Foreign Direct Investment- Supplementing Indian Capital

56
www.femaindia.in Foreign Direct investment Supplementing Indian Capital

description

‘FDI’ means investment by non-resident entity/person resident outside India in the capital of an Indian company as per FEMA Regulations. Investments can be made by non-residents in the equity shares/ fully, compulsorily and mandatorily convertible debentures/ fully, compulsorily and mandatorily convertible preference shares of an Indian company, through the Automatic Route or the Government Route. Under the Automatic Route, the non-resident investor or the Indian company does not require any approval from Government of India for the investment. Under the Government Route, prior approval of the Government of India is required. Proposals for foreign investment under Government route are considered by FIPB.

Transcript of Foreign Direct Investment- Supplementing Indian Capital

Page 1: Foreign Direct Investment- Supplementing Indian Capital

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Foreign Direct investment Supplementing Indian Capital

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Foreign Investments

in India

Primary Market

Secondary Market

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Foreign Investments

Repatriation Basis

Foreign Direct Investments

Automatic Route

PROI

Govt Route

Foreign Portfolio

Investments

FIIs NRI,PIO

,QFIs

Foreign Venture Capital

Investments

SEBI regd. FVCIs

VCF, IVCUs

Other Investments

FIIs NRIs,PIO,QFIs

Non Repatriation Basis

NRIs, PIO

Foreign Investments in India

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What is FDI

FDI Means investment by Non-resident Entity/Person resident outside India in the capital of an Indian Company under Schedule 1 of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations 2000.

Consolidated FDI Policy Issued by Department of Industrial Policy and Promotion(DIPP), Ministry of Commerce and Industry annually along with Press Notes/Press releases, rules and Regulations, A.P. Dir. (series) Circulars determine the modalities of Foreign Direct Investment in India

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Eligibility for FDI in India

A non-resident entity or PROI

NRIs resident in Nepal and Bhutan as well as citizens

of Nepal and Bhutan

Erstwhile Overseas Commercial Bodies

SEBI registered Foreign Institutional Investor

SEBI registered Foreign Venture Capital Investor

Qualified Foreign Investors

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Eligibility for FDI in India

• It covers all persons resident outside India. • Citizen of or an entity incorporated in Bangladesh can invest

only under the Government route. • *A citizen of or an entity incorporated in Pakistan can invest,

only under the Government route, in sectors/activities other than defence, space and atomic energy. *Amended by Press Note No.3 (2012 Series) on August 1, 2012 issued by DIPP

Non Resident Entity

• Invest in the capital of Indian companies on repatriation basis, subject to the condition that the amount of consideration for such investment shall be paid only by way of inward remittance in free foreign exchange through normal banking channels.

NRIs or Citizens of Nepal and

Bhutan

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Eligibility for FDI in India

• Derecognized as class of investors in India w.e.f. September 16, 2003.

• Can make fresh investments under FDI Policy as incorporated non-resident entities, with the prior approval of GOI, if investment is through Government route; and with prior approval of RBI, if investment is through Automatic route. For those incorporated outside India and are not under the adverse notice of RBI

Erstwhile Overseas

Commercial Bodies

• FII means an entity established or incorporated outside India which proposes to make investment in India and which is registered as a FII in accordance with the SEBI (FII) Regulations 1995)

• SEBI registered FII can invest directly in Indian company under FDI Policy

• Can also invest though a registered broker on recognized Exchange under

Foreign Institutional

Investors(FII)

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Eligibility for FDI in India

• SEBI registered FVCIs are also allowed to invest under the FDI Scheme, as non-resident entities subject to FDI Policy and FEMA regulations in

• SEBI registered IVCU • SEBI registered IVCF • Other companies as per FDI policy

Foreign Venture

Capital Fund

• QFIs can invest through SEBI registered DP(for listed companies), equity shares of other Indian companies which are offered to public in India

• Individual & aggregate investment limit is 5% and 10% respectively of the paid up capital of an Indian company.

Qualified Foreign

Investors

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Entities Into Which FDI Can Be Made

Indian Company

Partnership Firm/

Proprietorship Concern

Venture Capital Funds

Trusts LLPs

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Indian Company

Indian Company

Can issue capital against FDI, i.e. Equity shares, Fully and mandatorily convertible preference shares, Fully and

mandatorily convertible Debentures, ADRs/GDRS

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Partnership Firm/ Proprietary Concern

Non Repatriation

NRI or PIO resident outside India can invest

Investment by Inward remittance or out of

NRE/FCNR/NRO account

Repatriation

NRIs/PIO only with prior approval of RBI

Note: 1) An NRI or PIO is not allowed to invest in a firm or proprietorship concern

engaged in any agricultural/plantation activity or real estate business or print media.

2) Other than NRI/PIO can invest with prior approval of RBI

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Venture Capital Fund

FVCIs are allowed to invest in Indian Venture Capital Undertakings (IVCUs) /Venture Capital Funds (VCFs) /other

companies.

A person resident outside India can invest in Domestic VCF set up as a trust, subject to approval of the FIPB.

A person resident outside India can invest in a domestic VCF is set-up as an incorporated company under the

Companies Act, 1956 under the automatic route.

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Trusts and Limited Liability Partnerships

Trusts

FDI in Trusts other than VCF is not permitted

Limited Liability Partnerships

FDI is permitted, subject to certain conditions

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Entry routes for FDI in India

Foreign investor or the Indian company doesn't require any approval from RBI or GOI

Foreign investor or the Indian company should obtain prior approval of

Foreign Investment Promotion Board (FIPB)

Approval Route Automatic Route

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Types of Instruments

Equity Shares

Fully & Compulsorily convertible preference

Shares

Fully & Compulsorily convertible debentures

ADRs/GDRs/ FCCBs

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Pricing Guidelines

• Listed Companies- SEBI guidelines • Unlisted Companies- Not less than fair value

determined by SEBI registered Merchant Banker or a Chartered Accountant as per DFCF

Fresh Issue of shares

• Issue Price shall not be less that the price as applicable to transfer of shares from resident to non-resident

Preferential Allotment

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Pricing Guidelines

• Company listed on recognised stock exchange - At a price as determined by the company

• For others- At a price which is not less than the price at which the offer on right basis is made to the resident shareholders

Right Shares

• Companies listed on recognized stock exchange- negotiated price for shares, which shall not be less than the price at which the preferential allotment of shares can be made under the SEBI guidelines, as applicable.

• Price per share arrived at certified by a SEBI registered Merchant Banker or a Chartered Accountant.

• Companies not listed on recognized stock exchange- negotiated price for shares, which shall not be less than the fair value to be determined by a SEBI registered Merchant Banker or a Chartered Accountant as per DFCF

Acquisition/ transfer of existing

shares (private arrangement)

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Total Foreign Investment in Indian Company

Direct Foreign Investment by non resident

entity into Indian company

Indirect Foreign Investment by

Resident Indian entity, having

Foreign Investment

Total Foreign Investment in

Indian Company

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Direct Foreign Investment in Indian Company for further Investment

Direct Foreign Investment in Indian Company for further

Investment

Investing Company

Approval of FIPB for formation of investing

company with FDI

Operating cum Investing Company

Sectoral Caps and Pricing Guidelines etc. to be

complied with, as per FDI Policy

Non Operating Company

Approval of FIPB is required

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Calculation of Direct and Indirect Foreign Investment

Direct Foreign Investment

All investment directly by a non-resident entity into the Indian company.

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Calculation of Direct and Indirect Foreign Investment

Indirect foreign Investment

Investment by Indian companies owned and controlled by resident Indian citizens and/or Indian Companies which are owned and controlled by resident Indian citizens- This would not be considered for calculation of the indirect foreign investment.

Cases where condition (a) above is not satisfied or if the Indian investing company is owned or controlled by ‗non resident entities- the entire investment would be considered as indirect foreign investment.

Exception: 100% owned subsidiaries of operating-cum-investing/investing companies, will be limited to the foreign investment in the operating-cum-investing/ investing company

Note: A company is considered as Controlled by resident Indian citizens if the resident Indian citizens and Indian companies, which are owned and controlled by resident Indian citizens, have the power to appoint a majority of its directors in that company A company is considered as 'Owned‘ by resident Indian citizens if more than 50% of the capital in it is beneficially owned by resident Indian citizens and / or Indian companies, which are ultimately owned and controlled by resident Indian citizens

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Down Stream Investment

Less than 50% Investment in X Ltd

Invests 49% in Y Ltd

Total Indirect Foreign Investment

is NIL

Foreign Company Y Ltd, Indian Company

X Ltd, Indian Company

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Down Stream Investment

More than 50% Investment in X Ltd

Invests 15% in Y Ltd

Total Indirect Foreign Investment

is 15%

Foreign Company Y Ltd, Indian Company

X Ltd, Indian Company

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Down Stream Investment

More than 50% Investment in X Ltd

Invests 90% in Y Ltd

Total Indirect Foreign Investment

is 90%

Foreign Company Y Ltd, Indian Company

X Ltd, Indian Company

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Down Stream Investment

75% Investment in X Ltd

Invests 100% in Y Ltd

Total Indirect Foreign Investment

is 75%

Foreign Company Y Ltd,

Wholly Owned Subsidiary of X Ltd

X Ltd, Indian Company

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Modes of Investment under FDI

Modes of Investment

Issue of fresh shares

Transfer of existing shares

by Person resident in or outside India

Issue of Rights / Bonus shares

Conversion of ECB /

Lumpsum Fee / Royalty / Import

of capital goods by SEZs

into Equity/ Import

payables / Pre incorporation

expenses

Acquisition of shares under

Scheme of Merger /

Amalgamation

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Issue of Fresh Shares & Swap

• Indian company may issue fresh shares /convertible debentures under FDI Scheme to PROI (who is eligible for investment in India) subject to compliance with FDI policy and FEMA Regulations

Issue of Fresh Shares

• Issue can be done in lieu for the consideration which has to be paid for shares acquired in the overseas company, with prior approval of FIPB and in compliance of pricing guidelines

Issue of shares to a non-resident

against shares swap

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Issue of Rights / Bonus shares

An Indian company may issue Rights / Bonus shares to existing non-resident shareholders, subject to adherence to sectoral cap, reporting requirements, etc.

• Right Shares- Specific prior permission from RBI. • Bonus shares- Without prior approval of RBI. Should not

be in the adverse list of RBI.

Issue of Right /Bonus shares to Erstwhile OCBs

• Investee company can allot the additional rights shares out of unsubscribed portion, subject to the condition that the overall issue of shares to non-residents in the total paid-up capital of the company does not exceed the sectoral cap.

Additional allocation of rights share by residents to non-residents

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Conversion of ECB / Lumpsum Fee / Royalty / Import of capital goods by SEZs into Equity/ Import payables / Pre incorporation expenses

Conversion of ECB into shares /

convertible debentures

General Permission

Lump-sum technical

know-how fee/royalty

General permission

under automatic route or SIA / FIPB route

Import of capital goods

by units in SEZs

Can issue equity shares to non

residents, subject to valuation

Import of capital goods /

machinery / equipment

Allowed under Government

route

Pre-operative / pre –

incorporation expenses

Allowed under Government

route

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Acquisition of shares under Scheme of Merger / Amalgamation

Mergers & Amalgamations of companies in India are usually governed by an order issued by a competent Court. The transferee

company or new company is allowed to issue shares to the shareholders of the transferor company resident outside India, subject

to following conditions

Percentage of shareholding of persons resident outside India in the transferee or

new company does not exceed the sectoral cap, and

Transferor company or the transferee or the new company is not engaged in activities which are prohibited under the FDI policy

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Transfer of Shares

Transfers of existing shares by PRI to PROI or vice

versa

By Gift By Sale

Transfer where FIPB Approval

required

Transfers where RBI Approval is

required

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Transfers of existing shares by PRI to PROI or vice versa by way of Gift

By Gift

Non Resident to Non Resident

General Permission

Comply with Sectoral

Caps/Pricing Guidelines/ Reporting formalities

Non Resident to Resident

General Permission is

granted

Resident to Non resident

Approval of RBI with specific conditions

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Transfers of existing shares by way of Sale

Non Resident to Non Resident

General Permission

granted

Non Resident to Resident

General Permission, if sale through recognised Stock Exchange

Where transfer is under SEBI guidelines and pricing guidelines are not met, provided

following conditions are met

Comply with FDI policy and

FEMA regulations

Pricing complies with relevant SEBI

regulations

CA certificate is obtained

Compliance with reporting

and other guidelines

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Transfers of existing shares by way of Sale

Resident to Non Resident

General Permission

granted, if sale through Stock

Exchange

FIPB approval where required

Adhere to SEBI(SAST) Regulations

Certain conditions to be fulfilled if pricing guidelines are

not met

Comply with FDI Policy and

FEMA regulations

Pricing is compliant with

specific regulations

CA Certificate of compliance of

SEBI regulations

NOC from regulators

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Transfer of Shares by Resident to Non Resident requiring FIPB approval

Transfer of shares from residents to non-residents by way of sale or

otherwise

Transfer of shares of companies engaged in sector falling under the

Government Route.

Transfer of shares resulting in foreign investments in the Indian company, breaching the sectoral

cap applicable.

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Prior permission of the Reserve Bank in certain cases for acquisition / transfer of security

Deferment of payment of the amount of

consideration

PRI who intends to transfer any security, by way of gift to PROI

Transfer of shares from NRI to NR

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Investments other than FDI

Investments other than FDI

Foreign Portfolio Investments

Foreign Venture Capital

Investments

Other investments (G-Sec, NCDs, etc)

Investments on non-repatriable

basis

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Foreign investments under Portfolio Investment Scheme (PIS)

Entities Investment in listed Indian companies

Transfer of shares

acquired under PIS

under private arrangement

Prior intimation to

Reserve Bank of India

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Entities

• Eligible to purchase shares and convertible debentures issued by Indian companies. FIIs registered with SEBI

• Eligible to purchase shares and convertible debentures , if permitted by designated branch of any AD Category - I bank (which has been authorized by RBI to administer the PIS)

NRIs

• General permission granted SEBI approved sub

accounts of FIIs (sub accounts)

• Not permitted to invest. • OCBs which have already made investments under the PIS

are allowed to continue holding such shares / convertible debentures till such time these are sold on stock exchange

Erstwhile Overseas Commercial Bodies

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Investment in Listed Companies

FIIs

An Individual FII/ SEBI approved sub accounts

Maximum 10% investment of paid-

up capital or paid-up value of each series

of convertible debentures

The limit would include shares held by SEBI registered FII/ sub accounts of FII under PIS as well as shares acquired by SEBI registered

FII

Total holdings of all FIIs / SEBI approved sub accounts

of FIIs

Shall not exceed 24 % of paid-up capital or paid-up value of

each series of convertible debentures.

Limit of 24% can be increased to the

sectoral cap / statutory limit, by passing a Board

resolution followed by a special

resolution and subject to prior

approval from RBI.

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Reporting of FDI By Company

Fresh issue of Shares Transfer of Shares Conversion of Equity into equity

ESOPs for allotment of equity shares ADRs/GDRs

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Fresh Issue of Shares

Reporting of Inflow

• Details of amount of consideration within 30 days from the date of receipt in Advance Reporting Form.

• Equity instruments shall be issued within 180 days, and have to file Form FC-GPR within 30 days from the date of issue

• FC-GPR for Issue of bonus/rights shares or shares on conversion of stock options issued under ESOP to persons resident outside India directly or on amalgamation / merger with an existing Indian company, as well as issue of shares on conversion of ECB / royalty / lumpsum technical know-how fee / import of capital goods by units in SEZs

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Transfer of shares

Reporting of FDI for Transfer of shares route • Reporting of transfer of shares between residents and non-residents and vice- versa is to be made

in Form FC-TRS

• It should be submitted to the AD Category – I bank, within 60 days from the date of receipt of the amount of consideration.

• Onus of submission of the Form FC-TRS within the given timeframe would be on the transferor / transferee, resident in India.

• The sale consideration in respect of equity instruments purchased by a person resident outside India, remitted into India through normal banking channels, shall be subjected to a KYC check by the remittance receiving AD Category – I bank at the time of receipt of funds.

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Conversion of ECB into equity

Reporting of conversion of ECB into equity

• Details of issue of shares against conversion of ECB has to be reported to concerned Regional Office of RBI

• In case of full conversion of ECB into equity, the company shall report the conversion in Form FC-GPR as well as in Form ECB-2.

• In case of partial conversion of ECB, converted portion in Form FC-GPR well as in Form ECB-2 clearly differentiating the converted portion from the non-converted portion.

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ESOPs

Reporting of ESOPs for allotment of equity shares

• The issuing company is required to report the details of issuance of ESOPs to its employees within 30 days from the date of issue of ESOPs.

• At the time of conversion of options into shares in FC-GPR, within 30 days of allotment of such shares.

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ADRs/GDRs

Reporting of ADR/GDR Issues

• Indian company issuing ADRs / GDRs has to furnish full details of such issue in the Form DR, within 30 days from the date of closing of the issue.

• Company should also furnish a quarterly return in the Form-DR Quarterly, within 15 days of the close of the calendar quarter.

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Prohibited Sectors

Lottery Business including Government /private lottery, online lotteries, etc.

Retail Trading (except single brand product retailing)

Real Estate Business or Construction of Farm Houses

Trading in Transferable Development Rights (TDRs)

Nidhi company

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Prohibited Sectors

Chit funds

Gambling and Betting including casinos etc.

Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes

Activities / sectors not open to private sector investment e.g. Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems).

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Foreign Investment Promotion Board

FIPB

Secretaries to Government

Chairperson-Department of

Economic Affairs, Ministry

of Finance

Department of Industrial Policy

& Promotion, Ministry of

Commerce & Industry

Department of Commerce, Ministry of

Commerce & Industry

Economic Relations, Ministry of

External Affairs

Ministry of Overseas Indian

Affairs

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Levels of Approvals for cases under Government Route

Minister of Finance

In-charge of FIPB

Would consider the recommendations of FIPB on proposals with total foreign equity inflow of and below Rs.1200

crore.

Cabinet Committee on Economic Affairs (CCEA)

Would consider recommendations of FIPB on proposals with total foreign equity inflow of more than Rs. 1200

crore

It would also consider proposals which may be referred to it by the FIPB/ the

Minister of Finance

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Cases which do not require Fresh Approval (For bringing in additional foreign investment into the same entity)

Required FIPB/CCFI/CCEA approval was obtained at the time of initial foreign investment, and the activity was subsequently came under automatic route

Prior approval of FIPB/CCFI/CCEA was obtained for activities with sectoral caps at the time of initial foreign investment, and the caps were removed/increased and the activities placed under the automatic route. Additional investment alongwith the initial/original investment shall not exceed the sectoral caps

Prior approval of FIPB/CCFI/CCEA had been obtained at the time of original foreign investment due to requirements of Press Note 18/1998 or Press Note 1 of 2005 and prior approval of the Government under the FDI policy is not required for any other reason/purpose

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Compounding of Offences under FEMA

• Under Section 13(1) of the FEMA, 1999, an applicant can seek compounding voluntarily

Compounding under FEMA

• Contravention of any provision of FEMA, 1999,or any rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or contravenes any condition subject to which an authorization is issued by RBI

What can be compounded

• RBI empowered to compound contraventions of all sections of FEMA, 1999, except Section 3(a) of the Act

• Directorate of Enforcement empowered to compound contraventions under Section 3(a) of FEMA, 1999 (dealing essentially with Hawala transactions).

Powers of Compounding

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Type of Contravention

Technical and/or minor

Needs only an administrative

cautionary advice

Material

Compounding of the contravention

Serious/ Sensitive

Money Laundering, National and Security

concerns involving serious infringement of regulatory framework

Note: Master Circular dated July 2, 2012 issued by RBI reserves the right to classify the contraventions as stated above and neither the contravener nor others have any right to classify any contravention as technical suo- moto.

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Process of Compounding

Application

• To be submitted with Compounding Authority on being advised of a contravention under FEMA, 1999, either through a memorandum or suo moto on being made or on becoming aware of the contravention

Order

• After completion of proceedings, order to be issued by the authority within 180 days from the date of the receipt of application

Additional Information

• Authority may call for any additional information, to be submitted within specified period

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Process of Compounding

Examination & Assessment

• Application will be examined to assess whether the contravention is compoundable and the amount of contravention is quantified.

Penalty

• Penalty up to thrice the sum involved in such contravention where the amount is quantifiable or up to Rupees Two lakh, where the amount is not quantifiable

• If contravention is a continuing one, further penalty which may extend to Rs. 5000/-for every day after the first day during which the contravention continues.

• FE (Compounding Proceedings) Rules, 2000, prescribes the power to compound the contravention with regard to the sum involved in such contravention.

• No contravention shall be compounded unless the amount involved in the contravention is quantifiable

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Arun Gupta

Corporate Professionals, D-28, South Ex-Part-1, New Delhi - 110 049, India, (B): 09810275571, +91 11 40622214

www.CorporateProfessionals.com

Thank You!

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