FOREIGN EXCHANGE LAWS
INDEX Executive Summary... 3 1. Deferment of sale consideration and opening of an escrow account... 4 2. Guidance Note on compounding of contraventions under FEMA, 1999... 4 3. Procedural guidelines for establishment of BO/ LO/ PO in India... 8 4. Manner of Receipt and Payment Regulations, 2016... 10 5. Amendment in FDI Policy for foreign investment in ARC... 11 The contents provided in this newsletter are for information purpose only and are intended, but not promised or guaranteed, to be correct, complete and up-to-date. The firm hereby disclaims any and all liability to any person for any loss or damage caused by errors or omissions, whether such errors or omissions result from negligence, accident or any other cause. For private circulation only 2
EXECUTIVE SUMMARY o RBI has permitted deferment/entering into escrow arrangement for 25% of the total consideration payable by buyer to the seller up to a period of 18 months. Further in cases where total consideration is paid, seller can provide indemnity for an amount up to 25% of the consideration up to a period of 18 months. o RBI has issued a Guidance Note for amounts to be imposed on compounding of contraventions under FEMA. o RBI has issued procedural guidelines for establishment of Branch Office (BO/ Liaison Office (LO)/ Project Office (PO) in India by foreign entities. o RBI has revised Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2014 to permit the following transactions: - Payment on account of sitting fees or commission or remuneration and travel expenses to and from and within India to a whole time director who is a person resident outside India by a company or a person resident in India in rupees; - Receipt of funds from a rupee account held in the name of an Exchange House with an AD upto a specified limit; and - Receipt of any payment other than for exports by means of postal order. o 100% FDI is permitted in Asset Reconstruction Company (ARC) under automatic route. For private circulation only 3
1. Deferment of sale consideration and opening of an escrow account As per the erstwhile provisions, prior approval of the RBI was required for deferment of payment of consideration by the non-resident buyer to Indian resident seller in case of transfer of shares of an Indian company from an Indian resident seller to a non-resident acquirer regardless of the quantum of consideration. RBI has now further provided that deferment of consideration for transfer of shares between a resident buyer and a non-resident seller or vice-versa shall be permitted subject to the following conditions: a. Amount to be deferred does not exceed 25% of the total consideration payable by the buyer to the seller and b. Amount to be paid is allowed to be deferred upto a maximum period of 18 months from the date of transfer agreement. Also, the buyer and the seller can enter into an escrow arrangement for an amount up to 25% of the total consideration for a maximum period of 18 months from the date of the transfer agreement. Further where entire consideration is provided, indemnity by seller cannot exceeds 25% of the total consideration and for a period not exceeding 18 month. 2. Guidance Note on compounding of contraventions under FEMA, 1999 FEMA provides that a penalty of up to 3 times of the amount involved in a contravention can be levied (Limit). Subject to this Limit, RBI has issued a Guidance Note on computation of the amounts imposed under the Foreign Exchange (Compounding Proceedings) Rules 2000. For private circulation only 4
Nature of contravention Contraventions relating to reporting under FEMA pertaining to: a. FC-GPR, FC-TRS b. Non submission of ECB statements c. Non reporting/delay in reporting of acquisition/setup of subsidiaries/step down subsidiaries /changes in the shareholding pattern d. Any other reporting contraventions (except those in Row 2 below) Reporting contraventions by Liaison Office (LO)/Branch Office (BO)/ Project Office(PO) Limits Fixed amount of Rs. 10,000 for each contravention in a compounding application + variable amount as under: Amount of contravention Upto Rs. 10 lakhs Rs. 10-40 lakhs Rs. 40-100 lakhs Rs. 1-10 crores Rs. 10-100 crores Above Rs. 100 crores Amount of compounding fee Rs. 1,000 per year Rs. 2,500 per year Rs. 7,000 per year Rs. 50,000 per year Rs. 100,000 per year Rs. 200,000 per year The period of contravention may be considered proportionately i.e. rounded off to next higher month 12 X amount for 1 year. As above, subject to a maximum limit of Rs. 2 lakhs. In case of PO, the amount imposed shall be calculated on 10% of total project cost. Non compliances related to nonsubmission or delayed submission of APR/ share certificates or AAC or FCGPR returns Rs.10,000/- per AAC/APR/FCGPR return delayed. Delayed receipt of share certificate Rs.10,000/- per year. For private circulation only 5
Nature of contravention Contraventions pertaining to non-allotment of shares or allotment after the stipulated period of 180 days with prior approval of RBI allotment of shares after 180 days without the prior approval of RBI Non allotment of shares and refund after 180 days - with the prior permission of RBI - without the prior permission of RBI Contraventions (other than reporting contraventions) by LO/BO/PO All other contraventions except corporate guarantees Limits Rs. 30,000/- + given percentage of the amount involved: Period of default Variable amount of compounding fee 1st year 0.30% 1-2 years 0.35% 2-3 years 0.40% 3-4 years 0.45% 4-5 years 0.50% >5 years 0.75% 1.25 times of the amount as calculated above 1.50 times of the amount calculated above 1.75 times of the amount calculated above Based on table provided above. For project offices the amount of contravention shall be deemed to be 10% of the cost of project. Rs.50,000/- + given percentage of the amount involved: Period of default Variable amount of compounding fee 1st year 0.50% 1-2 years 0.55% 2-3 years 0.60% 3-4 years 0.65% 4-5 years 0.70% >5 years 0.75% For private circulation only 6
Nature of contravention Contravention relating to issue of corporate guarantees without obtaining UIN/ permission wherever required /open ended guarantees or any other contravention related to issue of corporate guarantees. Limits Rs.50,000/- + given percentage of the amount involved: Period of default Variable amount of compounding fee 1st year 0.050% 1-2 years 0.055% 2-3 years 0.060% 3-4 years 0.065% 4-5 years 0.070% >5 years 0.075% In case the contravention relating to issue of guarantees for raising loans that are invested back into India, the amount imposed may be trebled. The above amounts are presently subject to the following restrictions: a. In case where the amount of contravention is less than Rs. 1 lakh, the amount to be imposed shall not exceed: Nature of contraventions Reporting related contraventions All other contraventions Maximum amount to be imposed Simple interest @ 5% p.a. Simple interest @ 10% p.a. The amounts to be imposed shall be calculated on the amount of contravention for the period of contravention. b. In cases where the contravenor has made undue gains, the amount of undue gains shall be neutralized to a reasonable extent by adding the same to the compounding amount. For private circulation only 7
c. If a party who has been compounded earlier applies for compounding again for similar contravention, the amount calculated as above may be enhanced by 50%. 3. Procedural guidelines for establishment of BO/ LO/ PO in India RBI has issued revised guidelines for establishment of a BO/ LO/ PO in India by foreign entities. a. Eligibility for setting up a LO/ BO/ PO As per the erstwhile provisions, prior approval from RBI was required by a person resident outside India to establish a BO/ LO/ PO in India. Now, for applicants whose principal business falls under sectors where 100% FDI is allowed, Authorised Dealer (AD) banks are permitted to consider such applications under the delegated powers. Prior approval from RBI shall be obtained only for following categories of applicants: i. Applicant being a citizen of or is registered/ incorporated in Pakistan ii. Applicant being a citizen of or is registered/ incorporated in Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau and BO/LO/PO is to be set up in Jammu and Kashmir, North East region and Andaman and Nicobar Islands. iii. Principal business of the applicant is Defence, Telecom, Private Security and Information and Broadcasting. However, opening of PO in defence sector, no separate approval of the Government of India (GOI) or RBI shall be required if the foreign applicant has been awarded a contract by/ entered into an agreement with the Ministry of Defence or Service Headquarters or Defence Public Sector Undertakings. iv. Applicant being a NGO, NPO, Body/Agency/ Department of a foreign government. For private circulation only 8
b. Other conditions in relation to setting up of a BO/ LO/ PO in India Particulars Extant Revised Time frame No specific Within 6 months from the date of grant for setting time frame of approval by AD bank failing which up of LO/ prescribed the approval shall lapse. BO/ PO Where the delay is due to reasons beyond applicant s control extension upto 6 months may be granted with the prior approval of the AD Bank. Prior approval of RBI shall be required for extension beyond 6 months. Setting up additional LOs/ BOs Change name LO/BO in of Prior approval of RBI required No specific provision Prior approval from AD banks is required However, any other activity in addition to those permitted by RBI shall require RBI approval. For change in name without change in ownership, AD bank approval is required For change in name on account of acquisitions or mergers of foreign entities involving change in ownership, the acquired entity or the new entity is required to apply afresh by closing the existing entity. Change in top management Transfer assets of No specific provision No specific provision The approvals given to one foreign entity is not transferrable to another foreign entity. Prior approval from RBI is not required for change in the top management of the LO/BO. However, such change needs to be intimated to the AD bank. Approval from AD Banks shall be required for transfer of assets by way of donations of old furniture, vehicles, computers and other office items to NGOs/NPOs. For private circulation only 9
4. Manner of Receipt and Payment Regulations, 2016 The revised Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2016 have now permitted the following receipts/ payment: Nature of transaction Provision Payment to a whole time director being a person resident outside India by a company or a person resident in India in Indian rupees Permissible payment Permissible receipts - who is on a visit to India for the company's work and is entitled to payment of sitting fees or commission or remuneration and travel expenses to and from and within India - in accordance with the company's Memorandum or Articles of Association or any agreement entered into by it or any resolution passed by the company in general meeting or by its Board of Directors. Receipts from a rupee account held in the name of an Exchange House with an AD upto a maximum amount of Rs. 15 lakh (erstwhile Rs. 5 lakh) per export transaction. Receipts by a person resident in India any payment other than for exports by means of postal order issued by a post office outside India or by a postal money order issued by such post office. For private circulation only 10
5. Amendment in FDI Policy for foreign investment in ARC The GOI vide Press Note 4 has amended the provisions relating to foreign investment in an ARC. The amendments are summarized as under: Particulars Extant Revised FDI cap 100% of paid up capital of ARC Entry route Upto 49% - automatic route Beyond 49% - approval route Now, 100% FDI is permitted under automatic route. Other conditions Sponsor cannot hold more than 50% of shareholding of ARC either by way of FDI or by routing it through FII/ FPI controlled by a single sponsor. Investment limit of a sponsor in the shareholding of an ARC will be governed by the SARFAESI Act. FIIs/ FPIs can invest in Security Receipts (SRs) upto 74% of each tranche of scheme issued by the ARCs subject to compliance with FII/ FPI limit of corporate bonds and sectoral caps under the FDI Regulations. FIIs/ FPIs can invest in Security Receipts (SRs) upto 100% of each tranche of scheme issued by the ARCs subject to compliance with FII/ FPI limit of corporate bonds and RBI directions. For private circulation only 11
From: N. A. Shah Associates Chartered Accountants Address: B 41-45, Paragon Centre, Pandurang Budhkar Marg, Mumbai 400 013. Tel: 91-022-4073 3000, Fax: 91-022-4073 3090 E-mail Id: info@nashah.com For private circulation only 12