FEMA. An Overview and Update. Sudhakar. G / Shruti. KP 09 June ICAI Bangalore Branch

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1 FEMA An Overview and Update Sudhakar. G / Shruti. KP 09 June 2012 ICAI Bangalore Branch

2 The Road to FEMA That s the 70s show Foreign Exchange Regulation Act, 1973 (FERA) enacted in the 70s when environment in was rigid and severely restricted Slow economic growth Foreign exchange was scarce India s global trade was extremely limited 27 years later globally Change in global economic and political scene Emerging trends of globalisation 2

3 The Road to FEMA 27 years later.india Liberalization of Indian economy from License Raj New Industrial Policy announced by the Indian government Necessity of improving the climate of foreign investment in India recognized Considered necessary to empower Reserve Bank of India (RBI) to impose penalties on authorized dealers (AD) for their lapses Government set about revamping FERA through notifications issued through the RBI However, this piecemeal relaxation of FERA did not calm foreign investor s nerves Advent of several significant changes in the economy Growth in foreign trade Increase in foreign exchange reserves Current account convertibility Access to external commercial borrowings Rationalization of tariffs Participation of foreign institutional investors in Indian stock exchanges 3

4 The Road to FEMA 27 years later.india Decision to repeal FERA and RBI set out to draft new legislation FERA (Amendment) Bill was to be introduced swept away in the Ayodhya fiasco However, Ordinance promulgated amending FERA Subsequently, FERA (Amendment) Act, 1998 enacted Additionally, India as member of International Monetary Fund (IMF) was obliged to realign its laws by introducing reforms in the exchange control regulations as well 4

5 The Road to FEMA Legislation FEMA FEMA Rules FEMA Regulations FEMA Notifications FEMA AP(DIR) Circulars Master Circulars FDI Policy Press Notes Authority Central Government Central Government Central Government/RBI Central Government/RBI RBI RBI Consolidated Circulars DIPP MoC DIPP MoC 5

6 Foreign Currency Transactions 6

7 Foreign Currency Transactions Exchange control regulations significantly liberalized to facilitate payments by residents to non-residents Authorized dealers significantly empowered Drawal of foreign currency: Items listed in Schedule I Not permitted Items listed in Schedule II Permitted with the approval of the specified ministries Items listed in Schedule III Permitted under the automatic route within the specified limits 7

8 Foreign Currency Transactions Capital Account Remittances Generally prohibited unless specifically permitted, such as: Foreign currency loans Preference shares/convertible debentures Current Account Remittances Generally permitted unless specifically restricted, such as: Pre-Incorporation expense reimbursement higher of 5% of foreign investment & USD 100,000 Consultancy service fee allowed only up to USD 1 million per project Exchange Control - substantially diluted, limited restrictions remain 8

9 Foreign Currency Transactions Particulars Remarks Business Travel USD 25,000 Medical Treatment USD 100,000 Cultural Tours Private Visits Based on approval from HRD Ministry USD 10,000 except travel to Nepal and Bhutan Conferences USD 25,000 Gift/Donation USD 5,000 Overseas Employment USD 10,000 Higher Studies USD 100,000 Commission to overseas agent (Real Estate) USD 25,000 or 5% of inward remittance 9

10 Foreign Currency Transactions Unspent foreign exchange remit it back within 180 days Advance remittance towards imports USD 500,000 Issue of Guarantee USD 500,000 Liberalized remittance Scheme USD 200,000 on permissible current account and capital account transactions Per financial year without any approval Resident individuals can acquire hold shares, immovable properties, ESOP, repayment of Loan, investment in VC, mutual funds outside India, etc. Documentation 10

11 Foreign Currency Transactions Remittance of current income like interest, dividend, pensions, rent etc can be freely remitted by way of a debit to the NRO account by a NRI NRI s without NRO account can remit freely based on a CA certificate Remittance of assets by a foreign national of a non-indian origin USD 1,000,000 NRI/PIO can remit upto USD 1,000,000 held in NRO/sale proceeds of assets NRI/PIO can remit sale proceeds of immovable property purchased from rupee funds without any lock in period Remittance of salary after payment of taxes due Remittances of sale proceeds of residential property by NRI/PIO USD 1,000,000 11

12 Foreign Currency Transactions Currently, AD Banks permitted to release remittances up to USD 5000 or its equivalent for all permissible transactions on the basis of a simple letter from applicant containing specified Information Henceforth, foreign exchange remittances for miscellaneous purposes without documentation formalities increased from USD 5000 to USD 25,000 RBI has advised AD Banks to accept a simple letter containing the specified details if the following conditions are satisfied: Foreign exchange is being purchased for a current account transaction (not included in the Schedules I and II the Foreign Exchange Management (Current Account Transactions) Rules 1999); and Amount for remittance does not exceed USD or its equivalent and the payment is made by a cheque drawn on the applicant s bank account or by a Demand Draft So what s new 12

13 FDI Policy Overview 13

14 Foreign Direct Investment Policy Foreign investment in India Foreign Direct Investment (FDI) Portfolio Investment Scheme Foreign Venture Capital Investor (FVCI) Other investments Investments on non-repatriable basis Automatic route Approval route FII NRI, PIO FII NRI, PIO NRI, PIO Person resident outside India Consolidated FDI Policy - effective 10 April 2012 to be reviewed yearly 14

15 FDI and the legal framework Regulated under Foreign Exchange Management Act, 1999 ('FEMA') and the various regulations framed under FEMA Regulators RBI FIPB, Department of Economic Affairs, Ministry of Finance DIPP, Ministry of Commerce and Industry Sector specific 100% FDI allowed in almost all sectors. FDI in certain sectors is subject to certain conditions and limitations Entry Routes Automatic route no government approval required Approval route approval of the FIPB required in specified sectors Investment s subject to existing venture/tie up condition Investment Routes By subscription of fresh shares By acquisition of existing shares through transfer 15

16 Foreign Direct Investment Policy Automatic Route No prior approval Intimate RBI within 30 days of inward remittance Issue shares within 180 days of receipt and requisite RBI filings Automatic route covers: Activities / Sectors not prohibited or not restricted in any manner Activities / Sectors within sectorial caps not requiring approval FDI thru normal banking channel 2 Routes Prohibited Sectors Approval Route Prior government approval is required from FIPB Approval required for FDI in the following cases: Proposals for foreign equity beyond 24% in undertaking which manufactures items reserved for MSE Proposals outside sectoral caps Swap of shares Indian Company engaged only in investing in the capital of other Indian company/ies FDI in LLP 16

17 Foreign Direct Investment Policy an Overview Prohibited Agriculture (some exceptions) Betting, Gambling & Lottery Chit funds & Nidhi Co. Real estate (except construction development) Retail Trading (except single brand retail) Tobacco products Trading in Transferable Development Rights Restricted Some Sectors FDI Cap Civil Aviation 49% Defence sector 26% Insurance 26% News Media 26% Private Banking 74% Single Brand Retail* 100% Telecom 74% Pharma 100% (Brownfield) Govt. sector only Railways (other than Mass Rapid Transport Systems) Atomic Energy Permitted 100% FDI permitted under automatic route in most Sectors *For FDI beyond 51% in Single brand retail approval of FIPB required, sourcing of at least 30% of the value of products sold will have to be mandatorily done from Indian 'Small Industries/ Village and Cottage Industries, Artisans and Craftsmen'. 17

18 Who can invest? A non-resident entity (except citizen/entity incorporated in Pakistan) Citizen/entity incorporated in Bangladesh only approval route NRIs resident in Nepal/Bhutan and citizens of Nepal / Bhutan subject to certain conditions Erstwhile OCBs (with prior approval through both routes) FIIs (certain compliances mandatory) FVCIs Only FII/NRIs permitted to invest in Indian companies in Indian stock exchanges directly 18

19 FVCIs Registration with SEBI as FVCI under the SEBI (FVCI) Regulations, 2000 Registration not mandatory but brings certain advantages Example: No pricing guidelines applicable during entry and exit Lock in benefits FVCIs may invest in unlisted domestic companies in sectors which are not in the negative list 19

20 Permitted entities for FDI Indian company Partnership Firm/ Proprietary Concern Venture Capital Fund Trusts Limited Liability Partnerships FDI in resident entities other than those mentioned above is not permitted 20

21 Choice of forms for doing Business in India 21

22 Choice of forms for Doing Business in India An Overview Foreign Investor Unincorporated entities Incorporated entities Partnerships VCF/T rust Liaison Office Branch Office Project Office Public / Private company Limited Liability Partnership (LLP) Wholly owned Subsidiary / Joint Venture 22

23 Unincorporated entities Liaison Office Can only undertake liaising / representing / promoting / communication activities Local expenses have to be met through inward remittances from overseas entity Requires registration with RBI and ROC Branch Office Project Office Can undertake activities export / import of goods, professional / consultancy services, research work, technical / financial collaborations, buying / selling agent, IT services / development of software, technical support, foreign airline & shipping company Cannot undertake retail trading activities, manufacturing / processing activities Can acquire property but not for leasing / renting Requires registration with RBI and ROC Foreign Companies planning to execute specific projects in India can set up project/site offices in India if it has secured contract from Indian company Project Office cannot undertake or carry on any activity other than the activity relating and incidental to execution of the project Funded directly by inward remittance (or) bilateral or loan from multilateral International Financing Agency (or) project has been cleared by an appropriate authority (or) Indian company who has awarded contract has been granted Term Loan by a Public Financial Institution or a bank in India for the project Requires intimation with RBI (if above conditions are met) and registration with ROC 23

24 Foreign Direct investment in Partnership Firms NRI / PIO resident outside India may invest by way of contribution of capital on non-repatriation basis Not Permitted: Investment in Firm / proprietary concern engaged in agricultural / plantation activities, real estate business, print media sector Investments by NRI / PIO with repatriation benefits - RBI prior permission Investments by nonresidents other than NRI/ PIO RBI prior permission required 24

25 Foreign Direct investment in Venture Capital Fund (VCF) / Trust Only SEBI registered FVCI may contribute up to 100% of the capital of an Indian Venture Capital Undertaking / VCF / Other companies FVCI may also set up a Domestic asset management company to manage the fund FDI in Trusts other than VCF is not permitted 25

26 Foreign Direct investment in LLPs 100% FDI is allowed: Activities currently eligible for 100% FDI under automatic route Prior approval from FIPB LLPs with FDI cannot make downstream investment FII and FVCI investment not permitted in LLPs Foreign Capital participation in LLPs allowed only by way of cash consideration LLPs with FDI cannot raise foreign currency loan (ECB) Permissible Activities Services IT / ITeS / KPO Business services, Advertising and films Engineering, technical support and R&D Healthcare and medical services Logistics, supply chain management Hotels, tourism, F&B, restaurants Trading Wholesale/ B2B/ Exports Sourcing Manufacturing and Processing Special Economic Zones Developers Units NBFCs, Construction Development Projects etc. where FDI Linked performance conditions are prescribed or LLPs engaged in agricultural/plantation activity, print media or real estate business Not permitted 26

27 Investment Instruments 27

28 Investment instruments Shares Shares Equity shares Preference shares Compulsorily Convertible i.e. Non- Redeemable Non-Convertible i.e. Redeemable Treated as Equity Treated as Debt (ECB) Foreign investments in Equity shares allowed as per FDI Guidelines 28

29 Investment instruments Debt Debt Debenture FCCB / DR Loan Compulsorily Convertible i.e. Non-Redeemable Non-Convertible i.e. Redeemable Treated as Equity for FDI Treated as Debt (ECB) Treated as Equity for FDI Treated as Debt (ECB) 29 29

30 Eligible Instruments for FDI Foreign company Equity Ownership rights Limited Redemption No cap on rate of dividend (Transfer to reserve) CCPS Carry fixed rate of Dividend Conversion as per Company Law RPS/OCPS/NPS regarded as ECB. Maximum Coupon rate SBI PLR basis points CCD Carry fixed rate of interest Conversion into Equity as per term of Issue RPS/OCPS/NPS regarded as ECB. Coupon rate SBI PLR basis points Indian company Instruments other than stated above like Options, Warrants, Partly paid etc. require prior approval of FIPB 30

31 Pricing of Instrument Fresh Issue Preferential Allotment Rights Issue Transfer R to NR: Listed Cos. - SEBI Guidelines Unlisted Cos.- Atleast DCF Listed Cos. At least at a price as per Preferential Allotment SEBI Guidelines Unlisted Cos.- Atleast DCF Listed Cos.- As determined by Co. Unlisted Cos. Not less than price offered to resident S/H Listed Co.- Not less than the price at which preferential allotment are made Unlisted Co Atleast DCF NR to R: Listed Co. Not more than Minimum price at which preferential allotment made Unlisted Co - Not more than DCF The price/ conversion formula of convertible capital instruments should be determined upfront at the time of issue of the instruments. The price at the time of conversion should not be lower than the fair value worked out, at the time of issuance of such instruments [the DCF method of valuation for the unlisted companies and valuation in terms of SEBI (ICDR) Regulations, for the listed companies]. 31

32 Consideration for Investment Cash Inward Remittance Debit of FC A/C in India Non Cash Automatic ECB Conversion Royalty FTS Approval Route -FIPB Import of Plant & Machinery (other than second hand machinery) Pre-Incorporation Expenses Preliminary Expenses Shares to be allotted or refund to be made within 180 days of receipt of subscription money 32

33 FDI and downstream investment FDI Rule Downstream investment Rule In Operating company Governed by relevant sectorial policies In Operating companies by operating cum investing company Governed by relevant sectorial policies In Operating and investment company Notification to FIPB within 30 days of investment In Operating company by investing company Governed by relevant sectorial policies In investment companies Requires prior FIPB approval by Non-operating and noninvesting company Governed by relevant sectorial policies In Non-operating and non-investing company Requires prior FIPB approval 33

34 Reporting and Remittance Reporting Investment : 30 days RBI reporting on receipt of money :FC(GPR) to RBI in 30 day through AD for FDI, ESOP, Right, Bonus, M&A, ECB, FCCB, ADR/GDR Transfer Stage : FC(TRS) to AD within 60 days of receipt of amount of consideration Remittance Through Authorized Dealer subject to WHT: Dividend Interest Sale Proceeds of shares and other instruments Winding up/ Liquidation: Auditor Certificate for no o/s Liabilities or adequately provided for, If voluntary W/L no pending legal proceeding 34

35 Recent Developments Existing JV No more a stumbling point. No JV Partner approval required Escrow Account Earlier exempted for SAST, Exit Offer and Delisting only Now permitted for all subject to: Non Interest bearing Non fund based No Forex Risk Closed in 6 month SEBI/FEMA compliant Upfront disclosure in Escrow Agmt. about terms of JV Pledge of Shares It include Transfer includes sale, purchase, exchange, mortgage, pledge, gift, loan or any other form of transfer of right, title, possession or lien; Earlier exemption was available for sale or gift of shares only Now Pledge permitted: Indian promoter can pledge its shares of ICo or Group Co for ECB if NOC from AD NR can pledge its shares in ICo in favour of AD Bank for raising loan by ICo from Indian Bank NR can pledge its shares in ICo in favour of O/S Bank to secure credit facilities to NR or its O/S group company So what s new 35

36 External Commercial Borrowing 36

37 External Commercial Borrowings ('ECB') Definition: ECB refers to: commercial loans; buyers credit; suppliers credit; securitized instruments availed of from non-resident lenders with a minimum average maturity of 3 years Types: External Commercial Borrowings Foreign Currency Convertible Bonds Preference shares (i.e. non-convertible, optionally convertible or partially convertible) Foreign Currency Exchangeable Bond (FCEB) ECB can be accessed under two routes, viz., (i) Automatic Route; (ii) Approval Route 37

38 External Commercial Borrowings Automatic route no approval required Eligible borrowers: Indian companies (Real Sector/ Infrastructure Sector) except those engaged in financial sector Units in SEZ NGO's engaged in micro finance activities Eligible lenders: International banks; International Capital Markets Multilateral financial institutions; Export credit agencies; Suppliers of equipment; Foreign collaborators; and Foreign equity holders with the prescribed equity holding (other than erstwhile OCBs) Permissible end-uses capital investments, overseas acquisitions, etc. excludes general corporate purposes, working capital requirements (except civil aviation) and real estate sector 38

39 External Commercial Borrowings Amount and Maturity Corporate other than hotel, hospital and software company can avail USD 500 million per year Hotels, Hospitals and software sectors can avail USD 100 million per year The overall ECB ceiling for the entire civil aviation sector would be USD 1 billion and the maximum permissible ECB that can be availed by an individual airline company will be USD 300 million ECB in civil aviation can be utilized for working capital as well as refinancing of the outstanding working capital Rupee loan(s) availed of from the domestic banking system Security choice of parties NOC required from Authorized Dealer for security in shares, immovable property and issuance of guarantees Rate of interest: Three years and up to five years 6 month Libor basis points More than five years 6 month Libor basis points Parking of ECB proceeds As per the RBI/ /539 A. P. (DIR Series) Circular No.119 the ECB proceeds meant for Rupee expenditure are repatriated to India immediately after drawdown In either case, loan has to be registered with the RBI before draw-down thereafter, monthly reports regarding utilization 39

40 External Commercial Borrowings Approval route Eligible Borrowers: On lending by the EXIM Bank Banks and financial institutions - which had participated in the textile or steel sector restructuring package Non-Banking Financial Companies (NBFCs) Infrastructure Finance Companies (IFCs) Housing Finance Companies Special Purpose Vehicles, or any other entity notified by the Reserve Bank, set up to finance infrastructure companies / projects Multi-State Co-operative Societies engaged in manufacturing activity SEZ developers Corporates in the services sector viz. hotels, hospitals and software sector beyond USD100 millions Corporates which have violated the extant ECB policy Amount and Maturity: ECB beyond USD 100 million - corporates in the services sector viz. hotels, hospitals and software sector The proceeds of the ECBs should not be used for acquisition of land Corporates can avail ECB of an additional amount of USD 250 million (over and above USD 500 million under approval route) with the average maturity of more than 10 years Interest rates same as approval route 40

41 External Commercial Borrowings ECB End use restrictions: For lending or investing in capital market or acquiring a company in India; Real estate Working capital, general corporate purposes and repayment of existing rupee loans (except civil aviation sector) Foreign Currency Exchangeable Bonds: means a bond expressed in foreign currency, the principal and interest in respect of which is payable in foreign currency, issued by an Issuing Company and subscribed to by a person who is a resident outside India End-use of FCEB proceeds: Overseas by way of direct investment including in JVs or WOS abroad May be invested by the issuing company in the promoter group companies Rate of Interest As specified by ECB policy Pricing norms: Average weekly high and low of the closing prices of the shares during the six months Average weekly high and low of the closing prices of the shares during the two weeks Maturity: Minimum maturity of FCEB shall be five years 41

42 Conversion of External Commercial Borrowings Permitted under following conditions: Activity of the company falls under automatic route / approval has been obtained if activity falls under approval route Foreign equity holding after such conversion is within the sectoral cap, if any Pricing of shares is as per SEBI guidelines listed company Valuation of CA unlisted company Borrowers to report: In form FC-GPR to regional office, RBI and form ECB-2 to DSIM, RBI within 7 days from the close of the month to which it relates In case of partial conversion, the outstanding portion of ECB shall be reported in ECB-2 to DSIM, RBI in the subsequent months 42

43 Review of All-in-cost Ceiling for ECBs Borrowers are experiencing difficulties in raising ECBs The Reserve Bank has thus decided to continue with the enhanced all-in-cost ceiling for ECBs Enhanced ceiling to be applicable for a further period of 6 months Maturity Period All in cost over 6 months LIBOR 3 years and up to 5 years 350 bps More than 5 years 500 bps So what s new 43

44 Refinancing/ Rescheduling of ECBs Borrowers desirous of refinancing an existing ECB can now raise fresh ECB at a higher all-in-cost Those wanting to reschedule an existing ECB can now do so at a higher all-in-cost Refinancing/ rescheduling to be done under the approval route. Condition: The enhanced all-in-cost cannot exceed the all-in-cost ceiling prescribed in the existing guidelines So what s new 44

45 Enhancement of Refinancing Limit of ECBs Applicable to Indian companies in the power sector Permitted to utilize up to 40% of fresh ECB raised towards refinancing of Rupee loans availed from the domestic banking system Utilization to be done under the approval route Condition: At least 60% of the fresh ECB raised is to be utilized for fresh capital expenditure for infrastructure projects So what s new 45

46 ECBs for Aviation Sector Working capital now a permissible end-use of ECBs raised by the civil aviation sector Overall ECB ceiling for aviation sector USD 1 Billion To be allowed under the approval route Conditions: Must be a company registered under the Companies Act, 1956 Possess a scheduled operator permit license from DGCA for passenger transportation Permissibility based on certain conditions like cash flow, foreign exchange earnings and capability to service the debt ECB to be raised within twelve months, that is, by 24 April 2013 Can be raised with a minimum average maturity period of three years Maximum permissible ECB that can be availed by an individual airline company is USD 300 million Limit can be utilized for working capital as well as refinancing of any outstanding working capital Rupee loans availed of from the domestic banking system Such ECBs not allowed to roll over So what s new 46

47 Utilisation of ECB proceeds for Rupee expenditure Presently, ECB proceeds can be utilized for permissible foreign currency expenditure and Rupee expenditure RBI has directed borrowers to provide bifurcation of utilization of ECB proceeds towards foreign currency and Rupee expenditure in Form prescribed RBI clarified that primary responsibility to ensure that ECB proceeds meant for Rupee expenditure in India are repatriated to India for credit to Rupee accounts is on borrower concerned So what s new 47

48 Overseas Direct Investment 48

49 Overseas Direct Investment ('ODI') Benefits: Promoting global business by Indian entrepreneurs Transfer of technology and skill Sharing of results of R&D Access to wider global market promotion of brand image generation of employment utilisation of raw materials available in India and in the host country Legal Framework: Section 6 of the FEMA provides powers to the RBI to specify classes of capital account transactions in consultation with the Government. Section 6(3) of the FEMA provides powers to the RBI to prohibit, restrict or regulate transactions Prohibitions: Making investment in a foreign entity engaged in real estate but excludes development of townships, construction of residential/commercial premises, roads or bridges Banking business, without the prior approval of the RBI 49

50 Overseas Direct Investment ('ODI') General Permission: Out of the funds held in RFC account Bonus shares on existing holding of foreign currency shares Out of their foreign currency resources outside India General permission is also available to sell the shares so purchased or acquired ODI Routes Automatic route no government approval required Approval route approval of the RBI Who can Invest? Indian Companies (ownership not relevant) Registered Partnership firms Approval route Resident Individuals Approval route Registered Trusts/ Societies Approval route Any other entity notified by RBI Approval route 50

51 Overseas Direct Investment ('ODI') Automatic Route - Financial commitment by Indian party: Investment in overseas JV / WOS, not exceeding 400 per cent of the net worth 400 per cent of net worth excludes: Investment is made out of balances held in EEFC account Funds raised through ADRs/GDRs The above ceiling of 400 percent includes: Contribution to the capital of the overseas JV/WOS Loan granted to the JV/WOS 100 percent of the guarantees given to the JV/WOS other than performance guarantee 50 per cent of the amount of performance guarantees Issue of guarantee by an Indian Party to step down subsidiary of JV / WOS: Permitted under automatic route - Irrespective of direct subsidiary is operative company or SPV, Indian party may extend corporate guarantee May be extended to SPVs Financial commitment of the Indian Party is within the extant limit of ODI Such guarantee shall be reported to RBI in Form ODI through the AD Issuance of corporate guarantee to subsequent level step down operating subsidiaries will be considered under the Approval Route 51

52 Overseas Direct Investment ('ODI') Investment through Special Purpose Vehicle (SPV): Approval under automatic route Such investment subject to following conditions Indian party is not included in the RBI's caution list Under investigation by the Directorate of Enforcement Indian party included in the list of defaulters to the banking system Method of Funding: Drawal of foreign exchange from an AD bank in India Capitalization of exports Swap of shares proceeds of ECBs / FCCBs Exchange of ADRs/GDRs Balances held in EEFC account Proceeds of foreign currency funds raised through ADR / GDR Capitalization of Export proceeds: permitted to capitalize towards exports, fees, royalties or any other dues from the foreign entity for supply of technical know-how, consultancy, managerial and other services within the ceilings applicable Software exporters allowed to receive 25% of their export proceeds in the form of shares 52

53 Overseas Direct Investment ('ODI') Investments in Financial Services Sector: Investment in an entity outside India, which is engaged in the financial sector, should fulfill the following additional conditions: Registered with the regulatory authority in India Company has earned profit during the preceding three financial years Has obtained approval from the regulatory authorities in India as well as abroad has fulfilled the prudential norms relating to capital adequacy Portfolio Investments by listed Indian companies: Listed Indian companies are permitted to invest up to 50 per cent of their net worth as on the date of the last audited balance sheet in followings; shares bonds / fixed income securities Investment by Mutual Funds: Indian Mutual Funds registered with SEBI are permitted to invest within an overall cap of USD 7 billion in : ADRs / GDRs of the Indian and foreign companies Listed overseas companies equity shares IPO / FPO of overseas companies Foreign debt securities Money market instruments rated not below investment grade Government securities rated not below investment grade Derivatives traded on recognized stock exchanges overseas only for hedging and portfolio balancing with underlying as securities 53

54 Overseas Direct Investment ('ODI') Short-term deposits with banks overseas where the issuer is rated not below investment grade; and Units / securities issued by overseas Mutual Funds or Unit Trusts A limited number of qualified Indian Mutual Funds, are permitted to invest cumulatively up to USD 1 billion in overseas Exchange Traded Funds as may be permitted by SEBI Domestic Venture Capital Funds registered with SEBI may invest in equity and equity linked instruments subject to overall limit of USD 500 million Overseas investment by Registered Trust / Society: Registered Trusts and Societies engaged in manufacturing / educational / hospital sector are allowed to make investment in the same sector in a JV/WOS with the prior approval of RBI: Eligibility Criteria: The Trust / Society should be registered Trust deed / MoA of society permits the proposed investment Proposed investment should be approved by the trustee/s Trust / Society is KYC compliant Trust has been in existence at least for a period of three years Trust / Society has not come under the adverse notice of any Regulatory / Enforcement agency 54

55 Overseas Direct Investment ('ODI') Write off of capital and receivables of Overseas entity: Indian promoters who have set up WOS abroad have at least 51 per cent stake in overseas JV Indian company may write off capital (Equity / preference) or other receivables in JV / WOS as follows: Listed Indian companies - 25% of equity investment / receivable under the Automatic Route Unlisted companies 25% of equity investment / receivable under the Approval Route Write -off / restructuring have to be reported to the Reserve Bank within 30 days Transfer by way of sale of shares of a JV / WOS: Indian Party may transfer by way of sale to another Indian Party or to a person resident outside India of any share / security held in JV / WOS subject to the following conditions: The sale does not result in any write off of the investment The sale is effected through a stock exchange If the shares are not listed on the stock exchange then the value certified by a Chartered Accountant / Certified Public Accountant as the fair value of the shares based on the latest audited financial statements Indian party does not have any outstanding dues by way of dividend, technical know-how fees, royalty, consultancy, commission or other entitlements and / or export proceeds from JV / WOS 55

56 Overseas Direct Investment ('ODI') Overseas concern has been in operation for at least one full year and the APR together with the audited accounts for that year has been submitted to the Reserve Bank Indian party is not under investigation by CBI / DoE/ SEBI / IRDA or any other regulatory authority in India Indian entity is required to submit details within 30 days from the date of disinvestment Transfer by way of sale of shares of a JV / WOS involving Write off of the investment: Indian Parties may disinvest, without prior approval of the Reserve Bank incase; The JV / WOS is listed in the overseas stock exchange Indian Party is listed on a stock exchange in India and has a net worth of not less than Rs.100 crore Indian Party is an unlisted company and the investment in the overseas venture does not exceed USD 10 million Indian Party is a listed company with net worth of less than Rs.100 crore but investment in an overseas JV/WOS does not exceed USD 10 million 56

57 Other forms of Investment Overseas Setting up of branch overseas: No equity investment Extension of the Head office No separate entity Liabilities could be passed on to Indian Company Subject to local country laws Current Account Transactions under FEMA Investments by Residents: Shares in overseas entity gifted by non residents Acquisition of shares under a Cash less route no outward remittance Assets inherited outside India Shares of Foreign Company by Indian employees Sale of those shares allowed Repatriation of forex within 90 days In Qualification shares for overseas Directorships ESOPS of WOS/ JV ADR/ GDR ESOPS of the Indian Companies Limit of $ 50 K in a block of five years In any other investment up to $ 200K in a FY Permitted Capital and current account transactions- General approval 57

58 Other forms of Investment Overseas Investment by way of share swap: Indian party has to obtain FIPB approval Valuation has been done as per the laid-down procedures Post Investment Regulatory filings: Getting UIN (Unique Identification Number) Submitting Share Certificates or similar documents Filing Annual Performance Report (Form APR) Periodical ODI forms for Follow-on investments Intimation of Step Down Investments Intimation regarding winding up within 30 days and remittance of sale/ liquidation proceeds within 90 days Filing form APR every year 58

59 Overseas Direct Investments The liberalizations/ rationalizations announced by the RBI aim to provide an impetus to boost Overseas Direct Investments (ODI) and widen the class of investors investing outside India and also provide the much needed operational flexibility. The liberalized ODI facilities are applicable to: Resident Individuals; and Indian Parties So what s new 59

60 ODI- Facilities for Resident Individuals The Reserve Bank has granted general permission to resident individuals in respect of the following: Qualification shares for holding the post of director in the overseas entity Acquiring equity shares in a foreign company by way of Professional services rendered to the overseas entity or in lieu of director s remuneration ESOP scheme So what s new 60

61 ODI- Facilities for Resident Individuals Acquiring qualification shares in a foreign company for holding the post of director Applicable to resident individuals Present restriction on acquisition not exceeding 1% of the paid-up capital of the foreign company has been removed Can now acquire foreign securities as qualification shares Acquisition must be in accordance with the qualification shares requirement as per the laws of the host country Remittance of the amount for acquiring such qualification shares to fall within the overall ceiling prescribed under the Liberalized Remittance Scheme (LRS) So what s new 61

62 ODI- Facilities for Resident Individuals Acquiring shares towards professional services/ in lieu of director s remuneration Applicable to resident individuals Can now acquire shares of a foreign entity in part or full consideration of professional services rendered to the foreign company or in lieu of director s remuneration Limit in terms of value of such shares acquired will be the overall ceiling prescribed under the Liberalized Remittance Scheme (LRS) So what s new 62

63 ODI- Facilities for Resident Individuals Acquiring shares in a foreign company through ESOP scheme Applicable to resident employees and directors of the Indian Company Can accept shares under an ESOP Scheme, offered by the foreign entity globally on a uniform basis Annual Return to be submitted by the Indian company to the Reserve Bank through the AD Category I bank giving details of remittances/ beneficiaries Allowed to accept the shares irrespective of the percentage of direct or indirect equity stake the foreign entity holds in the Indian company So what s new 63

64 ODI- Facilities for Indian Parties Creation of charge Indian party now permitted to create charge in the form of pledge/ mortgage/ hypothecation on the immovable/ movable property and other financial assets of the Indian party and its group companies Creation of charge under the approval route Conditions Must be within the overall limit (presently 400%) of the financial commitment Indian party and its group companies to submit a No Objection from their Indian lenders Appropriate reporting mechanism for capturing the financial commitment on account of creation of such charge will be introduced separately. So what s new 64

65 ODI- Facilities for Indian Parties Reckoning bank guarantee issued on behalf of JV/ WOS This facility relates to a bank guarantee issued by a resident bank on behalf of an overseas joint venture (JV) or a wholly-owned subsidiary (WOS) of an Indian party, which is backed by a counter guarantee or collateral by the Indian party, Such bank guarantee to be reckoned for computation of the financial commitment of the Indian party So what s new 65

66 ODI- Facilities for Indian Parties Issuance of personal guarantee Applicable to indirect resident individual promoters of the Indian party Now allowed to issue personal guarantee in the same manner as allowed under the General Permission for direct promoters So what s new 66

67 ODI- Facilities for Indian Parties Financial Commitment without equity contribution to JV/ WOS Proposals for undertaking financial commitment without equity contribution in JV/ WOS may be considered by RBI Allowed under the approval route AD banks to forward the proposals after ensuring that the laws of the host country permit incorporation of a company without equity participation by the Indian party So what s new 67

68 ODI- Facilities for Indian Parties Submission of Annual Performance Report Indian party can file the Annual Performance Report for each JV or WOS outside India on the basis of unaudited annual accounts of the JV/ WOS in cases where the law of the host country does not mandatorily require auditing of the books of account of the JV/ WOS Conditions: Statutory Auditors of the Indian party to certify that the unaudited annual accounts of the JV/ WOS reflect a true and fair picture of the affairs of the JV/ WOS The unaudited annual accounts of the JV/ WOS are adopted and ratified by the Board of the Indian party So what s new 68

69 ODI- Facilities for Indian Parties Contribution by way of Compulsorily Convertible Preference Shares (CCPS) Indian party can now set up or acquire a JV/ WOS outside India by subscribing to the CCPS of the JV/ WOS. The CCPS will be treated at par with equity shares So what s new 69

70 ODI- Facilities for Indian Parties Opening of a Foreign Currency Account to make ODI Prior permission of the RBI was required to open, hold and maintain Foreign Currency Account (FCA) in a foreign country for the purpose of making ODI RBI has now liberalized the regulations by granting general permission Conditions: The Indian party is eligible for ODI in terms of the ODI regulations Host country regulations stipulate that the investments into the country is required to be routed through a designated account FCA to be opened, held and maintained as per the host country regulations Remittances to the FCA to be utilized only for making ODI in the JV/ WOS abroad Amount received in the account by way of dividend or other entitlements to repatriated to India within 30 days from the date of credit FCA to be closed within 30 days from the date of disinvestment from JV/ WOS or cessation thereof. So what s new 70

71 Exports & Imports 71

72 Export and Import of Goods Exports of Goods & Services Exporter under dual obligation Furnish true and correct material particulars including full export value Furnish on information required by RBI to ensure repatriation of export proceeds Declaration to be submitted by exporter when exporting goods or software in physical form Form GR : Export otherwise than by Post including export of software in physical form i.e. magnetic tapes/discs and paper media (to customs authorities) Form SDF : To be appended to the shipping bill, for exports declared to Customs Offices notified by the Central Government which have introduced Electronic Data Interchange (EDI) system for processing shipping bills notified by the Central Government Form PP: Export by Post- Authorised Dealer Form Softex: Export of software otherwise than in physical form, i.e. magnetic tapes/discs, and paper media- designated official of STPIs/Free Trade Zones (FTZs)/Export Processing Zones (EPZs) /Special Economic Zones (SEZs) Export of services no particular Forms specified the exporter may export such services without furnishing any declaration but would be required to be realise and repatriate the payment for these services as per the FEMA 72

73 Export and Import of Goods Certain exemptions from this requirement Trade samples of goods and publicity materials supplied free of payment Personal effects of travellers Goods or software accompanied by a declaration by the exporter that they are not more than USD 25,000 in value By way of gift of goods accompanied by a declaration by the exporter that they are not more than Rs. 5 lakh in value Goods imported free of cost on re-export basis Goods sent outside India for testing subject to re-import into India Period within which export value of goods/software to be realised and repatriated SEZ Units : No time specified EOU/STP/EHTP/BTP units: Within a period of 12 months 73

74 Export and Import of Goods Exports requiring prior approval Export of goods on lease, hire etc.- only on approval Counter Trade: Any arrangement involving adjustment of value of goods imported into India against value of goods exported from India, shall require prior approval of the Reserve Bank Advance payment against exports Where an exporter receives advance payment (with or without interest), from a buyer outside India, the exporter shall be under an obligation to ensure that Goods are shipped within one year from the date of receipt of advance payment; the rate of interest, if any, payable on the advance payment does not exceed London Inter-Bank Offered Rate (LIBOR) basis points, and the documents covering the shipment are routed through the authorised dealer through whom the advance payment is received; If exporter is unable to ship goods (partly or fully) within one year from the date of receipt of advance payment, remittance of refund of unutilised portion of advance payment or payment of interest to be made only with prior approval of RBI 74

75 Export and Import of Goods Import of goods and services Persons, firms, companies making payments exceeding USD 500 or equivalent towards imports into India - Form A1 Importer to submit proof of import goods into India like Exchange Control copy of the Bill of Entry, Postal Appraisal Form or Customs Assessment Certificate, etc., as proof that goods equivalent to the value of remittance have been imported Evidence of imports: Goods- bill of entry for home consumption/warehousing Non physical imports like software/drawings/designs etc received via the internet- CA certificate stating receipt of such software/drawings/designs None specified for any services 75

76 Export and Import of Goods Time limit Remittances against imports should be completed not later than six months from the date of shipment Deferred payment arrangements: Deferred payment arrangements including suppliers and buyers credit, providing for payments beyond a period of 6 months from date of shipment up to a period of less than 3 years are treated as trade credits and External Commercial Borrowings guidelines applicable Advance remittance for Imports of goods allowed Where exceeds USD 200,000 : unconditional, irrevocable Letter of Credit or bank guarantee to be furnished Advance remittance for Imports of services allowed Where amount of advance exceeds USD 500,000 bank guarantee by international bank to be furnished 76

77 Immovable Property 77

78 Acquisition of Immovable property in India by NRI/PIO Indian citizen resident outside India Cannot acquire agricultural land/farm house/plantation Can acquire any immovable property in India Can transfer any immovable property in India to a person resident in India, resident outside India who is a citizen, PIO Person of Indian Origin (PIO) Cannot acquire agricultural land/farm house/plantation Can acquire immovable property by gift from person resident in India, person resident outside India who is a citizen of India or another PIO Can acquire any immovable property by inheritance from person resident outside India Transfer by sale to person resident in India Transfer by gift (commercial/residential property to resident, non-resident or PIO Foreign national of non-indian origin, resident outside India cannot purchase any immovable property in India unless acquired by way of inheritance from a person who was resident in India (exception: lease not exceeding five years) 78

79 Bank Accounts 79

80 Bank Account facilities available for NRI/PIO Non Resident Ordinary Rupee Account (NRO Account) Who can open account: Any person resident outside India Savings/current/recurring/ FD Account denominated in INR Permissible Credits: transfers from rupee accounts of non-resident banks remittances received in permitted currency from outside India through normal banking channels permitted currency tendered by account holder during his temporary visit to India legitimate dues in India of the account holder like current income like rent, dividend, pension, interest, etc. sale proceeds of assets including immovable property acquired out of rupee/foreign currency funds or by way of legacy/ inheritance Permissible debits: all local payments in rupees remittance outside India of current income like rent, dividend, pension, interest, etc., net of applicable taxes, of the account holder 80

81 Bank Account facilities available for NRI/PIO Non Resident Ordinary Rupee Account (NRO Account) Not repatriable except for the following: i) current income ii) up to USD 1 million per financial year (April-March) for any bona fide purpose out of balances in the account e.g., sale proceeds of assets in India acquired by way of purchase/ inheritance / legacy inclusive of assets acquired out of settlement subject to certain conditions Banks free to fix interest rates though should not exceed normal domestic savings account 81

82 Bank Account facilities available for NRI/PIO Non-resident (external) Rupee Account (NRE Account) Who can open account: NRIs Savings/current/recurring/FD Account maintained in INR Accrued interest income and balances held in NRE accounts are exempt from Income tax and Wealth tax, respectively Permissible credits: inward remittance to India in permitted currency proceeds of account payee cheques, demand drafts / bankers' cheques, issued against encashment of foreign currency transfers from other NRE / FCNR accounts sale proceeds of FDI investments interest accruing on the funds held in such accounts interest on Government securities/dividends on units of mutual funds purchased by debit to the NRE/FCNR(B) account of the holder 82

83 Bank Account facilities available for NRI/PIO Non-resident (external) Rupee Account (NRE Account) Permissible debits: local disbursements transfer to other NRE / FCNR accounts of person eligible to open such accounts, remittance outside India investments in shares / securities/commercial paper of an Indian company Fully repatriable Banks free to fix interest rates- not to exceed normal domestic rates 83

84 Bank Account facilities available for NRI/PIO Foreign Currency Non Resident Bank Account (FCNR-B Account) Who can open account: NRIs Term deposits- 1 to 5 years All debits / credits permissible in respect of NRE accounts, including credit of sale proceeds of FDI investments, are permissible in FCNR (B) accounts also Account can be in any freely convertible currency Interest rates: LIBOR +125 basis points for the currency concerned Repatriable 84

85 Bank Account facilities available for returning NRI/PIO Resident Foreign Currency Account (RFC Account) Returning NRIs /PIOs may maintain Resident Foreign Currency (RFC) Account to transfer balances held in NRE/FCNR(B) accounts Savings/current/term deposits Proceeds of assets held outside India at the time of return can be credited to RFC account Funds in RFC accounts are free from all restrictions regarding utilisation of foreign currency balances including any restriction on investment in any form outside India RFC accounts can be maintained in the form of current or savings or term deposit accounts, where the account holder is an individual and in the form of current or term deposits in all other cases Banks can fix interest rates 85

86 Other Bank Account facilities Exchange Earner s Foreign Currency Account (EEFC Account) Facility provided to foreign exchange earners (including exporters) to credit 100% of their foreign exchange earnings to the account Account holders do not have to convert foreign exchange into Rupees and vice versa, thereby minimizing the transaction costs All categories of foreign exchange earners, such as individuals, companies, etc. who are resident in India, may open EEFC accounts Current account- no interest payable Credit up to 100 % of foreign exchange earnings into the EEFC account allowed subject to permissible credits and debits SEZ units not allowed to open EEFC account Permissible Credits: Inward remittance through normal banking channels other than remittances received on account of foreign currency loan or investment received from abroad or received for meeting specific obligations by the account holder Payments received in foreign exchange by a 100% EOU/STPI/EHTP for supply of goods to similar such units or to a unit in Domestic Tariff Area Payments received in foreign exchange by a unit in the Domestic Tariff Area for supply of goods to a unit in the Special Economic Zone (SEZ); 86

87 Bank Account facilities available for returning NRI/PIO Exchange Earner s Foreign Currency Account (EEFC Account) Payment received by an exporter from an account maintained with an authorised dealer for the purpose of counter trade Advance remittance received by an exporter towards export of goods or service Professional earnings including directors fees, consultancy fees, lecture fees, honorarium and similar other earnings received by a professional by rendering services in his individual capacity; Re-credit of unutilised foreign currency earlier withdrawn from the account; Amount representing repayment by the account holder's importer customer, of loan/advances granted, to the exporter holding such account; 87 Permissible Debits: Payment outside India towards a permissible current account and capital account transactions Payment in foreign exchange towards cost of goods purchased from a 100% EOU/EHTP/STPI payment of customs duty in accordance with the provisions of the Foreign Trade Policy Trade related loans/advances, extended by an exporter holding such account to his importer customer outside India Payment in foreign exchange to a person resident in India for supply of goods/services including payments for airfare and hotel expenditure

88 Transfer of Funds from NRO to NRE account Opening of a Foreign Currency Account to make ODI Transfer of funds by NRI from NRO account to NRE account within the overall ceiling of USD 1 million per financial year subject to payment of taxes as applicable is now permissible Such credit of funds to NRE account shall be treated as permissible credits So what s new 88

89 Case Studies Deloitte Haskins & Sells

90 Case study 1: Defence Sector A India Pvt Ltd a subsidiary of French Company, providing software development and back office support to its parent, who is engaged in providing defence supplies globally Is 100% FDI permitted in A Ltd? being software and services provider or will the cap of 26% apply to it being services in the area of defence? 90

91 Case study 1: Defence Sector FDI in companies carrying out defence restricted to 26% and subject to approval of the Government Defence approvals subject to licensing under the Industries (Development & Regulations) Act, 1956 Does the cap on investments cover only products specified in the Industries (Development & Regulations) Act, 1956 or does it also include services? Services are not subject to licensing FIPB s view Contradictary views emerging. In an existing software company providing defence services - 100% FDI permitted with approval While a company exclusively set up for services in the area of defence FDI cap applies 91

92 Case study 2: Press Note 1/ 2005 Where there is an existing JV or technical collaboration in India by a foreign company and the foreign company proposes to set up its own WOS or acquire stake in another JV in the same or allied field, prior approval of the JV and FIPB required Prior approval of the JV company done away with; approval required only from FIPB Approval/ clarifications to FIPB on same or allied filed - NIC codes 92

93 Case study 3: Merger Merger of a foreign company into Indian company permitted with the approval of the jurisdictional High Court Shares to be issued to non-resident consequent to the merger Regulations liberalised to permit issue of shares subjection FDI policy and compliances Issue A India Ltd with a NRI promoter sets up another company in Singapore which in turn has a subsidiary in India AS India Ltd. A India Ltd proposes to merge into AS India Ltd and a consequence of the merger, no/minimum shares will be issued to the NRI promoter. Is this a violation of FEMA/FDI guidelines? 93

94 Case study 4: Issue of Shares for non-cash consideration Issue of shares for non-cash consideration not permitted Exceptions ECB, royalty, FTS received and payable to the foreign company Import of capital goods, machinery, equipment, pre-operation and preincorporation expenses can be capitalised and shares issued with FIPB approval Can the following be capitalised with FIPB approval? Post incorporation expenses Raw material purchase Trade payables Second had machinery 94

95 Case study 5: Share Swap Share swap transactions based on mutual benefits accruing to both Indian entity as well as foreign entity Reduces cash flow needs while meeting end objectives of investments, especially for Indian companies making overseas investments Swaps permitted subject to approval based on following requirements: The overseas investment being in accordance with the Overseas Direct Investment guidelines and the inward investment compliant with FDI policy Valuation norms in relation to overseas investment, as well as in relation to inbound investment in the Indian companies, being complied with Issue: In a scenario where a shareholder gives up his shares in an Indian company, in exchange for shares in a foreign company would FIPB have the remit to give approval in such instances? 95

96 Case study 6: Issue of share warrants/ partly paid up shares Share warrants to be issued with FIPB approval Partly paid up shares can be issued only with FIPB approval 96

97 Questions??? 97