 10 India - Permitted holders million million Outside India Not Outside India Outside India Permitted permitted Permitted provided no funds are remitted back to India and are used abroad only provided no funds are remitted back to India and are used abroad only Foreign Currency Loan in India - Upto Rs. 10 million Foreign Currency Loan in India - Not permitted Foreign Currency Loan in India - Not permitted 39

40 Deposits By Non-residents contd PARTICULARS FCNR(B) ACCOUNT NRE ACCOUNT NRO ACCOUNT Loan to the Purpose Purpose Purpose account In India In India In India holders (contd.) For personal purpose or For personal purpose or For personal business purpose except business purpose except for purpose or for relending or relending or agricultural / business purpose agricultural / plantation plantation activity or for except for activity or for investment investment in real estate relending or in real estate business business agricultural / For direct investment t in For direct investment t in plantation activity India in firms / companies India in firms / companies or for investment on non-repatriation basis on non-repatriation basis in real estate business For purchase of flat in ForpurchaseofflatinIndia India for own residential for own residential purpose Outside India purpose Outside India Not permitted Outside India Fund based or non-fund Fund based or non-fund based facilities for bonafide based facilities for purposes bonafide purposes 40

41 Deposits By Non-residents contd PARTICULARS FCNR(B) ACCOUNT NRE ACCOUNT NRO ACCOUNT Loan to Rupee Loan - Rupee Loan - Rupee Loan - third parties India - Upto Rs. 10 India - Upto Rs. 10 India - Permitted million million Outside India Not Outside India Outside India Permitted permitted Permitted provided no funds are remitted back to India and are used abroad only provided no funds are remitted back to India and are used abroad only Foreign Currency Loan in India - Not permitted Foreign Currency Loan in India - Not permitted Foreign Currency Loan in India - Not permitted 41

42 Deposits By Non-residents contd PARTICULARS FCNR(B) ACCOUNT NRE ACCOUNT NRO ACCOUNT Loan to Purpose Purpose Purpose third parties In India In India In India (contd.) Fund based and / or nonfund based facilities for fund based facilities for purpose or Fund based and / or non- For personal personal purposes or personal purposes or business purpose business purposes except business purposes except except for for relending or for relending or agricultural relending or agricultural / plantation / plantation activity or for agricultural / activity or for investment investment in real estate plantation activity in real estate business business or for investment Outside India Outside India in real estate business Fund based or non-fund Fund based or non-fund based facilities for based facilities for bonafide Outside India bonafide purposes purposes Not permitted 42

43 Income exempt for NRIs Sec. 10 (4) (ii) Interest on NRE Account (w.e.f. A.Y ) Conditions: Account should be maintained as per FEMA Person should be Person Resident Outside India as per FEMA Available only to Individuals & not to HUF Sec. 10(15)(iv)(fa)- Interest on deposits made in foreign currency Conditions: Deposits in foreign currency (will include Resident Foreign Currency (RFC) deposits and FCNR(B) deposits.) Available to individuals and HUFs who are either Non Resident or Resident But Not Ordinarily Resident in terms of Sec. 6(6) Account should be with SBI or Scheduled Bank 43

44 Inbound Investments

45 Background FDI policy is formulated by Government of India FEMA regulations prescribe the mode of investments i.e. manner of receipt of funds, issue of shares/convertible db debentures and preference shares and reporting of the investments to RBI 45

46 Inbound Investments - Process Investor Proposed Mode of (Other than Activity in Remittance citizen & India NRE entity of Prohibited Inward Pakistan) Activities Remittance NRI Non- Resident Approval Route Automatic Route Procedural Compliance at the time of Investment Annual Compliance 46

47 Inbound Investments - Overview Inbound Investments Corporate Entity Limited Liability Partnership Partnership firm/ Proprietary concern Venture Capital Fund Establishment of Branch / Liaison / Project office Fresh Investment FDI, Portfolio Investment, FVCI, Investment on non-repatriation basis, Investment in securities other than shares & debentures Transfer of existing shares To Non- Resident By Non- Resident 47

48 Inbound Regulations Broad Framework Inbound investment in India is governed by the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 ("Inbound Regulations") and Consolidated FDI Policy issued by DIPP. Inbound Regulations provides for the following schemes for inbound investment in India. Schedule 1 : Foreign Direct Investment (FDI) Scheme Schedule 2 : Investment in shares / debentures by FII under Portfolio Investment Scheme Schedule 3 : Portfolio Investment Scheme for NRI (Repatriable) Schedule 4 : Investment Scheme for NRI (Non-repatriable) Schedule 5 : Investment Scheme for securities other than share / convertible debentures Schedule 6 : Investment Scheme for Foreign Venture Capital Undertaking 48

49 Inbound Regulations Broad Framework Regulation 4 Except as provided in FEMA or Rules or Regulations made thereunder, an Indian entity shall not issue any security to any person resident outside India or record in its books any transfer of security from or to such person. Regulation 5 - prescribes various schemes under inbound investment for NR and NRIs Regulation 6 & 7 - Acquisition of Right Shares & under merger/de-merger Regulation 8 - Issue of shares under ESOP Regulation 9 & 10 - provisions relating to transfer of shares by/to Non Resident Regulation 11 - Repatriation of sale proceeds 49

50 FDI Scheme Corporate Entity Types of instruments permitted Equity Shares; Fully, compulsorily and mandatorily convertible debentures; and Fully, compulsorily and mandatorily convertible preference shares Remittance received via issuance of Depository Receipts (DRs) and Foreign Currency Convertible Bonds (FCCBs) are treated as FDI Other types of Preference shares/debentures i.e. non-convertible, optionally convertible or partially convertible are considered d as debt and accordingly all norms applicable for External Commercial Borrowings (ECB) applies to such instruments. Citizens of Pakistan or entities of Pakistan are prohibited from making investment in India Citizens & entities of Bangladesh are allowed with approval of FIPB 50

51 FDI Scheme FDI Scheme is divided into 3 parts: Prohibited Sectors - Sectors/activities where FDI is prohibited Approval Route - Sectors/activities which require Approval from Government i.e. SIA or FIPB - Automatic Route - Sectors/activities which require procedural compliance and intimation to RBI without any approval 51

52 FDI Scheme Prohibited sectors Paragraph 5.1 of Consolidated FDI Policy: Retail Trading (except single brand product retailing) Lottery Business including Government /private lottery, online lotteries etc. Gambling and Betting including casinos etc. Business of chit fund Nidhi company Trading in Transferable Development Rights (TDRs) RealEtt Estate Business or Construction ti of Farm Houses Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes Activities / sectors not opened to private sector investment including Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems). Besides above foreign investment in any form, foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also completely prohibited for Lottery Business and Gambling and Betting activities. 52

53 FDI Scheme Automatic Route In those sectors/activities listed under paragraph p 5.2 of Consolidated FDI Policy, where FDI upto limit specified against each sector /activity is allowed/permitted under automatic route subject to other conditions indicated & security conditions where applicable. FDI is permitted upto 100% under the automatic route, in sectors/activities not listed in paragraph 5.2 of Consolidated FDI Policy, subject to applicable laws/sectoral rules/regulations/security conditions. General permission is available for issue of shares/preference shares against conversion of ECB (excluding those deemed as ECB) lump sum technical know-how fee, royalty, subject to entry route, sectoral cap and pricing guidelines and compliance with applicable tax laws. 53

54 FDI Scheme Approval Route In those sectors/activities listed under paragraph p 5.2 of Consolidated FDI Policy, where FDI upto limit specified against each sector /activity is allowed/permitted under approval route subject to other conditions indicated & security conditions where applicable Proposals falling outside sectoral policy/cap Any industrial undertaking manufacturing items reserved for the MSE sector would require Government approval where foreign investment is more than 24% in the capital Issue of equity shares import of capital goods/ machinery/ equipment (including second-hand machinery) and preoperative/ pre-incorporation expenses (including payments of rent etc.) subject to pricing guidelines of RBI and appropriate tax clearance and other specified conditions. 54

55 FDI Scheme Other Provisions Pricing Guidelines - Issue Price shall not be less than Listed Company- price as per SEBI guidelines Unlisted Company price as per Discounted Free Cash Flow (DCF) method Mode of payment for inbound investment Inward remittance through banking channels Debit to NRE/FCNR (B) Account Capitalization of lumpsum fee, royalty and ECBs (other than import dues deemed as ECB or Trade Credit) Capitalization of import of capital goods/ machinery/ equipment (including second-hand machinery) and pre-operative/ preincorporation expenses (including payments of rent etc.) 55

56 Portfolio Investment on repatriation / non- repatriation basis by NRIs Schedule 3 Limit of 5% by single NRI, 10% by all NRIs (this can be increased to 24%) to be maintained i Payment for purchase to be made by way of inward remittance through normal banking channels or out of funds held in NRE/FCNR(B) account or NRO account (only in case of non repatriable investment) Only delivery based purchase and sale permitted Shares purchased under PIS cannot be transferred under private arrangements or by way of gift to person resident in India or outside India without prior approval of RBI Gift to relatives defined in Section 6 of Companies Act, 1956 or to charitable trust in India is permitted without RBI approval OCBs are not permitted after 29/11/2001 to invest in PIS 56

57 Investment in shares and debentures on non- repatriation basis by NRIs Schedule 4 Scheme applies to investment other than Portfolio Investments NRIs may acquire without any limit, shares under public issue, private placement or right issue Payment for purchase to be made by way of inward remittance through normal banking channels or out of funds held in NRE/FCNR(B) account or NRO account Not permitted - investment in companies engaged in chit fund/nidhi, agricultural/plantation l/ l t ti or real estate t business or construction of farm house or dealing in TDRs 57

58 Investment in Securities other than shares or debentures by Non-Resident Schedule 5 Scheme available to FIIs & NRIs Investment on repatriation basis in dated Govt., securities/treasury bills, NCD issued by Indian company and units of domestic MF other conditions on FII for composition of investment and registration with SEBI NRIs can also invest in shares of Public Sector enterprise in disinvestment process and in bonds of Public Sector Undertaking in India Investment on non repatriation basis by NRIs in also units of money market funds in India or National Plan/Saving Certificates 58

59 Procedure under Automatic Route Intimation to RBI through Authorized Dealer: within 30 days from receipt of funds in the Advance Reporting Form to be filed along with copy of FIRC and KYC Report (in prescribed format) on the non-resident investor Reporting of issue of shares: Shares shall be issued within 180 days from the date of from the date of receiptoffund(fromthedateofreceiptoftheinwardremittanceordateof debit to NRE/FCNR(B) account) If the shares are not issued within 180 days, then amount received shall be refunded back Refund / allotment of shares beyond a period of 180 days from the date of receiptof fund may be considered by RBI, on the merits of the case. Report to be filed in Part A of form FC-GPR within 30 days from the date of issue of shares alongwith valuation certificate and certificate from the Company Secretary for compliance of Companies Act, 1956 Annual Return in shall be filed in the revised format by 15 th July every year 59

60 Procedure under Approval Route Applications for NRI investment, Export Oriented Units and Retail Trading (Single Brand) should be submitted to SIA in DIPP Applications for FDI other than above should be submitted to FIPB unit, Department of Economic Affairs, Ministry of Finance Application in Form FC-IL 60

61 Investment in Limited Liability Partnership (LLP) Permitted under approval route Allowed in sectors/activities with 100% FDI under the automatic route and where there are no FDI-linked performance related conditions LLP should not undertake - Print Media, Agricultural/ Plantation & real estate business Not allowed to make downstream investment Investment shall be brought in cash by way of inward remittance or by debit to NRE/FCNR account Not allowed to avail ECBs 61

62 Investment in Partnership Firm or Proprietary concern Permitted to NRIs/PIOs PIOs who are not citizen of Bangladesh, Pakistan or Sri Lanka Firm should not undertake - Pi PrintMdi Media, Agricultural/ l/ Plantation & real estate business Capital invested cannot be repatriated Income can however be repatriated 62

63 Investment in Venture Capital Fund (VCF) Allowed under automatic route in VCF set-up as a company under the Companies Act, 1956 Investment in VCF set up as a trust is allowed only under approval route 63

64 If you learn only methods you will be tied to your methods, but if you learn principles you can device your own methods.