INBOUND INVESTMENT- FEMA PROVISIONS 23 rd October 2008 CA Manoj Shah Shah & Modi Phone :+ 91 22 2512 6399 E-Mail :email@example.com Visakhapatnam Branch of SIRC
“ If you learn only methods you will be tied to your methods, but if you learn principles you can device your own methods.”
STRUCTURE OF THE FEMA (ACT)
FEMA has in all 49 sections of which 9 (section 1 to 9) are substantive and the rest are procedural/administrative.
Section 46 of the Act grants power to Central Government to makes rules and section 47 of the Act grants power to RBI to make regulations to implements its provisions and the rules made there under.
Thus RBI is entrusted with the administration and implementation of FEMA
Difference in implementation of Income Tax Act & FEMA
Under Income Tax, issue is of taxability of income which is determined for the full year, therefore generally amendments are annual.
Whereas FEMA regulations are there for undertaking transaction itself, therefore clarity at the time of undertaking transaction is a must and therefore amendments keep pace with changes taking place in economy.
Current & Capital A/c Transactions
Capital A/c transactions means a transaction which alters assets or liabilities including contingent liabilities outside Indian of person resident in India and vice-versa. It’s a economic definition rather than accounting or legal definition
Current A/c transaction - transaction other than a current a/c transaction
Current & Capital Account Transaction
Difference between concept of Capital Assets and Capital A/c transaction
e.g. Import of machinery on payment of cash. From FEMA perspective it is current a/c transaction ( to be looked from Balance of payment position of Country)
Current & Capital A/c transactions
General Policy is
Current A/c transactions are freely permitted unless prohibited whereas Capital A/c transactions are prohibited unless generally permitted.
Current A/c transactions are regulated by Central Government whereas Capital A/c transactions are regulated by RBI
Sec. 6(3) of FEMA, prescribes the class of capital a/c transactions which are regulated.
Sec. 6(4) & 6(5)
Sec. 6(4) A Person Resident in India, may hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India- If such property was acquired, held or owned by such persons when he was resident outside India or inherited from a person who was resident outside India
Sec. 6(5)- Similar provisions for Persons Resident Outside India and assets held in India
Inbound Investments FEMA Provisions
“ If u want 1 year of prosperity grow grains,
If u want 10 year of prosperity grow trees
If u want 100 years of prosperity grow people”
A decade and a half ago the prospect of India becoming a major player in the global economy seemed a distant dream, only a theoretical possibility. During the last 14 years there has been a sea change not only in the world’s perception about India’s future, but in our own perception about ourselves. The world has acknowledged the ‘arrival of India’ . We no longer discuss the future of India: we say “the future is India”.
Background of Inbound Investment
FDI policy is formulated by Government of India.
FEMA regulations prescribe the mode of investments i.e. manner of receipt of funds, issue of shares/convertible debentures and preference shares and reporting of the investments to RBI.
Inbound Investment – Check Points Investor (Other than citizen & entity of Pakistan) Proposed Activity in India NRI Non-Resident Prohibited Activities Approval Route Automatic Route Mode of Remittance Procedural Compliance at the time of Investment Annual Compliance NRE Inward Remittance
A. Fresh Investment. Schedules
1. FDI Scheme.
i. Private / Direct Investment.
ii. ADR / GDR Issue.
2. Investment by FIIs under PIS.
3. Investment by NRIs under PIS.
4. Purchase & Sale of shares by NRIs on Non
5. Purchase & Sale of Securities other than
Shares or CDs by Non Resident.
6. Investment in Venture Capital undertaking
by Regd. Foreign VC.
B. Right Shares. (Regulation 6)
C. Effect of Shares on Merger / Demerger.
D. ESOP. (Regulation 8)
Overview of Inbound Investments
Foreign Direct Investment (Schedule I - Notification 20) Automatic Route
Annexure A activities.
Annexure B activities beyond sectoral cap.
Gambling & Betting.
Housing & Real Estate Business.
Provisions of Notification No.20
Important Definitions :
Capital - equity, Preference shares, Convertible Preference, Convertible debentures
Entity incorporated outside India - entity incorporated or registered under the relevant statutes
Govt. Approval - from SIA - DIPP or FIPB
Investment on repatriation basis- sale proceeds net of taxes eligible for repatriation out of India
Regulation 4- An Indian entity shall not issue any security to any person resident outside India or record in its books any transfer of security from or to such person
Regulation 5 prescribes the various schemes under inbound investment for NR and NRIs
Reg 6 & 7 Acquisition of Right Shares & under merger/de-merger
Reg 8-Issue of shares under ESOP
Reg 9 & 10- provisions relating to transfer of shares by/to Non Resident
Reg 11- Repatriation of sale proceeds
Schedule 1 : FDI Scheme
Schedule 2 : FII Scheme
Schedule 3 : Portfolio Investment Scheme for NRI (Repatriable)
Schedule 4 : Investment Scheme for NRI (Non-repatriable)
Schedule 5 : Investment Scheme for securities other than share / convertible debentures
Schedule 6 : Investment Scheme for Foreign Venture Capital Investment
Foreign Direct Investment
Available Financial Instruments
Equity Shares, Compulsorily Convertible Preference Shares and compulsorily Convertible Debentures.
Not Available to Investors who are
Citizens of Pakistan OR Entities of Pakistan
Available with approval of FIPB (AP (DIR) No.22 dt.19/12/2007)
To Citizens & Entities of Bangladesh
FDI Scheme can be categorized in following 3 segments:
Sectors/activities where FDI is prohibited
Sectors/activities which require Approval from Govt.- Approval Route
Sectors/activities which require procedural compliance and intimation to RBI without any approval- Automatic Route of RBI
FDI Prohibited in following activities or items
Retail Trading (except single branded product retailing)
Gambling and Betting
Housing and Real Estate business, (other than construction of integrated township)
Agriculture (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisiculture and Cultivation of vegetables, mushrooms etc. under controlled conditions and services related to agro and allied sectors) and Plantations (Other than Tea plantations)
Other activities prohibited are-Business of chit fund and Nidhi company, trading in TDRs, Construction of farm houses (in terms of Notification No.1- Permissible Capital Account Transactions)
Automatic Route for FDI
Available in following cases:
Company which is not engaged in items included in Annexure A to Schedule I of Not.20 (Annex. A lists out activities which are prohibited and automatic route is not available)
Shares are issued up to the limits specified in Annexure B (prescribes Sectoral cap) to Schedule I (provided activity doesn’t require industrial license under Industries (Development & Regulation Act) or under the locational policy under Industrial Policy of 1991
Automatic Route for FDI (Continue..)
Shares are not issued by the Indian company with a view to acquire existing shares of any Indian Company
Shares can be issued to provider of technology, or against royalty payment or against ECB, subject to sectoral guidelines
Approval Route for FDI
Activities/Sectors requiring prior approval of
Proposals in which foreign collaborator has an existing financial or technical collaboration in the same field (Press Note 1 of 2005)
Proposals falling outside sectoral policy/cap
Activities listed in part A of Annexure A
Investment in SSI unit manufacturing items reserved for small scale sector
Provisions for Certain Specific Sectors _________________________
FDI in SSI units
SSI unit can’t have more than 24% from any industrial undertaking either foreign or domestic
More than 24% FDI requires Government approval if items are reserved for small scale sector, it will also require industrial license.
An SSI unit, not manufacturing items reserved for Small sector, can have more than 24% equity by giving up SSI status and can go under Automatic route.
An EOU can have more than 24% equity participation from Non Resident
Investment can be made under Automatic route for
Up to 100% in Wholesale/ cash & carry trading (PN 7/2008)
Up to 100% in Trading for exports
(PN/4 of 2006)
Under approval from FIPB, investment is permitted
Up to 51% for Retail trade of “Single brand” products (PN/3-06)
Any addition to the product/product categories to be sold under ‘Single Brand’ would require a fresh approval of the Government .
Up to 100% for Items sourced from small scale sector
Up to 100% for Test marketing of such product for which company has approval for manufacture
100% FDI permitted under Automatic route in –
Construction Development projects including housing, commercial premises, resorts educational institutions, recreational facilities, city and regional level infrastructure, townships
Note : FDI is not allowed in Real Estate Business.
Construction Sector.. Continued..
Minimum area to be developed under each project:
Development of serviced housing plots, a minimum land area of 10 hectares
Construction-development projects, a minimum built-up area of 50,000 sq.mts
Combination project, any one of the above two conditions
Capitalization and lock-in requirements:
Minimum capitalization of UDS 10 million for wholly owned subsidiaries and USD 5 million for joint ventures with Indian partners
The funds would have to be brought in within six months of commencement of business of the company
Original investment cannot be repatriated before a period of three years from completion of minimum capitalization
Investor may be permitted to exit earlier with prior approval of the Government through FIPB
Construction Sector .. Continued..
50% of the project to be developed within 5 years
Investors not allowed to sell undeveloped plots*
The project to conform to norms and standards as laid down in applicable regulations
Obtain all necessary approvals
State Government/Municipal/Local Body concerned, which approves the building/development plans, to monitor compliance of above conditions
undeveloped plots” would mean where roads, water supply, street lighting, drainage, sewerage, and other conveniences, as applicable under prescribed regulations, have not been made available. Investor needs to provide this infrastructure and obtain completion certificate from concerned local body/service agency before he would be allowed to dispose off serviced housing plots.
Construction Sector.. Continued..
Exclusion from the applicability of Press Note 2 of 2005:
Hotel & Tourism (Press Note 4 of 2001)
Hospitals (Press Note 2 of 2000)
Special Economic Zones (Special Economic Zones Act, 2005)
Industrial Parks (PN 3/ 2008)
Construction sector for NRIs
100% investment permitted under Automatic Route in
Development of serviced plots and construction of built-up residential premises
Investment in real estate covering construction of residential and commercial premises including business centers and offices
Development of townships
City and regional level urban infrastructure facilities, including both roads and bridges
Investment in manufacture of building materials
Investment in participatory ventures in (a) to (e) above
Investment in housing finance institutions which is also opened to FDI as an NBFC.
NBFC Sector- 100% under Automatic Route in 18 activities Minimum Capitalization Norms Fund based NBFC Non-Fund based NBFC FDI up to 51% - US$ 0.5 million to be brought upfront. FDI above 51% to 75% - US$ 5 million to be brought upfront. FDI above 75% to 100% - US$ 50 million, of which US$ 7.5 million upfront and balance in 24 months. Minimum US$ 0.5 million
FDI Scheme- General Provisions
Listed Company- As per SEBI guidelines
Unlisted Company-CCI Valuation
Dividend balancing requirement abolished
Rate of dividend on Preference shares
Cannot exceed 300 basis points over the PLR of SBI
Mode of payment for inbound investment
Inward remittance through banking channels
Debit to NRE/FCNR A/c
Capitalization of lumpsum fee, royalty and ECBs (other than import dues deemed as ECB or Trade Credit)
Acquisition of Right Shares
NR may acquire equity/preference or CDs offered on right basis subject to following conditions:
Sectoral cap to be maintained
Existing shares were acquired in accordance with the regulations
Price is not lower than the price which is offered to resident shareholders
Same conditions to apply regarding repatriability as are applicable to original shares
Acquisition of shares after merger/de-merger
In case the percentage of shareholding likely to increase on account of merger/de-merger, Govt., approval & RBI approval needed
New company should not carry on agricultural, plantation or real estate business or trading in TDRs.
To file a report in 30 days with RBI
Issue of shares under ESOP
Indian company can issue shares to employees of its J/V or WOS abroad
The scheme should be approved by SEBI
Face value of the shares to be allotted under scheme to the non resident employees not to exceed 5% of the paid up capital
PIS by NRIs
Limit of 5% by single NRI, 10% by all NRIs (this can be increased to 24%) to be maintained
Payment to come from NRE/FCNR or NRO (in case of non repatriable investment)
Delivery based purchase and sale permitted
Shares purchased under PIS cannot be transferred under private arrangements to person resident in India or outside India without prior approval of RBI
OCBs are not permitted after 29/11/2001 to invest in PIS
Investment in Shares/CDs on non repatriation basis by NRIs
Scheme applies to investment other than PI
NRIs may acquire without any limit, shares under public issue, private placement or right issue
Central Govt., approval needed if investor has previous JV or technical collaboration or trade mark agreement in the same or allied field
Not permitted- investment in companies engaged in chit fund/nidhi, agricultural/plantation or real estate business or construction of farm house or dealing in TDRs
Investment in securities other than shares or CDs by Non Resident
Scheme available to FIIs & NRIs
Investment on repatriation basis in
- dated Govt., securities/treasury bills,
NCD and Units of Domestic MF
Other conditions on FII for composition of investment and registration with SEBI
NRIs can also invest in shares of Public Sector enterprise in disinvestment process
Investment on Non Repatriation basis by NRIs in – units of money market funds in India or National Plan/Saving Certificates.
Procedure under Automatic Route
Intimation to Authorized Dealer
within 30 days from receipt of funds in Annexure II to Form FC-GPR
Intimation to be filed along with KYC Report (Annexure III to Form FC-GPR gives KYC Report)
To file report in form FC-GPR (Part A of Annexure I) within 30 days from the date of issue of shares
Annual Return in FC-GPR (Part B of Annexure I) by 31 st July
Procedure under Approval Route
Applications for NRI investment, EOU and Retail Trading (Single Brand) should be submitted to SIA in DIPP
Applications for FDI other than above should be submitted to FIPB unit, DEA, MoF
Application in Form FC-IL
Time Limit for issue of shares/CDs
Notification No.170 dt. Nov 29, 2007,( AP (DIR) Series Circular No. 20 dated 14th Dec 07)
Shares & CDs to be issued within 180 days from the date of receipt of inward remittance or date of debit to NRE/FCNR A/c.
In case Share Application is outstanding beyond a period of 180 days –
.. application to be made with sufficient reasons for refunding share application
If 180 days have elapsed on Nov 28, 2007- approval of RBI needed either for issue or for refund
Transfer of Shares- without RBI approval/ or any procedure Transferor Transferee Mode of Transfer PROI- other than NRI & OCB PROI (including NRI) Sale or gift (prior approval of Govt., by transferee, in case transferee has previous J/V or technical collaboration in same field) NRI/OCBs NRI Sale or gift (conditions same as above) Note: above conditions not to apply to IT sector & certain international financial institutions/bank.
Transfers without any permission/procedural compliance Transferor Transferee Mode of Transfer for shares/C.Deb., of Indian Company PROI Person Res. in India Gift PROI Sell on Recognized Stock Exchange PROI Indian Company Under buy back/ capital reduction scheme (other than financial serv sector)
Transfer of security with prior permission Transferor Transferee Mode Person Resident in India NRI Person Resident Outside India (Not being erstwhile OCBs) Non Resident Gift Sale
Transfer of Shares/CDs by way of Sales
From Resident to Non Resident
Applicable to industries of Annexure B to FDI schedule, except Banking, NBFC & Insurance and Financial Services sector.
Transfer doesn’t fall under SEBI takeover regulations
(RBI approval for Fin services & SEBI takeover)
Sectoral caps are maintained (if not then first Govt., approval & then RBI approval)
From Non Resident to Resident
Applicable to other than those covered under Reg.9
Both the above categories of transfer are Subject to P, D & R (pricing guidelines, Documentation & Reporting Requirements)
Pricing, documentation & reporting for transfer by way of sale
Transfer between resident & non resident
Seller (non resident/ resident)
Buyer (non resident/ resident)
Duly authorized agents of seller/ buyer
For transfer from Res to NR (non OCBs)
Price shall not be less than
Ruling market price for listed shares
CA certified fair valuation as per CCI guidelines for unlisted shares
For transfer from NR (including OCBs) to Resident- In case of listed shares
At prevailing price & sale effected through merchant banker or registered stock broker
In other cases- avg. (avg of daily high and low) quotations of one week preceding the date of appln with 5% variation
Price could be higher up to a ceiling of 25% as arrived above, if shares are sold to Indian promoters for passing management control
Pricing Guidelines (NR TO R). Contd..
For thinly traded shares
1- consideration per seller per company is up to INR 20.0 lacs- mutually agreed price between seller & buyer, based on current valuation methodology and valuation certificate from statutory auditors
2- for consideration exceeding INR 20 lacs-at seller’s option (a) higher of the price based on EPS multiple or NAV linked to book value multiple OR (b) prevailing market price in small lots so that entire shareholding is sold in not less than 5 trading days
Pricing Guidelines (NR TO R). Contd..
In case of unlisted shares
At a price lower of two valuations- one by Statutory Auditors and other by CA or Cat-I merchant banker registered with SEBI
Form FC-TRS in quadruplicate
For sale by person resident in India
Consent letter from both seller & buyer or their agent (PoA in case signing by agent)
Share holding pattern after investment by Non Resident
CA cert for valuation/ broker’s note
Undertaking from the buyer that he is eligible to acquire shares and FDI limit complied with
Undertaking from FII/sub account that individual ceiling prescribed by SEBI not breached
For sale by person resident outside India
Consent letter from both seller & buyer or their agent (PoA in case signing by agent)
Copies of RBI approval for NRI/OCBs to determine investment on repatriation/non repatriation basis
Fair valuation certificate from CA
No objection/Tax clearance certificate from income tax authority/ Chartered Accountant
Undertaking from buyer for adherence to pricing guidelines.
Reporting by AD
R return for actual inflow/ outflow of forex
Two copies of FC-TRS to FED
Recording of transfer in Indian company
On submission of A.D. certified copy of FC-TRS
Note- Shares purchased under PIS cannot be transferred by way of sale under private arrangement
Investment in Firm or Proprietary Concern
Permitted to NRIs/PIOs
PIOs who are not citizen of Bangladesh, Pakistan or Sri Lanka
Firm should not undertake- Print Media, Agricultural/ Plantation & dealing in land and immovable property
Capital invested can’t be repatriated
Income can however be repatriated
Establishment of Branch or Liaison office in India (Notification No 22)
Permitted activities for a branch in India of a person resident outside India:
Export/Import of goods.
Rendering professional or consultancy services.
Carrying out research work, in which the parent company is engaged.
Promotional technical of financial collaborations between Indian companies and parent or overseas group company.
Representing the parent company in India and acting as buying/selling agent in India.
Rendering services in IT and development of software in India.
Establishment Branch or Liaison office in India (Notification No 22) Continue.
Permitted activities for a Liaison office in India of a person resident outside India:
Rendering technical support to the product supplied by parent/group companies.
Foreign airline/shipping company.
For Liaison Office
Representing in India the parent company/group company.
Promoting export import from/to India.
Promoting technical/financial collaborations between parent/ group companies and companies in India.
Acting as a communication channel between the parent company and Indian company.
Application to RBI for opening branch or liaison office
A person resident outside India desiring to establish a branch or liaison office in India shall apply to RBI, in form FNC 1.
Remittance of profit or surplus
A person resident outside India shall produce following documents to the authorised dealer through whom the remittance is effected
For remittance of profit of a branch:
Certified copy of the audited balance sheet and profit and loss account for the relevant year
A CA’s Certificate certifying:
The manner of arriving at the remittable profit
That the entire remittable profit has been earned by undertaking the permitted activities, and
That the profit does not include any profit on revaluation of the asset of the branch
Remittance of profit or surplus Continue…
For remittance of surplus on completion of project
Certified copy of the final audited project account
A CA’s certificate showing the manner of arriving at the remittable surplus
Income tax assessment order or either documentary evidence showing payment of income tax and other applicable taxes, or a CA’s certificate stating that sufficient funds have been set aside for meeting all Indian tax liabilities
Auditor’s certificate stating that no statutory liabilities in respect of the project are outstanding