RECENT CHANGES IN FEMA AND FDI POLICY

Transcription

1 RECENT CHANGES IN FEMA AND FDI POLICY 15 th June, 2016 Foreign Direct Investment (FDI): WHAT IS FDI FDI stands for Foreign Direct Investment, a component of a country's important source of investment. Foreign direct investment is investment of foreign assets into domestic structures, equipment, and organizations. It does not include foreign investment into the stock markets. FDI is thought to be more useful to a country than investments in the equity of its companies because equity investments are potentially "hot money" which can leave at the first sign of trouble, whereas FDI is durable and generally useful whether things go well or badly. 1

2 FDI- RECENT CHANGES Basis - Consolidated FDI Policy Circular of 2016 issued by DIPB effective 7th June 2016 Press Notes issued subsequently FEMA Notification No.20 (Transfer or Issue of Security by persons of resident outside India) Regulations Master Circular dated issued by RBI Subsequent amendments to FEM Notification No. 20 Clarifications by DIPB and FAQ by RBI FOREIGN DIRECT INVESTMENT POLICY FDI Guidelines for Investing in Indian Wholly Owned Subsidiary / Joint Venture Automatic Route No Prior Regulatory Approval but only Post Facto Filings to RBI, through AD Allowed for Most sectors Limits : Sectoral caps/ stipulated sector specific guidelines Inward remittances through proper banking channels Pricing valuations prescribed Post facto filing with 30 days of fund receipt Government Route Foreign Investment Promotion Board (FIPB) Only for cases other than Automatic Route and those mentioned in sectoral policy Applies to cases with existing venture/ tie up in same field Applies to investment over 24% in SSI reserved items FC-GPR- within 30 days of share allotment 2

3 FOREIGN DIRECT INVESTMENT POLICY FDI limits not exhaustive list Automatic Route (Illustrative) NBFC (minimum capitalization norms) IT / Ites/ SEZ Financial services (a) Telecom Sector (74% cap) (a) Insurance / pension(49 % cap) (a) Real Estate (a) Asset Reconstruction Company (100%) Infrastructure Shipping Manufacturing sector Hotels and tourism Prior Approval (Illustrative) Existing Airports 100% Titanium Minerals 100% Broadcasting (a) Courier 100% Print Media (a) 26% Single brand retailing 100% (49% Auto) Pharma- brownfield 100% Banking (49% A) 74% Agriculture (b) Atomic energy Negative List (Illustrative) Retail trading (except single brand up to 51%) Lottery, betting and gambling including technology collaboration Chit fund, Nidhi company Trading in Transferable Development Rights Real estate Business or construction of farm house (b) Note: (a) Sector specific guidelines (b) Subject to certain exceptions Foreign Investments Foreign Direct Investments Foreign Portfolio Investments Foreign Venture Capital Investments Other Investments (G-Sec, NCDs, etc) Investments by NRIs / PIOs Company / LLP/ REITS/ AIF NRIs/PIO FIIs / QFIs / RFPIs Proprietorship/ Partnership/ LLP / Company Automatic Route Govt. Route SEBI regd. FVCIs FIIs/RFPIs, NRIs, PIO, QFIs Long term Investors Repatriable (approval reqd) Nonrepatriable VCF, IVCUs Persons Resident Outside India including NRIs 3

4 FDI POLICY PRINCIPLES Capital defined as Equity, Compulsorily Fully Convertible Preference Shares and Compulsorily Fully Convertible Debentures Investment in other instruments such as: Non Convertible Preference Shares/ Debenture ( NCP ) Optionally Convertible Preference Shares/ Debentures ( OCP ) Partially Convertible Preference Shares/ Debentures ( PCP ) treated as External Commercial Borrowings ( ECB ) - subject to ECB guidelines Dividend on preference shares cannot exceed 300 bips of SBI PLR prevailing on the date of board meeting authorising the issue of such shares. FDI POLICY- PRINCIPLES Issue of shares with conditionalities like minimum return- this is not possible. Even the co-shareholders cannot assure a minimum return. Earlier, no conditionalities could be attached to any instrument. After, , it is now permissible for a buy back clause in the case of equity and compulsorily convertible instruments (debentures and Pref shares) so long as such buy back is agreed to be done at a fair value to be computed on the date of exercising of such option without assuring a minimum return to the investor. The same is subject to a minimum lock in period of one year or as per FDI condition whichever is higher. 4

5 FDI POLICY PRINCIPLES CONTD. Partly paid equity shares- pricing should be fixed upfront and minimum 25% of the consideration should be received at the time of allotment. Balance should be received within a period of 12 months. Shares have to be clearly shown as partly paid. Issue of partly paid convertible preference shares/ debentures not permitted. The pricing of warrants and conversion price should be fixed upfront and 25% amount should be received at the time of allotment with a grace period of 18 months for the balance amount. Pricing at the time of conversion cannot be lesser than the fair price at the time of allotment. However, higher amount can be received. FDI POLICY PRINCIPLES CONTD. Conversion of ECB- foreign exchange rate to convert- this can be based on the date on which it is agreed to convert. FDI permitted in: Indian companies including micro & small enterprise Partnership firm/ proprietorship concern by NRI/PIOs on non repatriation basis. NRI/POI s can invest with repatriation option with prior permission of RBI. Other than NRI/PIO s requires permission of RBI. The Firm or proprietary should not be engaged in business of agriculture/plantation/or real estate business or print media Sector. Trust only in the form of VCFs Now permitted in LLPs under automatic route subject to some exceptions Investment by FIIs permitted up to 10% for individual FII and 24% in aggregate which can be further increased upto sectoral caps. 5

6 FDI POLICY PRINCIPLES CONTD. Pricing of capital instruments (including conversion price for convertible instruments) is now required to be decided upfront at the time of issue of instruments Investment by FVCI in DVCF set up as trust is under automatic route subject to sectoral caps and FEMA regulations. Definition of NRI includes PIO cardholder. PIO who is not holding a PIO card is classified as a separate category. Definition of NRI in various regulations issued by RBI is not uniform. For example in the case of FEM (Acquisition and Transfer of Immovable Property in India) Regulations, spouse of a NRI is not covered. INVESTMENT BY NRIS (INCLUDES PIO CARDHOLDER) AND THEIR OVERSEAS ENTITIES Investment by NRI and PIO cardholder as per schedule 4 of Notification No. 20 FEM (Transfer or Issue of Security by persons of resident outside India) Regulations- on non repatriation basis- will be treated as domestic investment at par with residents. Even the investment by the companies, firms and trusts owned by the NRIs is treated as domestic investments by the residents, if done on a non repatriation basis as per schedule 4 Notification No.20. 6

7 Foreign Company has the following options to set up business operations in India : a. By incorporating a company under the Companies Act, 2013 A wholly owned subsidiary Joint venture company - existing company or new company with domestic partner b. By incorporating a LLP under the LLP Act, 2008 or by becoming a partner in an existing LLP. c. Setting up of Liaison Office Project Office Branch Office ISSUE OF SHARES Direct remittance and debit to NRE a/c, In the case of non repatriation- NRO. Lump sum royalty/ know how ; Conversion of ECB whether matured or not - - Subject to sectoral cap, pricing norms, tax law compliance for royalty/ know how and reporting guidelines. Issue of shares against import of machinery/ capital goods/ equipment (excluding second hand machinery) only with the prior approval of Govt. Capitalisation of pre-operative expenses including payments of rent etc requires Govt approval. Swap of shares- issue of shares in an Indian company in lieu of transfer of shares in a foreign company requires prior permission of FIPB. 7

8 EXIT ROUTE Sale or gift by one non resident (other than NRI and erstwhile OCB) to another non resident including NRI is permitted. NRIs can sell or gift to another NRI. Sale by one non resident to a resident Any non resident can transfer any security by way of gift to any resident. Transfer of shares in companies having a sectoral cap requires prior permission including in the case of mergers, amalgamations etc. A resident in India can sell any security to a non resident under private arrangement subject to sectoral caps and after complying with the pricing guidelines- cannot sell at a price less than the fair price. Sale by a non resident to resident is also permitted subject to pricing guidelines- cannot buy at a price more than the fair price. EXIT ROUTE Transfer of shares to a non resident on deferment terms (credit sales) requires prior permission of RBI. However, w.e.f , general permission is granted for sale from resident to non resident or vice versa to give credit up to 25% with a limit of 18 months. Further, in case the seller has to give any indemnity to the buyer, he can give upto 25% of the sale consideration up to a period of 18 months. Final receipt of amount cannot be lesser than the fair price computed. All other conditional sales or sales with indemnities require prior permission. Sales effected with certain promises of performance? Transfer of shares by a resident by way of gift to non resident- subject to prior approval which is granted subject to certain conditions including a proof that the transferee is a close relative as defined u/s 2 (77) of CA, Transfer of shares by a NRI to a non resident requires prior permission of RBI. 8

9 FDI IN E - COMMERCE B2B E commerce 100% automatic route B2C Not permitted except in the following situations: A manufacturer in India is permitted to sell through retail store as well as through e commerce retail; Single brand retail trading entity already operating through brick and mortar stores, is permitted to undertake retail trade through e commerce. INDIAN MANUFACTURER- E COMMERCE Indian Manufacturer who should be the owner of the brand- single brand products can be sold in e com retail. However, 70% of the sales should be that of the goods manufactured in India by the seller, while, only 30% of the goods can be sourced from other manufacturers in India. This means- import is not permitted; Brand should be owned by the Indian company; 30% goods also to be sourced from Indian manufacturers only. Not sure- whether the same can be bought through the distributors- it appears that purchasing from the manufacturers is also a must. 9

10 MARKET PLACE MODEL Marketplace based model of e com means providing of an IT Platform on a digital and electronic network to act as facilitator between buyer and seller. 100% FDI is permitted under market place e com company. INVENTORY BASED E - COMMERCE It means an e commerce activity where the inventory of goods and services is owned by the e commerce entity and is sold to the customers directly. FDI is not permitted in an inventory based e commerce entity. 10

11 MARKET PLACE BASED MODEL OF E COMMERCE Marketplace based model of e com- providing an information technology platform by the entity on a digital and electronic network to act as a facilitator between buyer and seller. Such companies cannot stock and sell the goods. 100% FDI is permitted in such entities. It may provide support services to sellers in respect of warehousing, logistics, order fulfillment, call center, payment collection and other services. E payment facilities can also be provided by the market place e commerce entity. Looks like except Buying and selling of goods, all other activities is permitted. An e-commerce entity can not permit more than 25% of the sales affected through its marketplace from one vendor or their group companies MARKET PLACE BASED E COMMERCE- CONTD. In the website, the name and address of the seller should be clearly indicated. Delivery of goods to the customer and customer satisfaction is that of the Seller and not that of the market place e commerce entity. Warranty/ guarantee/ service of the goods should be the responsibility of the seller. E commerce market place entities cannot directly or indirectly influence the price of goods or services and shall maintain level playing field. 11

12 WHOLESALE CASH AND CARRY B2B Sales to retailers, industrial, commercial, institutional or other professional business users or to other service providers as opposed to the end consumers. Determination is based on the type of customers and not the volume of sale to a particular person. It includes B2B E commerce Purchasers should have VAT/ Service tax/ excise duty/ shops and establishment registration/ trade registration / other retail trade licenses/ societies/ trusts for their self consumption. Sales to the group companies cannot exceed 25% of total sales. Requisite licenses should be obtained from the State Government also. Normal credit facilities can be extended though the name suggests that it should be only cash and carry. Such company can also undertake Single Brand Retail Trading subject to the conditions applicable to single brand retail trading entity discussed separately. Separate books should be maintained for the two stream of businesses. These guidelines will also apply to B2B e commerce. SINGLE BRAND PRODUCT RETAIL TRADE Up to 49% is under automatic route and beyond that, it is Govt route subject to conditions and Govt can permit up to 100%. Products should be sold under single brand only including in the international market which is also a pre-condition. Only goods branded during manufacturing is covered. Investor need not be the owner of the brand. It can be based on an agreement with the owner. The brand owner can set up one or more WOS/ JVs for this purpose. In case investment beyond 51%, 30% of the value of goods shall be sourced from India, preferably MSMEs, village and cottage industries, artisans and craftsmen or Indian manufacturers. Indian brands should be owned by resident Indians or entities owned by them. The regulations is applicable even to the Indian brand companies seeking FDI. 12

13 MULTI BRAND RETAIL TRADING Investment up to 51% is permitted with prior approval of FIPB; Agricultural goods need not be branded; Minimum investment of USD 100 Mln; 50% should be used to improve the backend infrastructure like processing, packaging, logistics, storage, warehouse, agricultural market produce infrastructure etc excluding the land and rental cost. At least 30% of value of procurement of manufactured/ processed products should be from Indian Micro, small and medium industries which have a total investment in plant and machinery not exceeding USD 2 Mio (gross). E commerce retail is not permitted in any of its forms by such companies. Population should be minimum one mln and only in the States where the local Govts have permitted the MBRT can be chosen. DUTY FREE SHOPS- 100% AUTOMATIC Duty free shops are the shops set up in custom bonded area at international airports/ international seaports and Land Customs Stations where there is transit of international passengers. The entity should comply with all the customs Act, 1962 regulations. Such entity cannot have any retail trading activity in the Domestic Tariff Area. 13

14 FDI IN REAL ESTATE FDI is not permitted in any entity which is engaged in real estate business, construction of farm houses and trading in TDR. Definition of real estate has been changed as under: Real estate business means dealing in land and immovable property with a view to earning profit therefrom and does not include development of townships, institutions, recreational facilities, city and regional level infrastructure, townships. Further, earning of rent/ income on lease of the property, not amounting to transfer (as per section 2 (47) of Income Tax Act), will not amount to real estate business. Cross sharing agreements between the group companies and earning rentals has been clarified earlier itself as an activity not falling with in definition of real estate business. FDI IN COMPLETED BUILDINGS Investment in completed buildings with a view to earn rental income is not a real estate business and hence, it falls under the automatic entry. 100% FDI is permitted in completed projects for operation and management of malls/ shopping complexes and business centres. There would be a lock in period of three years calculated with reference to each tranche of investment. During the period of three years, transfer of immovable property or part thereof is not permitted. Definition of transfer is as per section 2 (47) of ITA and hence, even sale agreement with possession is not permitted. 14

15 FDI IN COMPLETED PROJECTS FDI policy provides that such entity cannot transfer, but can earn rent by leasing the property, so long as the transaction does not amount to transfer. A question would arise whether long term lease of 99 years is a possibility or it should be normal lease only? when given on 99 years, entire amount is collected upfront; In the books, the transaction has to be shown as a Sale and we cannot show the cost of the assets in the Fixed assets; Service tax may attract on such rentals if called as rentals (currently commercial property only). This can even be caught under the mischief of the definition of transfer given under the FDI policy which includes the following: any transaction, by acquiring shares in a company or by way of any agreement or any arrangement or in any other manner whatsoever, which has the effect of transferring, or enabling the enjoyment of, any immovable property. FDI IN REAL ESTATE Conditions regarding minimum area to be built has been removed. Condition regarding minimum investment of USD 5 Mln has been removed. Investor can exit after completion of the project or after development of trunk infrastructure, i.e., roads, water supply, street lighting, drainage and sewerage. Lock in period of three years is applicable to each tranche of investment. Upon completion of three years, even if the project is not completed as above. Sale of shares from one non resident to another non resident even before the completion of three years of investment is permitted. 15

16 FDI IN REAL ESTATE In the case of investment by NRIs, lock in period of three years is not applicable. Similarly, in the case of hotels and tourist resorts, hospitals, SEZs, old age homes, lock in period is not applicable. Developed plots can be sold. Developed plots mean plots where trunk infrastructure, i.e., roads, water supply, street lighting, drainage and sewerage have been made available. All local bye laws regarding development should be followed and local Govts which approve the plans will monitor the compliance of local regulations. E - COMMERCE SERVICE SELLERS Business to Customer (B 2 C) sale of services is under the automatic route except the security and other conditionalities, applicable laws and regulations. 16

17 INVESTMENT IN NBFCS 100% FDI is permitted in respect of 18 activities which includes- Leasing and finance (Operating lease- 100% under automatic route) Housing finance Money changing business Micro credit. Rural credit. Investment is subject to minimum capitalization norms- USD 0.5 Mio upto 51% to be brought upfront. USD 5 Mio upto 75% to be brought upfront. Step down permitted with capitalization norms. USD 50 Mio upto 100% (7.5 Mio upfront and balance in 24 months)- Step down subsidiaries without any capitalization norms Non fund based NBFCs- minimum USD 0.5 Mio to be brought upfront. No step down is permitted. INVESTMENT IN START UPS Schedule 6 has been amended to provide for investment in the start ups in the equity or equity linked instruments or debt instruments by the Foreign Venture capital investor( FVCI). Eligible start ups can issue such instruments irrespective of their sector. If the FVCI is registered with SEBI, no permission is required. FVCI- free pricing as per the negotiation between the buyer and seller. (xa) startup shall mean an entity, incorporated or registered in India not prior to five years, with an annual turnover not exceeding INR 25 Crores in any preceding financial year, working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property, Provided that such entity is not formed by splitting up, or reconstruction of a business already in existence. Company or firm or LLP is included in the definition of entity. 17

18 ESOP TO NON RESIDENTS ESOP or sweat equity shares to directors or employees of the holding company or JV or WOS who are non residents is permitted. The scheme has to be drawn either as per SEBI guidelines or as per the Companies (Share Capital and Debentures) Rules, 2014 notified under CA Sectoral gap guidelines should be maintained; If the investment in the company is under the approval route, then, prior permission is required. If the shares are issued to the citizens of Bangladesh or Pak, then, FIPB permission is required. Separate reporting requirements have been prescribed. OVERSEAS CORPORATE BODY- RELAXED A company, partnership firm, society and overseas trusts where NRIs hold 60% or more interest were banned from 16 th sept [hereinafter called as erstwhile OCBs] Erstwhile OCBs can invest with the permission of RBI if the investment is under the automatic route and with Govt approval in case the investment is under the approval route. New Companies, Trusts, Partnership Firms owned and controlled by NRIs are treated like NRIs who have special dispensation. Further, OCBs investing on non repatriation basis is considered equal to the investment by residents. 18

19 FDI IN LLPS In the case of sectors/ activities where 100% FDI is allowed, FDI is permitted in LLPs through the automatic route. No LLP if there is a sectoral cap. There should not be any FDI linked performance conditions. Examples of performance linked conditions- investment in real estate where there is a minimum lock in period etc. in NBFC- minimum capitalization;- LLP is also permitted to have a downstream investment in another LLP like that of a company as under: LLP should notify to SIA, DIPP and FIPB of its downstream investment within 30 days of investment; Pricing regulations should be followed; Downstream investment out of locally borrowed funds is not permitted. However, the downstream LLP can borrow locally for its business. Downstream investment out of accrued funds is also permitted. Schedule 9 of FEM 20. Separate form for reporting the receipt of the amount and also transfer of share from resident to non resident and non resident to resident. Required to file annual return of foreign assets and liabilities by 15 th July. INVESTMENT COMPANY Foreign investment in the companies engaged only with the objective of investing in other entities requires Govt approval. Core Investment Companies (CICs) will have to additionally follow RBI s regulatory framework for CICs. 19

20 DOWNSTREAM INVESTMENT Investment by resident controlled companies (50% or more resident holding) foreign investment in the investing company will be ignored. Thus, even if there is a sectoral cap, it will not apply to such downstream investment as it would be treated as an investment by residents. Investment by non resident controlled companies will be treated as 100% foreign investment. In the case of 100% subsidiary, the percentage of foreign investment held in the parent company itself will be treated as the foreign investment in the subsidiary company. If the sponsor or Manager or the Investment Manager is not an Indian owned or controlled company, the investment would be treated as a foreign investment. PRICING OF SHARES In the case of listed companies, pricing shall be as per SEBI guidelines. In the case of unlisted companies, the pricing shall NOT BE LESS THAN the valuation of shares by a SEBI registered Merchant banker or a Chartered Accountant as per internationally accepted pricing methodology on arms length basis. DCF method is no longer the only method of valuation. Further, non residents are permitted to subscribe to the MOA at par value. 20

21 PLEDGE OF SHARES Resident shareholders can freely pledge their shares to the resident lenders. Resident shareholders can also pledge the shares to secure ECB raised after getting a NOC from the AD who has to verify certain conditions and issue the NOC. Non resident shareholder can pledge the shares to a AD Bank in India in respect of the loan given to the investee company. Non resident shareholders can also pledge their shares in favor of overseas bank (not others) for the loans raised for genuine business purposes. Such loan should not be utilized to invest in India as a capital inflow. REPORTING OBLIGATIONS- POST INVESTMENT To report the receipt of the amount within 30 days along with KYC details (It is mandatory to file Advance Remittance Form electronically w.e.f 08th February 2016) Post issue of shares/ Right/ bonus/ CCPS/ CCD/ ESOP- to file FC- GPR within a period of 30 days from the date of allotment along with the valuation report and a certificate as per the format. An annual return on Foreign Liabilities and Assets to be filed on or before 15 th July every year. This return is not required in the case the investment is as per schedule 4 (non repatriation basis). Even issue of shares by capitalizing the receivables should be reported in FC- GPR. In the case of conversion of ECB into equity- FC- GPR and also ECB-2 should be filed with Statistics and Information Management, RBI, Mumbai. 21

22 REPORTING OBLIGATIONS- TRANSFER OF SHARES Transfer of shares from resident to non resident or non resident to resident- should be reported in FC- TRS within 60 days from the date of receipt of the amount of consideration. Onus to file FC- TRS is on the transferor/ transferee resident in India. REPORTING OBLIGATIONS RECURRING REMITTANCES LIKE INTEREST, DIVIDEND, ROYALTY Remittance of dividend, interest and royalty is covered under FEM (Current Account Transaction) and is freely repatriable without any restrictions (net of TDS/ DDT). 22

23 REPORTING OBLIGATIONS- REMITTANCE OF SALE PROCEEDS A2 form Form 15CA Covering letter to the Bank Form 15 CB - CA certificate, if required Refer Notification No. G.S.R. 978(E) dated 16 th December, 2015 IMMOVABLE PROPERTY PURCHASES Direct purchase of property is not called as FDI and is governed by separate regulations. 23

24 KINDS OF OFFENCES Delay in reporting the FDI Delay in allotting shares Delay in filing FC-GPR; Violation of pricing, instruments; Delay in refunding the unallotted amount; Guaranteed returns; Non filing of annual assets and liabilities KINDS OF OFFENCES Failure to file FC-TRS within 60 days; Downstream investments- errors; SHA terms and conditions- whether arbitration clause providing for an arbitration outside India can also be a violation? As per FDI policy, all investments are subject to compliance with all relevant sectoral laws, regulations, rules, security conditions, and state/ local/ regulations. Whether a clause in the SHA indicating the entire agreement should be interpreted in accordance with an international law is a FDI compliant clause? 24

25 COMPOUNDING OF OFFENCES All offences are compoundable. Though maximum penalty is three times of the transaction amount, RBI has now released a table of penalty payable for various offences. Refer Notification No 73 dated 3 rd June Sample penalty table is given herein below: Type of Contravention A. Reporting Contraventions 1. FEMA 20 Para 9(1)(A), 9(1)(B), Part B of FC(GPR), FCTRS (Reg. 10) and taking on record FCTRS (Reg. 4) 2. FEMA 3 Non submission of ECB Statements 3. FEMA 120 Non reporting / delay in reporting of acquisition / set up of subsidiaries / step down subsidiaries / changes in the shareholding pattern 4. Any other reporting contraventions Penalty Fixed Amount: Rs. 10,000/- [applied once for each contravention in a compounding application] PLUS Variable amount as under: Up to 10 lakhs: Rs. 1,000/- per year Rs lakhs: Rs. 2,500/- per year Rs lakhs: Rs. 7,000/- per year Rs crore: Rs. 50,000/- per year Rs crore: Rs. 1,00,000/- per year Above Rs. 100 crore: Rs. 2,00,000/- per year 25