Ppt on Fema Act Rashmi

OUTBOUND OUTBOUND INVESTMENTS – INVESTMENTS –

UNDER FEMA UNDER FEMA REGULATIONSREGULATIONS

Prof Rashmi Narayanswamy 2

AgendaAgenda

• Provisions of FEMA, Provisions of FEMA, 1999 and Applicable 1999 and Applicable RegulationsRegulations

• Types of Investments Types of Investments – Prohibited / – Prohibited / Regulated /Permitted Regulated /Permitted

• US$ 25,000 SchemeUS$ 25,000 Scheme

– JVJV– Investments by Investments by

EmployeesEmployees– Portfolio Portfolio

InvestmentsInvestments– Agricultural Agricultural

operations overseasoperations overseas


FEMA provisionsFEMA provisions• Overseas Investments is a Capital account Overseas Investments is a Capital account

transaction transaction • Hence prohibited unless permitted – Hence prohibited unless permitted –

generally or specifically - Section 6 generally or specifically - Section 6 • RBI empowered by Section 6(2) to specify RBI empowered by Section 6(2) to specify

permissible capital account transactions.permissible capital account transactions.• FEM (Permissible Capital account FEM (Permissible Capital account

transactions) Regulations issued in 2000. transactions) Regulations issued in 2000. – Schedule I lists 11 capital account – Schedule I lists 11 capital account transactions, of which ODI is # 1transactions, of which ODI is # 1


Prohibited InvestmentsProhibited Investments• Reg 5 (2)Reg 5 (2)

– All “Indian Parties” prohibited from All “Indian Parties” prohibited from investment in a foreign entity investment in a foreign entity engaged in –engaged in –• Real estate BusinessReal estate Business• Banking BusinessBanking Business

• Reg 5(1) Reg 5(1) – All residents not to make direct All residents not to make direct

investment o/s India – except with investment o/s India – except with general / specific approvalgeneral / specific approval

• Reg. 3 of Notif 120Reg. 3 of Notif 120– All persons resident in India All persons resident in India

prohibited from issuing foreign prohibited from issuing foreign security – except with RBI approvalsecurity – except with RBI approval


General PermissionGeneral Permission• Reg 4 / Para A 4 Reg 4 / Para A 4 • General permission General permission

granted to residents forgranted to residents for– Purchase / acquisition of Purchase / acquisition of

foreign securities and sale foreign securities and sale thereofthereof• Out of funds held in RFC Out of funds held in RFC

accountaccount• As bonus shares on securities As bonus shares on securities

already held already held • Out of their Foreign Out of their Foreign

Currency Resources outside Currency Resources outside IndiaIndia

(when not permanently (when not permanently resident in India)resident in India)


Direct Investment o/s India Direct Investment o/s India – – Automatic Route - Reg 6Automatic Route - Reg 6

• Who can invest?Who can invest?– Company incorporated in IndiaCompany incorporated in India– Body created under Act of ParliamentBody created under Act of Parliament– Partnership firm regd under Indian Partnership ActPartnership firm regd under Indian Partnership Act– Other entity as notified by RBIOther entity as notified by RBI

• Effective 27/3/2006, proprietary / Effective 27/3/2006, proprietary / unregistered partnership firms which are star unregistered partnership firms which are star export houses are also permitted – subject to export houses are also permitted – subject to RBI approval – Form ODI – Conditions as per RBI approval – Form ODI – Conditions as per Annex to circular dt 27/3/2006Annex to circular dt 27/3/2006


Direct Investment o/s India Direct Investment o/s India – – Automatic Route - Reg 6Automatic Route - Reg 6

• Indian party permitted to make Indian party permitted to make investment in overseas JV/WOSinvestment in overseas JV/WOS

• To submit Form ODA to designated To submit Form ODA to designated branch of ADbranch of AD

• Limit: 200% of Net Worth as on date of Limit: 200% of Net Worth as on date of last B/slast B/s

• Ceiling NA for investments out of EEFC Ceiling NA for investments out of EEFC a/c or funds raised thru ADRs/GDRs.a/c or funds raised thru ADRs/GDRs.

• Investment in Nepal/ Bhutan only in INRInvestment in Nepal/ Bhutan only in INR• Investment in Pakistan not permitted Investment in Pakistan not permitted

under automatic routeunder automatic route


Direct Investment o/s India Direct Investment o/s India – – Automatic Route - Reg 6 – Contd.Automatic Route - Reg 6 – Contd.• Limit will include capital contribution in / loans Limit will include capital contribution in / loans

granted to JV, and 50% of guarantees issued to granted to JV, and 50% of guarantees issued to / on behalf of JV./ on behalf of JV.

• Conditions:Conditions:– Loan / Guarantee may be given only to an overseas Loan / Guarantee may be given only to an overseas

concern in which it has equity participation.concern in which it has equity participation.– Investor should not be on RBI’s caution list / list of Investor should not be on RBI’s caution list / list of

defaulters to banking system or under investigationdefaulters to banking system or under investigation– All transactions to be routed thru one branch of AD.All transactions to be routed thru one branch of AD.– For acquisition of existing foreign co. – share For acquisition of existing foreign co. – share

valuation required from Cat 1 Merchant Banker ( > valuation required from Cat 1 Merchant Banker ( > US$ 5 Mn), or CA/CPA (< US$ 5 Mn)US$ 5 Mn), or CA/CPA (< US$ 5 Mn)


Direct Investment o/s India Direct Investment o/s India – – Automatic Route - Reg 6 – Contd.Automatic Route - Reg 6 – Contd.• Capitalisation of export Capitalisation of export

proceedsproceeds– Dues from foreign entity Dues from foreign entity

towards exports, fees, towards exports, fees, royalties or other royalties or other entitlements – dues > 6 entitlements – dues > 6 months need prior RBI months need prior RBI approval for capitalisationapproval for capitalisation

– Software exporters can Software exporters can get 25% of value of get 25% of value of exports to overseas exports to overseas software co in form of software co in form of shares shares without entering without entering into JV agreements into JV agreements – – with with RBI approval.RBI approval.


Share Swap – Reg 8Share Swap – Reg 8

• Indian parties which have already made Indian parties which have already made ADR/GDR may acquire shares of FC in ADR/GDR may acquire shares of FC in same core activity under Scheme / same core activity under Scheme / guidelinesguidelines

• Conditions –Conditions –– ADR /GDR listed on any stock exchange o/s ADR /GDR listed on any stock exchange o/s

IndiaIndia– Max – higher of (a) US$ 100 Mn; (b) 10 times Max – higher of (a) US$ 100 Mn; (b) 10 times

export earnings in preceding financial year export earnings in preceding financial year (including automatic investments in same (including automatic investments in same financial year)financial year)


Share Swap – Reg 8Share Swap – Reg 8

– ADR/GDR issue for purpose of ADR/GDR issue for purpose of acquisition is backed by fresh equity acquisition is backed by fresh equity shares of Indian party.shares of Indian party.

– Holding in Indian entity does not Holding in Indian entity does not exceed sectoral caps for FDIexceed sectoral caps for FDI

– Valuation as per recommendation of Valuation as per recommendation of investment banker (for unlisted shares) investment banker (for unlisted shares) or current market cap based of last or current market cap based of last three months average price on stock three months average price on stock exchangeexchange


GuaranteesGuarantees

• Till 27/3/06 – Only Till 27/3/06 – Only corporate corporate promoters promoters could offer guarantees could offer guarantees for JV/WOSfor JV/WOS

• Now – Now – all Indian entities all Indian entities may offer may offer any form of guarantee – corporate/ any form of guarantee – corporate/ personal /primary / collateral – by personal /primary / collateral – by promoter / group company / sister promoter / group company / sister concern / associate companiesconcern / associate companies


Portfolio InvestmentsPortfolio Investments

• Corporates-Corporates-– Listed Indian co’s can invest in shares of Listed Indian co’s can invest in shares of

companies listed on recognised stock exchange companies listed on recognised stock exchange and which has at least 10% holding in an and which has at least 10% holding in an Indian listed companyIndian listed company

– Also permitted to invest in bonds / fixed income Also permitted to invest in bonds / fixed income securities of such companiessecurities of such companies

– Max – 25% of Indian co’s net worth Max – 25% of Indian co’s net worth

• Individuals-Individuals-– Same as corporates – except no monetary limitSame as corporates – except no monetary limit


Portfolio InvestmentsPortfolio Investments

• Mutual Funds-Mutual Funds-– Can invest in ADR /GDR of Indian co’s Can invest in ADR /GDR of Indian co’s

rated debt instruments and also in equity rated debt instruments and also in equity of overseas companies as specified for of overseas companies as specified for corporatescorporates

– Overall cap of US$ 1 billionOverall cap of US$ 1 billion– SEBI approval requiredSEBI approval required

• General permission in each of the General permission in each of the above cases for sale of securities so above cases for sale of securities so acquiredacquired


Financial Services Sectors-Financial Services Sectors- Additional Conditions for Indian Additional Conditions for Indian

party party

• Should be regd. with appropriate regulatory authorityShould be regd. with appropriate regulatory authority• Should have earned net profit during preceding 3 Should have earned net profit during preceding 3

financial yearsfinancial years• Approval obtained from regulatory authorities in India Approval obtained from regulatory authorities in India

and abroadand abroad• Fulfilled prudential norms relating to capital adequacy Fulfilled prudential norms relating to capital adequacy

norms as prescribed by regulatory authoritynorms as prescribed by regulatory authority


US $ 25,000 SchemeUS $ 25,000 Scheme• An individual resident in India is permitted to remit An individual resident in India is permitted to remit

up to US $ 25,000 per calendar year up to US $ 25,000 per calendar year for any legal for any legal and lawful purpose and lawful purpose without obtaining prior without obtaining prior permission of RBI. The individual can use said facility permission of RBI. The individual can use said facility for any current or capital account transaction, for any current or capital account transaction, acquisition of any movable and/or immovable acquisition of any movable and/or immovable property or opening of a bank account outside India. property or opening of a bank account outside India.

• However, remittances cannot be made to Bhutan, However, remittances cannot be made to Bhutan, Nepal, Mauritius or Pakistan or countries identified Nepal, Mauritius or Pakistan or countries identified as "non co-operative countries and territories" by the as "non co-operative countries and territories" by the Financial Action Task Force. Currently, the countries Financial Action Task Force. Currently, the countries where investment cannot be made are Myanmar, where investment cannot be made are Myanmar, Nauru, Nigeria. The updated list can be seen at the Nauru, Nigeria. The updated list can be seen at the website of FATF - http://www.fatf-gaf website of FATF - http://www.fatf-gaf

Ppt on Fema Act Rashmi

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