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Foreign Investment in India

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Title: Foreign Investment in India


1
Foreign Investment in IndiaCompoundingS
ome Issues for consideration
  • By Neeta Behramfram
  • RBI, New Delhi

2
BASICS
  • What is Foreign Investment ?
  • Why Foreign Investment ?
  • Types of Foreign Investment
  • i) Foreign Direct Investment
  • Strategic long term relationship or lasting
    interest
  • ii) Foreign Portfolio Investment
  • - Higher returns

3
Legal and Regulatory framework
  • Foreign investment in India is governed by of
    Section 6 (3) of the Foreign Exchange Management
    Act, 1999, which covers Capital Account
    Transactions.
  • Regulations - Notification No. FEMA 20/2000-RB
    dated May 3, 2000 covers the aspects relating to
    Foreign investment in India.
  • prescribes the mode of investments i.e. manner of
    receipt of funds, issue of shares / type of
    instruments and reporting of the investments to
    the Reserve Bank.
  • Press Notes
  • Press Releases
  • Clarifications

4
Circulars
  • RBI issues notifications and AP (DIR Series)
    circulars from time to time which the procedural
    and operational aspects.
  • These generally follow the changes made in the
    FDI policy or the procedural changes to be
    brought in.

5
FDI Policy
  • Foreign Direct Investment (FDI) in India is
    governed by the FDI Policy announced by the
    Government of India and the provisions of FEMA)
    1999.
  • Consolidated policy announced by Dept. of
    Industrial Policy and Promotion (DIPP), Ministry
    of Commerce and Industry on 31st March and 30th
    September
  • Last policy annoucement on 31.1.2011 effective
    from 1.4.2011

6
FDI Policy 2011
  • Three new issues
  • Convertible instruments the conversion cn be
    based on a formula decided upfront
  • Pre-incorporation expenses can be capitalised
    with approval from FIPB
  • Import dues can be capitalised by companies not
    in SEZs with approval from FIPB.

7
FEMA 20
  • The six schedules of the FEMA notification No.
    20 dt.3.5.2000 prescribe the mode of investments
    by different class of investors and the
    reporting to RBI.
  • Schedule 1
  • Foreign Direct Investment by persons
  • resident outside India.
  • The reporting requirement under para 9(1)(A) and
    9 (1)(B) of Schedule 1

8
Schedules
  • Schedule 2
  • Foreign Portfolio investment by FIIs registered
    with SEBI.
  • Reporting to RBI by SEBI on a daily basis.
  • Schedule 3
  • Investment by NRIs on a Stock Exchange in
    India under Portfolio Investment Scheme.

9
Schedules
  • Schedule 4
  • Investment by NRIs on Non-Repatriation basis.
  • No reporting to RBI in FCGPR
  • Schedule 5
  • Other investments (G-Sec, NCDs, etc) by FIIs and
    NRIs

10
Schedules
  • Schedule 6
  • Foreign Venture Capital Investments (SEBI
    registered) in IVCF/ IVCU
  • RBI permission for opening of special accounts
    with designated AD Cat. I bank
  • Concessions regarding pricing, compliance with
    Press Note 1 of 2005
  • Reporting to Central Office through Custodian
    Bank

11
Reporting of inflow
  • Under para 9 (1) (A) of Schedule 1
  • Through AD Cat I bank within 30 days from date of
    receipt of inward remittance by normal banking
    channel / debit to NRE/FCNR account
  • In prescribed format along with FIRC and KYC
    report on remitter / investor
  • Purpose of remittance in FIRC
  • UIN is allotted

12
Allotment of equity instruments
  • In terms of AP (DIR Series) circular No. 20 dated
    14. 12.2007, time limit of 180 days from the
    date of receipt of inward remittance for
    allotment of equity instruments against all
    remittances pending allotment for less than 180
    days as on 29.11.2007 and those received
    subsequently.
  • Non-allotment within 180 days / allotment after
    lapse of 180 days without RBI approval
    contravention of Para 8 of schedule 1 of FEMA 20

13
Reporting of allotment
  • In form FCGPR within 30 days from date of
    allotment through AD cat.I bank
  • Along with Fair valuation certificate from CA
  • Certificate from CS in stipulated format
  • Copy of FIPB appoval, if under approval route
  • In case of allotment against inflow received
    prior to June 1, 2008, FIRC and KYC

14
FCGPR
  • Complete in all respect
  • Correct NIC code
  • Post issue share structure must tally for
    un-listed companies
  • UIN for inflow
  • Declaration part of FCGPR Press Note 1 of 2005,
    SSI unit, rights issue, bonus issue

15
FCGPR
  • Real estate development Undertaking regarding
    compliance with Press Note 2 of 2005.
  • In cases of merger/amalgamation No inflow,
  • Copy of Court order required which would give
    the ratio for allotment.
  • Conversion of ECB no inflow reported to Regional
    Office but FCGPR filed with RO along with CA
    certificate and copy of ECB returns submitted to
    Central Office, Mumbai.

16
Issues for clarification
  • Investment under Schedule 4
  • Whether an NRI, under Sch. 4 of FEMA 20, can
    invest in Multiple Brand Retail trading, Lottery,
    Gambling/Betting etc. as well ?
  • Whether any reporting / compliances requirements
    under Sch. 4 of FEMA 20 ?

17
Issues for clarification
  • Whether FC-TRS formalities shall be required for
    transfer of shares from Resident to Non-Residents
    when the shares transferred shall be held by the
    Non Resident on Non-Repatriation basis?
    Consideration shall be paid by the Non Resident
    from his NRO account.
  • Once a resident goes out of India for uncertain
    period, his/her Indian account is automatically
    termed as NRO Account. If the NRI makes
    investment out of this NRO account, will it be
    treated as FDI and called for compliance of
    FC-GPR etc.

18
Issues for clarification
  • Intimation to RBI for inward remittance - Can
    intimation to AD be made from a designated Bank /
    Branch (handling FC-GPR) which is different from
    receiving Bank / Branch?
  • Filing of FC-GPR - Can consolidated form be filed
    through a Bank/Branch consolidating all
    remittances received by different Banks /
    Branches of same Bank?

19
Reporting to RBI
  • Time limit of 30 days under para 9 (1)(A) and
    9(1)(B) of Sch. 1 to FEMA 20 i.e. intimation of
    receipt of funds/Form FC-GPR at RBI Regional
    office or at AD.
  • Is there any relaxation in genuine cases of delay
    by AD forwarding papers to RBI?

20
Utilisation of FDI funds refund
  • In cases where money is utilized and thereafter
    refunded within 180 days from the date of receipt
    of the inward remittance, whether this would mean
    temporary funding by foreign investor/collaborator
    in contravention of ECB guidelines.
  • Are there any reporting requirements when refund
    is made?

21
Issues for clarification
  • An engineering consultancy services company has
    been awarded a turnkey contract for erection of a
    plant. While reporting in FC GPR, how the same
    should be dealt with as Services and Turnkey
    Erection Contract may fall in different NIC
    Codes?
  • If an NRI makes investment out of NRE account,
    what will be the position?

22
Query
  • Whether a Section 25 Company limited by Shares
    (not for Profit Company) and carrying out
    activities akin to consultancy in social sector
    can issue shares under Automatic Route or under
    Approval Route?

23
Queries
  • Whether a Company who was granted approval to set
    up an IT project some 11 years back by FIPB/ SIA
    also need to file Annual Return of Assets
    Liabilities each year by July 15?
  • Does the merger of an overseas wholly owned
    subsidiary (no shares would be issued to overseas
    entity/shareholders post merger) with its Indian
    parent require any prior approval from RBI?  The
    overseas entity, as part of its assets, holds
    investment in Indian companies, cash and
    intangibles and does not hold any immovable
    property overseas.

24
Queries - Rights Shares
  • Whether non-existing non-resident shareholders
    allowed to apply for issue of additional shares /
    convertible debentures / preference shares over
    and above their rights share entitlements?
  • Is it possible for unlisted private/public
    entities to allot additional allocation to the
    non-resident investor/collaborator of
    unsubscribed portion of rights issue belonging to
    the promoters group, where the price of shares
    offered on rights basis is much below the pricing
    guidelines/ norms of RBI/SEBI?

25
Queries - Rights Shares
  • The price of shares offered on rights basis by
    the Indian company to non-resident shareholders
    in the case of shares of a company not listed on
    a recognised stock exchange in India, shall be at
    a price which is not less than the price at which
    the offer on right basis is made to the resident
    shareholders. Then why RBI insists on valuation
    certificate as per DCF? Can the shares be
    allotted for less than the DCF value?

26
Transfer of Securities
  • W.e.f. October 2004, general permission fo
    transfer of shares from Resident to Non Resident
    (except in financial services sector, investment
    under Approval route and OCBs)
  • Gen. Permission for transfer by way of sale or
    gift from NR to Resident
  • Gen. Permission for transfer from NRIs to NRIs
  • Reporting in FCTRS within 60 days for above
    transfers.
  • Gen. Permission also for NR (other than NRIs/
    OCBs) to NR - No reporting in FCTRS

27
Issues for clarification
  • Can a NRI residing in US sell shares of an Indian
    software company to a US Citizen or a US Company
    without taking prior approval of RBI and retain
    sale proceeds abroad?
  • Can a Resident Indian sell shares of an Indian
    software company to a US Citizen or a US Company
    without taking prior approval of RBI?

28
Basics - OCB
  • Overseas Corporate Bodies (OCBs) - a company,
    partnership firm, society and other corporate
    body owned directly or indirectly to the extent
    of at least sixty per cent by Non-Resident
    Indians and includes overseas trust in which not
    less than sixty per cent beneficial interest is
    held by NRIs
  • OCBs have been de-recognised as a class of
    investors in India with effect from September 16,
    2003.

29
OCB
  • Erstwhile OCBs which are incorporated outside
    India and are not under adverse notice of RBI can
    make fresh investments (including on rights
    basis) as incorporated non-resident entities -
  • with the prior approval of Government of India if
    the investment is through Government Route
  • with the prior approval of Reserve Bank if the
    investment is through Automatic Route.

30
OCB
  • However, no permission required for issue of
    bonus shares.
  • For disinvestment by OCBs permission of RBI
    required to open NRO account to credit sale
    proceeds.
  • Prior permission required even for transfer of
    shares.

31
Issues for clarification
  • Can a NRI sell shares of an Indian software
    company to an OCB without taking prior approval
    of RBI?
  • Can an OCB sell shares of an Indian software
    company to a US Citizen or a US Company
    without taking prior approval of RBI?

32
Issues for clarification
  • Creating voting rights disproportionate to
    shareholding (differential voting rights)
    Ownership by non-resident entities is defined
    in relation to the equity interest which is
    beneficially owned by the non-residents and not
    as per voting rights. Unlisted public and private
    companies have created structures in sectors
    under automatic route like minimum capitalization
    (NBFC and Real Estate) and Telecom sector up to
    49, wherein differential voting shares with
    different nominal amounts have been used to
    attract lower voting rights but with
    dis-proportionate higher paid-up share values
    thereby misrepresent actual beneficially
    interest.
  • Is this permitted or are there any checks at RBI
    to flag such structuring?

33
Issues for clarification
  • FDI in the Insurance sector, as prescribed in the
    Insurance Act, 1999, is allowed under the
    automatic route. This will be subject to the
    condition that Companies bringing in FDI shall
    obtain necessary license from the Insurance
    Regulatory Development Authority for
    undertaking insurance activities. The Insurance
    Regulatory Development Authority (Insurance
    Brokers) Regulations, 2002 prescribe a cap of 26
    for foreign investment for licensing of the
    activity. The Insurance Regulatory Development
    Authority (Licensing of Corporate Agents)
    Regulations, 2002 has no restrictive clause on
    foreign investment.
  • Whether Insurance sector would include the
    Insurance Broking and the Insurance Corporate
    Agents? And FDI caps/norms for each one of
    them?

34
Issues for clarification
  • Whether downstream investments can be made by
    Indian companies (with FDI) in unincorporated
    joint venture Special Purpose Vehicle e.g.
    partnership firm, AoP (prevalent in real estate
    and infrastructure businesses)?

35
Issues for clarification
  • Why does a subscriber to Memorandum of
    Association called for chartered accountants
    certificate by DCF method, when any way that has
    to be at face value?
  • Is it possible for unlisted private/public
    entities to allot additional allocation to the
    non-resident investor/collaborator of
    unsubscribed portion of rights issue belonging to
    the promoters group, where the price of shares
    offered on rights basis is much below the pricing
    guidelines/ norms of RBI/SEBI?

36
Query - pricing
  • Recent example in public domain being JT
    International India Pvt. Ltd. engaged in
    manufacture of cigarette, a prohibited sector,
    which on 25.03.2010 allotted 100,00,000 equity
    shares to JT International Holding BV,
    Netherlands _at_ Rs. 299 per shares and on the same
    date, allotted to Indian Resident 100,00,000
    equity shares _at_ Re. 1 only (without any premium).
    The shares were neither allotted on Rights Issue
    basis nor as Private Placement/ Preferential
    Allotment.

37
Continue
  • Another example is a company engaged in Private
    Security Agencies to which the Private Security
    Agencies (Regulation) Act, 2005 apply, reduced
    foreign paid-up share capital from 100 to 49 by
    issuing shares on March 30, 2010 to three Indian
    companies owned by lawyers/consultants advisors
    to the said Company by issuing shares at par
    nominal value of Rs. 10 each whereas book value
    as per last audited accounts as on March 31, 2009
    was Rs. 2042 and earnings per share of Rs. 72 per
    share. The new shares are to rank parri-passu
    with existing shares. The shares were allotted on
    Private Placement/ Preferential Allotment basis.

38
Continue
  • Recently in an approved single brand retail case
    with 51 FDI, the Indian JV partner was a private
    limited company owned by an advocate advising the
    foreign investor. 51 shares were allotted to
    foreign investor at a premium of Rs. 182 whereas
    the Indian JV partner was allotted at par value
    of Rs. 10 each share. The company has four
    foreign national directors i.e. controlled by
    foreigners/entity. Interest free unsecured has
    been provided by the foreign investor. In reality
    Indian JV partner is dormant.
  • How does RBI look into these cases from valuation
    and Policy perspective?

39
Procedural aspects
  • Is there a procedure for issue of Duplicate FIRC?
    Is it possible to amend the purpose of inward
    remittance in FIRC to reflect true intend post
    issue of original FIRC by Bank?
  • In case of inconsistencies between the Master
    Circular dated July 01, 2011 issued by RBI
    vis-à-vis the Consolidated FDI Policy Circular 1
    of 2011 dated March 31, 2011 which one will
    prevail
  • i) Sector-specific policy under FDI Circular
    over Master Circular, and
  • ii) Procedures and specific requirements for RBI
    approval under Master Circular over FDI Policy.

40
Other issues
  • What are the consequences if an Indian software
    company has shown foreign currency in hand in its
    Balance Sheet at the close of the financial year
    which were returned by its employee on returning
    back from foreign travel?
  • If an Indian company is a part of a group of
    companies, adjustment of amount
    receivable/payable within the group.

41
Other issues
  • An Indian Company has been awarded turnkey
    project in US by an Offshore Company. Supply of
    components and engineering services will be
    provided by Offshore companies in US and in other
    foreign jurisdictions. Consideration shall be
    paid both in forex and INR. How to repatriate the
    funds to Offshore companies for supply of
    components and rendering engineering services
    overseas directly?

42
Compounding of contraventions
  • What does it mean?
  • Settle an offence committed by the contravener
    through imposition of a monetary penalty without
    going in for litigation after the contravener
    acknowledges having committed the contravention

43
Compounding of contraventions
  • The procedure for compounding of contraventions
    under FEMA, 1999 have been framed with a view to
    provide comfort to the citizens and corporate
    community by minimizing transaction costs, while
    taking severe view of willful, malafide and
    fraudulent transactions.

44
Nature and scope
  • The nature of contravention is ascertained
    keeping in view the following indicative points
  • a) whether the contravention is technical
    and / or minor in nature
  • b) whether the contravention is serious in
    nature and
  • c) whether the contravention, prima facie,
    involves money-laundering, national and
    security concerns involving serious
    infringement of the regulatory framework.

45
Contraventions
  • Delay in submission of returns /statements to
    Central Office, Mumbai like
  • i)Indian Company issuing shares under ADR / GDR
    Scheme
  • ii) Annual Activity Certificate by Branch
    Office
  • iii) APR - Annual Performance Report (APR) on
    the functioning of Indian Joint Venture (JV)
    /Wholly Owned Subsidiaries (WOS).

46
Contraventions
  • Delay in submission of returns/statements to RO
    like
  • i) Inflow of share application / subscription
    money.
  • ii)Reporting of issue of shares by the company
    to a Person Resident outside India.
  • iii)Annual Activity Certificate by Liaison
    Office/Project Office.

47
Contraventions
  • Cases of contravention involving
  • Money Laundering,
  • national security concerns,
  • Involving serious infringements of the regulatory
    frame work,
  • the cases where the cases for compounding have
    not been filed within the stipulated period in
    the memorandum issued by RBI
  • Will be referred to under Section 37 of FEMA to
    DoE or to the Anti-Money Laundering Authority
    instituted under the PMLA, 2002.

48
Compounding
  • Contraventions relating to any transaction under
    FEMA but requiring approval or permission from
    the Government Department concerned or any
    Statutory Authority as the case may be, would not
    be compounded UNLESS the required approval is
    obtained from the authorities concerned.

49
Compounding
  • An application for compounding of a contravention
    to be submitted to the Compounding Authority
    either on being advised of a contravention
    through a memorandum or suo moto on being made or
    becoming aware of the contravention.

50
Penalty
  • The following factors, are taken into
    consideration for arriving at the quantum of
    penalty
  • the amount of gain of unfair advantage, wherever
    quantifiable, as a result of the contravention.
  • the amount of loss caused to any authority /
    agency / exchequer
  • economic benefits accruing to the contravener
    from delayed compliance or compliance avoided

51
Penalty
  • the repetitive nature of the contravention, the
    track record and / or history of non-compliance
    of the contravener
  • contraveners conduct in undertaking the
    transaction and disclosure of full facts in the
    application and submissions made during the
    personal hearing and
  • any other factor considered relevant and
    appropriate

52
Quantum of penalty
  • up to thrice the sum involved in such
    contravention where the amount is quantifiable
  • up to Rupees Two lakh, where the amount is not
    quantifiable
  • where the contravention is a continuing one,
    further penalty which may extend to Rupees Five
    thousand for every day after the first day during
    which the contravention continues (Section 13(1),
    Chapter IV of FEMA,

53
Compounding
Foreign Direct investment Foreign Direct investment
1. Filing of report beyond 30 days of receiving foreign remittance
2. Filing of Form FC-GPR beyond 30 days of allotment of shares
3. Filing of Annual Report of Assets Liabilities by July 15
4. Filing of Form FC-TRS after 60 days for transfer of shares from resident to non-resident and vice-versa
5. Allotment not made within 180 days either refund or allot shares and then approach for compounding
54
Compounding
Overseas investment Overseas investment
1. Report to RBI after 30 days regarding post-investment changes in JV/WOS aboard
2. Filing evidence with RBI regarding investment abroad-after 6 months of making the investment.
3. Filing of Annual Performance Report after 60 days of finalization of accounts of the JV/WOS
Other than Procedural lapses Other than Procedural lapses
4. Cases falling under Financial Services sector
5. Overseas regulatory approval not obtained
55
General General
1 Loan taken by a resident individual from an NRI relative on non-repatriable basis.
2 Loan taken by an entity in India from an NRI on non-repatriable basis-where the NRI and persons holding at least 51 of the share in the Indian entity, are relatives.
3 If an Indian company is a part of a group of companies, adjustment of amount receivable/payable within the group.
56
ECB
1 1. ECB 2 not filed/delayed
2 2. End use whether satisfied
3 3. Eligible lender
4 4. Drawal of loan before registration number is allotted

57
Non Quantifiable contraventions Non Quantifiable contraventions Non Quantifiable contraventions
1. 1. Liaison office continuing beyond approved period
2. 2. Liaison office carrying activities which are permitted for LO First convert into Branch office and go for compounding
Quantifiable contraventions Quantifiable contraventions Quantifiable contraventions
1 Liaison office received remittances post expiry of approval date Liaison office received remittances post expiry of approval date
     
Not Compoundable Not Compoundable Not Compoundable
ODI investment routed back to India as FDI Round tripping ODI investment routed back to India as FDI Round tripping ODI investment routed back to India as FDI Round tripping
Prohibited sector Prohibited sector Prohibited sector
Unwinding the transactions in cases where such transactions are not permissible under FEMA, 1999 before Compounding Unwinding the transactions in cases where such transactions are not permissible under FEMA, 1999 before Compounding Unwinding the transactions in cases where such transactions are not permissible under FEMA, 1999 before Compounding
58
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