FEMA Inbound Inv

8/3/2019 FEMA Inbound Inv

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INBOUND INVESTMENT- FEMA

PROVISIONS


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FEMA Overview

S K Dadar, Doon University3

STRUCTURE OF THE FEMA (ACT)

y FEMA has in all 49 sections of which 9

(section 1 to 9) are substantive and the restare procedural/administrative.

y Section 46 of the Act grants power to Central Governmentto makes rules and section 47 of the Act grants power to

RBI to make regulations to implements its provisions andthe rules made there under.

y Thus RBI is entrusted with the administration andimplementation ofFEMA


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Difference in implementation of Income

Tax Act & FEMA


y Under Income Tax, issue is of taxability of income which is

determined for the full year, therefore generally

amendments are annual.

y 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 ineconomy.


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Current & Capital A/c Transactions


y 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. Its a economic definition rather thanaccounting or legal definition

y Current A/c transaction - transaction other than a

capital a/c transaction


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Current & Capital Account Transaction


y Difference between concept of Capital Assets and

Capital A/c transaction

y e.g. Import of machinery on payment of cash. From

FEMAperspective it is current a/c transaction ( to belooked from Balance of payment position of Country)


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Current & Capital A/c transactions


y General Policy is

y Current A/c transactions are freely permitted unlessprohibited whereas Capital A/c transactions are prohibitedunless generally permitted.

y Current A/c transactions are regulated by CentralGovernment whereas Capital A/c transactions are regulated

by RBI

y Sec. 6(3) of FEMA, prescribes the class of capital a/c

transactions which are regulated.


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Sec. 6(4) & 6(5)


y 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

y Sec. 6(5)- Similar provisions for Persons Resident Outside

India and assets held in India


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Inbound Investments

FEMA Provisions


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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


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Destination India


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 worlds perception about Indias

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.


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Background of Inbound Investment


y FDI policy is formulated by Government of India.

y 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 theinvestments to RBI.


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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 ofRemittance

Procedural Compliance at thetime of Investment

Annual Compliance

NRE

Inward Remittance


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Non Corporate Entity

(Notification 24)

To Non Resident

(Regulation 10A)

By Non Resident

(Regulation 9 & 10B)

Transfer of

existing Shares

Corporate Entity

(Notification 20)J/V, WOS

Establishment of Branch /

Liaison office/Project Office(Notification 22)

Inbound Investments


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

Repatriable basis.

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.

(Regulation7)

D. ESOP. (Regulation 8)

Overview of

InboundInvestments


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Foreign Direct Investment

(Schedule I - Notification 20)

Automatic

Route

Approval Route:

Annexure A activities.

Annexure B activities

beyond sectoral cap.

Activities Prohibited:

Retail Trading.

Automatic Energy.

Lottery Business.

Gambling & Betting.

Housing & Real

Estate Business.


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Provisions of Notification No.20


Important Definitions:

y Capital - equity, Preference shares, Convertible Preference,Convertible debentures

y

Entity incorporated outside India - entity incorporated orregistered under the relevant statutes

y Govt. Approval - from SIA - DIPP orFIPB

y Investment on repatriation basis- sale proceeds net of taxeseligible for repatriation out of India


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Notification No.20..


y Regulation 4- An Indian entity shall not issue any security toany person resident outside India or record in its books anytransfer of security from or to such person

yRegulation 5 prescribes the various schemes under inboundinvestment for NRand NRIs

y Reg 6 & 7 Acquisition ofRight Shares & under merger/de-merger

y Reg 8-Issue of shares underESOP

y Reg 9 & 10- provisions relating to transfer of shares by/toNon Resident

y Reg 11- Repatriation of sale proceeds


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Basic Framework


y Schedule 1 : FDI Scheme

y Schedule 2 : FII Scheme

y Schedule 3 : Portfolio Investment Scheme for NRI

(Repatriable)y Schedule 4 : Investment Scheme for NRI (Non-repatriable)

y Schedule 5 : Investment Scheme for securities other thanshare / convertible debentures

y

Schedule 6 : Investment Scheme for Foreign VentureCapital Investment


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Foreign Direct Investment


Available Financial Instruments

Equity Shares, Compulsorily Convertible Preference Shares andcompulsorily 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 ofBangladesh


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FDI Scheme


FDI Scheme can be categorized in following 3 segments:

y Sectors/activities where FDI is prohibited

y Sectors/activities which require Approval from Govt.-

Approval Route

y Sectors/activities which require procedural compliance and

intimation to RBI without any approval- Automatic Route

ofRBI


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FDI Prohibited in following activities or items


y Retail Trading (except single branded product retailing)

y Atomic Energy

y Lottery Business

y Gambling and Betting

y Housing and Real Estate business, (other than construction ofintegrated township)

y Agriculture (excluding Floriculture, Horticulture, Developmentof seeds, Animal Husbandry, Pisiculture and Cultivation ofvegetables, mushrooms etc. under controlled conditions and

services related to agro and allied sectors) and Plantations(Other than Tea plantations)


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FDI Prohibitioncontinued..


y 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)


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Automatic Route for FDI


Available in following cases:

y Company which is not engaged in items included in Annexure A

to Schedule I of Not.20 (Annex. A lists out activities which areprohibited and automatic route is not available)

y Shares are issued up to the limits specified in Annexure B

(prescribes Sectoral cap) to Schedule I (provided activity

doesnt require industrial license under Industries (Development

& Regulation Act) or under the locational policy under Industrial Policy of 1991


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Automatic Route for FDI (Continue..)


y Shares are not issued by the Indian company with a view to

acquire existing shares of any Indian Company

y Shares can be issued to provider of technology, or againstroyalty payment or against ECB, subject to sectoral

guidelines


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Approval Route for FDI


Activities/Sectors requiring prior approval of

Government:

y Proposals in which foreign collaborator has an existing

financial or technical collaboration in the same field (Press

Note 1 of 2005)

y Proposals falling outside sectoral policy/cap

y Activities listed in part A ofAnnexure A

y Investment in SSI unit manufacturing items reserved for

small scale sector


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Provisions for Certain Specific

Sectors

_________________________



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FDI in SSI units


y SSI unit cant have more than 24% from any industrialundertaking either foreign or domestic

y More than 24% FDI requires Government approval if itemsare reserved for small scale sector, it will also requireindustrial license.

y An SSI unit, not manufacturing items reserved forSmallsector, can have more than 24% equity by giving up SSIstatus and can go underAutomatic route.

y An EOU can have more than 24% equity participation fromNon Resident


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Trading Sector


Investment can be made under Automatic route for

y Up to 100% in Wholesale/ cash & carry trading (PN 7/2008)

y Up to 100% in Trading for exports

y (PN/4 of 2006)

Under approval from FIPB, investment is permitted

Up to 51% forRetail trade of Single brand products (PN/3-06)

Any addition to the product/product categories to be sold underSingle Brand would require a fresh approval of the Government.

Up to 100% for Items sourced from small scale sector

y Up to 100% forTest marketing of such product for whichcompany has approval for manufacture


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Construction Sector


100% FDI permitted under Automatic route in

y 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.


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Construction Sector.. Continued..


y Minimum area to be developed under each project:

y Development of serviced housing plots, a minimum land area of10 hectares

y Construction-development projects, a minimum built-up area of50,000 sq.mts

y Combination project, any one of the above two conditions

y Capitalization and lock-in requirements:

y Minimum capitalization of UDS 10 million for wholly ownedsubsidiaries and USD 5 million for joint ventures with Indianpartners

y The funds would have to be brought in within six months ofcommencement of business of the company

y Original investment cannot be repatriated before a period ofthree years from completion of minimum capitalization

y Investor may be permitted to exit earlier with prior approval ofthe Government through FIPB


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Construction Sector .. Continued..


y 50% of the project to be developed within 5 years

y Investors not allowed to sell undeveloped plots*

y The project to conform to norms and standards as laid down inapplicable regulations

y Obtain all necessary approvals

y State Government/Municipal/Local Body concerned, whichapproves the building/development plans, to monitorcompliance of above conditions

undeveloped plots would mean where roads, water supply, street lighting,drainage, sewerage, and other conveniences, as applicable under prescribedregulations, have not been made available. Investor needs to provide thisinfrastructure and obtain completion certificate from concerned localbody/service agency before he would be allowed to dispose off servicedhousing plots.


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Construction Sector.. Continued..


y Exclusion from the applicability of Press Note 2 of 2005:

y Hotel & Tourism (Press Note 4 of 2001)

y Hospitals (Press Note 2 of 2000)

y Special Economic Zones (Special Economic Zones Act, 2005)

y Industrial Parks (PN 3/ 2008)


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Construction sector for NRIs


100% investment permitted under Automatic Route infollowing:y Development of serviced plots and construction of built-up

residential premisesy

Investment in real estate covering construction of residentialand commercial premises including business centers andoffices

y Development of townshipsy City and regional level urban infrastructure facilities,

including both roads and bridgesy

Investment in manufacture of building materialsy Investment in participatory ventures in (a) to (e) abovey Investment in housing finance institutions which is also

opened to FDI as an NBFC.


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NBFC Sector- 100%under Automatic

Route in 18 activities

Minimum Capitalization Norms

Fund based NBFC Non-Fundbased NBFC

FDI up to 51% - US$ 0.5 million to be broughtupfront.

FDI above 51% to 75% - US$ 5 million to bebrought upfront.

FDI above 75% to 100% - US$ 50 million, of

which US$ 7.5 million upfront and balance in24 months.

Minimum US$0.5 million



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FDI Scheme- General Provisions


Issue Price

y Listed Company- As perSEBI guidelines

y Unlisted Company-CCI Valuation

yDividend balancing requirement abolished

Rate of dividend on Preference shares

y Cannot exceed 300 basis points over the PLRofSBI

Mode of payment for inbound investment

y

Inward remittance through banking channelsy Debit to NRE/FCNRA/c

y Capitalization of lumpsum fee, royalty and ECBs (other thanimport dues deemed as ECB orTrade Credit)


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Acquisition of Right Shares


y NR may acquire equity/preference or CDs offered on rightbasis subject to following conditions:

y Sectoral cap to be maintained

yExisting shares were acquired in accordance with theregulations

y Price is not lower than the price which is offered to residentshareholders

y Same conditions to apply regarding repatriability as are

applicable to original shares


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Acquisition of shares after merger/de-

merger


y In case the percentage of shareholding likely to increase onaccount of merger/de-merger, Govt., approval & RBIapproval needed

y New company should not carry on agricultural, plantationor real estate business or trading in TDRs.

y To file a report in 30 days with RBI


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Issue of shares under ESOP


y Indian company can issue shares to employees of its J/V or

WOS abroad

y The scheme should be approved by SEBI

y Face value of the shares to be allotted under scheme to the

non resident employees not to exceed 5% of the paid up

capital


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PIS by NRIs


y Limit of5% by single NRI, 10% by all NRIs (this can be

increased to 24%) to be maintained

y Payment to come from NRE/FCNR or NRO (in case of non

repatriable investment)y Delivery based purchase and sale permitted

y Shares purchased under PIS cannot be transferred under

private arrangements to person resident in India or outside

India without prior approval ofRBIy OCBs are not permitted after 29/11/2001 to invest in PIS


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Investment in Shares/CDs on non

repatriation basis by NRIs


y Scheme applies to investment other than PI

y NRIs may acquire without any limit, shares under public issue,private placement or right issue

y

Central Govt., approval needed if investor has previous JV ortechnical collaboration or trade mark agreement in the same orallied field

y Not permitted- investment in companies engaged in chitfund/nidhi, agricultural/plantation or real estate business or

construction of farm house or dealing in TDRs


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Investment in securities other than shares or

CDs by Non Resident


y Scheme available to FIIs & NRIs

y Investment on repatriation basis in

- dated Govt., securities/treasury bills,

NCD and Units of Domestic MFOther conditions on FII for composition of investment and

registration with SEBI

y NRIs can also invest in shares of Public Sector enterprise indisinvestment process

y Investment on Non Repatriation basis by NRIs in units of money market funds in India or National Plan/SavingCertificates.


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Procedure under Automatic Route


Intimation to Authorized Dealer

y within 30 days from receipt of funds in Annexure II toForm FC-GPR

y Intimation to be filed along with KYC Report(Annexure III to Form FC-GPR gives KYC Report)

y To file report in form FC-GPR (Part A of Annexure I)within 30 days from the date of issue of shares

y

Annual Return in FC-GPR (Part B of Annexure I) by31stJuly


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Procedure under Approval Route


y Applications for NRI investment, EOU and RetailTrading (Single Brand) should be submitted toSIA in DIPP

y

Applications for FDI other than above should besubmitted to FIPB unit, DEA,MoF

y Application in Form FC-IL


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Time Limit for issue of shares/CDs


y Notification No.170 dt. Nov 29, 2007,( AP (DIR) Series

Circular No. 20 dated 14th Dec 07)

y 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.

y In case Share Application is outstanding beyond a period of 180

days

y .. application to be made with sufficient reasons for refunding

share application

y If 180 days have elapsed on Nov 28, 2007- approval of RBI neededeither for issue or for refund


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Transfer of Shares- without RBI approval/

or any procedure

Transferor Transferee Mode of Transfer

PROI- other

than NRI &OCB

PROI

(includingNRI)

Sale or gift (prior approval

of Govt., by transferee, incase 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.S K Dadar, Doon University45

T f ith t i i / d l


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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 IndianCompany

Under buy back/ capitalreduction scheme (other than

financial serv sector)



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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



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Transfer of Shares/CDs by way of Sales


y From Resident to Non Resident

y Applicable to industries of Annexure B to FDI schedule, exceptBanking, NBFC & Insurance and Financial Services sector.

y Transfer doesnt fall under SEBI takeover regulations

y

(RBI approval forF

in services & SE

BI takeover)y Sectoral caps are maintained (if not then first Govt., approval &

then RBI approval)

y From Non Resident to Resident

y Applicable to other than those covered under Reg.9

y

Both the above categories of transfer are Subject to P, D & R(pricing guidelines, Documentation & Reporting Requirements)


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Pricing, documentation & reporting for

transfer by way of sale


y Transfer between resident & non resident

y Parties involved

y Seller (non resident/ resident)

y

Buyer (non resident/ resident)y Duly authorized agents of seller/ buyer

y AD Branch

y Indian Company


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Pricing Guidelines


y For transfer from Res to NR (non OCBs)

y Price shall not be less than

y Ruling market price for listed shares

y

CA certified fair valuation as per CCI guidelines for unlistedshares


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Pricing Guidelines


y For transfer from NR (including OCBs) to Resident- In caseof listed shares

y At prevailing price & sale effected through merchant bankeror registered stock broker

y In other cases- avg. (avg of daily high and low) quotations ofone week preceding the date of appln with 5% variation

y Price could be higher up to a ceiling of 25% as arrived above,if shares are sold to Indian promoters for passing

management control


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Pricing Guidelines (NR TO R). Contd..


y For thinly traded shares

y 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

auditorsy 2- for consideration exceeding INR 20 lacs-at sellers 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


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Pricing Guidelines (NR TO R). Contd..


y In case of unlisted shares

y At a price lower of two valuations- one by Statutory Auditors

and other by CA or Cat-I merchant banker registered with

SEBI


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Documentation


y Form FC-TRS in quadruplicate

y For sale by person resident in India

y Consent letter from both seller & buyer or their agent (PoA incase signing by agent)

y Share holding pattern after investment by Non Residenty CA cert for valuation/ brokers note

y Undertaking from the buyer that he is eligible to acquire sharesand FDI limit complied with

y

Undertaking fromF

II/sub account that individual ceilingprescribed by SEBI not breached


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Documentation


y For sale by person resident outside India

y Consent letter from both seller & buyer or their agent (PoA in

case signing by agent)

y Copies of RBI approval for NRI/OCBs to determine investment

on repatriation/non repatriation basis

y Fair valuation certificate from CA

y No objection/Tax clearance certificate from income tax

authority/ Chartered Accountant

y Undertaking from buyer for adherence to pricing guidelines.


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Reporting by AD


y R return for actual inflow/ outflow of forex

y Two copies ofFC-TRS to FED

y Recording of transfer in Indian company

y

On submission of A.D. certified copy ofF

C-TRSy Note- Shares purchased under PIS cannot be transferred by

way of sale under private arrangement


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Investment in Firm or Proprietary Concern


y Permitted to NRIs/PIOs

y PIOs who are not citizen of Bangladesh, Pakistan or Sri

Lanka

y Firm should not undertake- Print Media, Agricultural/

Plantation & dealing in land and immovable property

y Capital invested cant be repatriated

y Income can however be repatriated


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Establishment of Branch or Liaison office

in India (Notification No 22)


Permitted activities for a branch in India of a person residentoutside India:

y Export/Import of goods.

y Rendering professional or consultancy services.

y Carrying out research work, in which the parent company isengaged.

y Promotional technical of financial collaborations betweenIndian companies and parent or overseas group company.

y Representing the parent company in India and acting as

buying/selling agent in India.y Rendering services in IT and development of software in

India.


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Establishment Branch or Liaison office in

India (Notification No 22) Continue.


Permitted activities for a Liaison office in India of a personresident outside India:

y Rendering technical support to the product supplied byparent/group companies.

y Foreign airline/shipping company.y ForLiaison Office

y Representing in India the parent company/group company.

y Promoting export import from/to India.

y Promoting technical/financial collaborations between

parent/ group companies and companies in India.y Acting as a communication channel between the parent

company and Indian company.


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Application to RBI for opening branch or

liaison office


y A person resident outside India desiring to establish a

branch or liaison office in India shall apply to RBI, in

form FNC 1.


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Remittance of profit or surplus


A person resident outside India shall produce followingdocuments to the authorised dealer through whom theremittance is effected

y For remittance of profit of a branch:

Certified copy of the audited balance sheet and profit andloss account for the relevant year

A CAs Certificate certifying:

The manner of arriving at the remittable profit

That the entire remittable profit has been earned byundertaking the permitted activities, and

That the profit does not include any profit on revaluationof the asset of the branch


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Remittance of profit or surplus

Continue


y For remittance of surplus on completion of project

Certified copy of the final audited project account

A CAs certificate showing the manner of arriving at the

remittable surplusIncome tax assessment order or either documentary

evidence showing payment of income tax and other

applicable taxes, or a CAs certificate stating that

sufficient funds have been set aside for meeting all Indian

tax liabilities

Auditors certificate stating that no statutory liabilities in

respect of the project are outstanding


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FIRST DESERVE

AND THEN

DESIRE

THANK YOU

FEMA Inbound Inv

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