Issue or Transfer of Shares under Exchange Control Regulation

Transcription

1 Issue or Transfer of Shares under Exchange Control Regulation - Varatharaj Kumar April 21, 2017

2 Content Overview Issue of Shares / Compulsory Convertible Preference Shares / Compulsory Convertible Debentures/ Warrants - Cash consideration - Non-Cash consideration Transfer of Share - Cash consideration - Non-Cash consideration - Deferred Consideration Investment by NRI on non-repatriation basis Foreign Direct Investment in Limited Liability Partnership

3 3 Overview

4 Evolution Page 4

5 Modes of foreign investment Modes of Investment Foreign Direct Investment NRI Investment Company LLP Nonrepartriable basis Schedule 1 of FEMA 20 Schedule 9 of FEMA 20 Schedule 4 of FEMA 20 Page 5

6 Instruments to Invest Cash Consideration Company Non-Cash Consideration Issue of Shares Equity Shares Partly paid equity shares Warrants CCPS CCD Rights Issue Issue of shares on Amalgamation or Demerger Issue of Nonredeemable preference shares / NCD Expenses, ECB etc ESOP/ Sweat Equity Shares Bonus Issue Schedule 1 of FEMA 20 Regulation 6 of FEMA Regulation 7(1) of FEMA Regulation 7(2) of FEMA Schedule 1 of FEMA 20 Regulation 8 of FEMA 20 Regulation 6A of FEMA Page 6

7 Cash: Issue of equity shares Foreign Co. Step 1 Valuation of Indian Company 1 Step 2 Infusion of fund Time Limit? Inward remittance Allotment equity share 2 Step 3 Advance reporting to AD Banker Step 4 Allotment of equity share Companies Act 60 days Vs FEMA 180 days India Co. Step 5 Allotment reporting to AD Banker Issue of Shares with differential voting right? Page 7 Delay in filing? Put / Call option? Pre-determined return?

8 Page 8 Cash: Partly paid shares / warrants - History Until 2010 Partly paid shares / warrants not considered as Capital for FDI 2010 Partly paid shares / warrants allowed to be issued subject to FIPB approval 2011 Policy for issuing partly paid shares / warrants kept under review July 2014 Partly paid shares / warrant now considered as eligible instruments - allowed to be issued under Automatic Route Equity shares Addition to FDI compliant instruments the issue would be subject to specific conditions and sectoral caps

9 Cash: Issue of partly paid-up equity shares Foreign Co. Step 1 Valuation of Indian Company 1 Inward remittance Allotment partly paidup equity share Face value Rs 100 Paid up value Rs 50 2 Step 2 Infusion of fund Minimum 25% of consideration Step 3 Advance reporting to AD Banker Balance consideration has to be brought within 12 months Page 9 India Co. Step 4 Allotment of equity share Step 5 Allotment reporting to AD Banker Consequence of not bringing in the remaining money within the stipulated time not specified Penalty / Compounding? Disconnect with Cos Act 2013 Rules for preferential issue by unlisted cos requires shares to be made fully paid-up at the time of allotment

10 Cash: Issue of Warrants Foreign Co. Step 1 Valuation of Indian Company 1 Inward remittance India Co. Allotment of Warrants Face value Rs 100 Paid up value Rs 50 2 Step 2 Infusion of fund Minimum 25% of consideration Step 3 Advance reporting to AD Banker Step 4 Allotment of Warrants Step 5 Allotment reporting to AD Banker Can a Private company issue warrants? Balance consideration has to be brought within 18 months Conversion price should not be lower than the upfront price receipt of higher consideration permitted No voting right / control until conversion Effective instrument? Page 10 Tax efficiency Considering amendments in the Tax treaty?

11 Cash: Issue of CCPS / CCD Foreign Co. Step 1 Valuation of Indian Company 1 Inward remittance Allotment of CCPS / CCD Step 2 Infusion of fund Step 3 Advance reporting to AD Banker Partly paid CCPS / CCD Possible? India Co. 2 Step 4 Allotment of CCPS / CCD Step 5 Allotment reporting to AD Banker Can CCPS / CCD can be redeemed before conversion? Any cap for dividend / Interest rate? Conversion price should not be lower than the upfront price receipt of higher consideration permitted Page 11 Tax efficiency?

12 Cash: Issue of Rights share Foreign Co 1 USA Acceptance / Renouncement of right 1 Rights offer Foreign Co 2 Singapore 90% 7% 7% 90% P Co India 3% 2 Step 1 - Based on existing FDI compliant shares Step 2 Infusion of fund Step 3 Advance reporting to AD Banker Step 4 Allotment of shares Valuation? Lesser price than normal share issue India Co. Step 5 Allotment reporting to AD Banker Page 12 Can it be used to effectively migrate the holding from one jurisdiction to other jurisdiction?

13 13 Non-Cash Consideration

14 Non-Cash: Issue and acquisition of shares after Merger / Demerger / Amalgamation F Co. 1 F Co. 2 F Co. 1 F Co. 2 Holds Shares Issue Shares Holds Shares Holds Shares No Valuation mechanism prescribed under FEMA? Jurisdiction Migration? I Co. 1 I Co. 2 I Co. 2 Instead of equity shares can preference shares be issued? Merger Can the consideration paid be partly in equity and partly in cash? Page 14 If the transferor company is already holding CCD, whether new CCD can be issued by Transferee company Regulation 7(1) enables only issue of share

15 Page 15 Non-Cash: Conversion of Reserves to RPS Liabilities INR Assets INR Equity Shares 100 Other Assets 300 Reserves 200 *Issue shares by utilizing reserves by way of Scheme of Arrangement under Companies Act Liabilities INR Assets INR Equity Shares 100 Other Assets 300 Preference Shares 100 Reserves 100 Will the issue of shares will be taxable under the head capital gains at the rate of 10 percent (Or) Will be treated as deemed dividend / buyback tax

16 Page 16 Non Cash: Conversion of Reserves to Debentures Liabilities INR Assets INR Equity Shares 100 Other Assets 300 Reserves 200 Issue debt by utilizing reserves by way of Scheme of Arrangement under Companies Act Liabilities INR Assets INR Equity Shares 100 Other Assets 300 Debentures 100 Reserves 100 Interest on debenture tax 30 percent for Indian Company Interest income for F Co - 10 percent / 15 percent as per tax treaty rate Effective saving 20%

17 Non Cash: Conversion of loan / Funds payable into Equity shares Liabilities INR Assets INR Page 17 Share Capital Reserves External Commercial Borrowing Interest on External Commercial Borrowing Trade Payables < 3 years Trade Payables > 3 years Royalty / Technical Fee XXX XXX XXX XXX XXX XXX XXX X * Subject to limit of 5 percent of capital or USD 5,00,00, whichever is less < 30 days filing of Form FC-GPR Valuation of equity shares Certificate from statutory auditor

18 18 Transfer of Shares

19 Cash: Transfer of Shares Transferee Transfer of Shares Transferor Non-Resident Resident NRI Non- Resident Resident NRI Non- Resident NRI Non- Resident Resident NRI No Valuation No approval required Pricing guidelines applicable, no approval required No Valuation No approval required Pricing guidelines applicable, no approval required Pricing guidelines applicable, no approval required Pricing guidelines applicable, RBI approval required Pricing guidelines applicable, no approval required No Valuation No approval required Sections 50CA + 56(2)(x) of the Income-tax Act, Transfer Pricing + FEMA = Needs to evaluated Page 19

20 Cash: Transfer of Shares - Compliances Page 20

21 Non-Cash: Gift Donee Gift of Shares Donor Non-Resident Resident NRI Non- Resident Resident NRI Non- Resident NRI Non- Resident Resident NRI No approval required No approval required No approval required RBI approval required subject to conditions RBI approval required subject to conditions, RBI approval required Permitted No approval required Page 21

22 Non Cash : Swapping of share Foreign Co. 2 Acquisition of share Indian CA can do valuation? 1 Transfer of shares P Co India India Co. Will it amount to round tripping Page 22

23 Deferred Consideration Reasons for Deferred Consideration INR 40 Crs INR 60 Crs P Co. Y 2 Y 1 INR 25 Crs INR 75 Crs F Co. Performance of the company for achieving growth Performance of the Promoter Liquidity crunch Any dispute in the company Transfer Shares Holds Shares Instead of shares can CCD be transferred? I Co. Page 23

24 24 Investment by Non-Resident on Non-repatriation basis

25 Investment by NRI on non-repatriation basis NRI Deemed domestic investment Equity Shares Convertible Preference shares Convertible Debentures Warrants Units Investment NRI owned and controlled Foreign company Foreign trust Foreign partnership Deemed domestic investment No limit on acquisition of security Can invest in the units issued by an investment vehicle No limit on the contribution to capital of partnership firm, proprietary firm or LLP Page 25

26 Impact of Deemed Domestic Investment Page 26

27 Whether repatriation of sale proceeds in NRO account is possible? NRI Withdrawal upto USD 1 million per FY NRO a/c Non-repatriation investment LLP Transfers money FEMA 20 (Schedule 4) Amount invested under this scheme and the capital appreciation shall not be allowed to be repatriated abroad Whether a view can be taken that NRI may remit sale proceeds in NRO Account to Overseas Bank A/c up to USD 1 million in a financial year? Page 27

28 28 FDI in LLP

29 Recent amendments in FEMA Designated partner being Indian Company / FEMA resident deleted Reporting requirements Restriction on availing ECB deleted Relaxations Conversion of company with FDI into LLP under the automatic route Reporting for investment and divestment to be prescribed Annual report for foreign assets and liabilities Page 29

30 FDI IN LLPS RBI GUIDELINES Eligible investor Person resident outside India (other than citizen of Pakistan/Bangladesh) Entity incorporated outside India (other than in Pakistan/Bangladesh) Not being a FII or FVCI or FPI registered with SEBI Eligibility of a LLP FDI is permitted subject to the following; Should operate in sectors where 100 percent FDI is allowed through automatic route and there are no FDI linked performance conditions To comply with the requirements under the LLP Act, 2008 A company having foreign investment operating in sector where FDI is allowed upto 100% under the automatic route without any performance based conditions can be converted to LLP

31 FDI IN LLPS RBI GUIDELINES Eligible Investments Contribution to the capital of the LLP Investment by way of profit share (reinvestment of earnings) Mode of capital contribution Only by way of cash contribution Pricing Capital contribution : Fair price to be worked out as per internationally accepted valuation norms or adopted as per market practices Transfer of capital contribution/profit share: - Non Resident To Resident Cap of fair price - Resident to Non Resident Floor of the fair price

32 Questions Varatharaj Kumar Views expressed are personal