4 Overview Of Current And Capital Account Transactions Current AccountRemittanceProhibited unlessspecifically permittedFreely permittedSubject to ceilings**ApprovingauthorityForeign Investment Promotion BoardAuthorized DealersCentral Government/RBIPurchase of machinery on credit or borrowing outside India for such purchasePurchase of machinery for cashIllustration**Approval requiredwhere ceilings breached
6 Capital Account Regulations Permissible Capital Account Transactions – Para 3 of the Capital Account Regulations(A) transactions of a person resident in India specified in Schedule I(B) transactions of a person resident outside India specified in Schedule IIProhibited Capital Account Transactions – Para 4 of the Capital Account RegulationsBusiness of chit fundNidhi CompanyAgricultural or plantation activitiesReal estate business, or construction of farm houses,Trading in Transferable Development Rights (TDRs)Real estate business does not include development of townships, construction of residential/commercial premises, roads or bridges.
7 Permissible Capital Account Transactions Investment by person resident in India [Schedule I, Regulation 3(1)(A)]Investment by person resident outside India [Schedule II, Regulation 3(1)(B)]Direct investment in IndiaExternal commercial borrowingsTransfer of immovable property outside IndiaGuarantees issued in favour of a person resident outside IndiaExport, import and holding of currency/currency notesMaintenance of foreign currency accounts in India and outside IndiaLoans and overdrafts to a person resident outside India.Remittance outside India of capital assets of a person resident in India.Sale and purchase of foreign exchange derivatives in India and abroad and commodity derivatives abroad.Investment in India i.e.,—In security issued by a body corporate or an entity in India; andto the capital of a firm or a proprietorship concern or an association of persons in India.Acquisition and transfer of immovable property in India.Guarantee in favour of, or on behalf of, a person resident in India.Import and export of currency/currency notes into/from IndiaDeposits between a person resident in India and a person resident outside India.Foreign currency accounts in IndiaRemittance outside India of capital assets in India of a person resident outside India.Subject to applicable conditions
9 Background Inbound investments are regulated by Reserve Bank of India ("RBI")Department of Industrial Policy & Promotion (FC Section), Ministry of Commerce, Government of IndiaUnder section 6(3)(b) of the FEMARBI has the power to prohibit, restrict or regulate the transfer or issue of any security by a person resident outside IndiaRBI has issued FEM (Transfer or issue of security by a person resident outside India) Regulations, 2000 ("FEMA 20/2000")to regulate the transfer / issue of shares by certain persons resident outside India subject to certain terms and conditions specified in Schedules to the aforesaid RegulationsFEMA 20/2000-RB, dated 3 may 2000 [GSR 406(E), dated 3 May 2000]RBI also issues annual master circular on "Foreign Investments in India" that deals with inbound investment in IndiaLatest Master Circular on "Foreign Investments in India“ is dated 2 July 2012 (updated as on 12 February 2013)
10 Background…Further, Ministry of Commerce and Industry (Department of Industrial Policy and Promotion), Government of India (GOI) has released Consolidated FDI Policy vide Circular 1 of 2012 dated 10 April 2012 which is effective from the same date.DIPP issues Press Notes which provide guidance on various issues including foreign investment in IndiaPress Notes and FEMA Regulations are to be read togetherFAQs on foreign Direct Investment in India updated on October 11, 2011
11 Background… Foreign Investments FDI Portfolio Investments Venture Capital InvestmentsOther investments (G-sec, NCDs, etc.)Investment on non repartriable basisAutomatic routeApproval RouteFIIsNRI, PIO, QFINRI, PIONRFIINRI, PIO, QFISEBI regd. FVCIsVCF, IVCUs
12 India’s FDI Policy – Sectoral view Sectors – Automatic Route(Illustrative)Sectors –Approval Route(Illustrative)Sectors – Negative List(Illustrative)Agriculture & Animal husbandryNBFC (subject to minimum capitalization norms)Insurance – 26%Special Economic ZonesAlcohol DistillationPrivate Sector Banking up to 49%MiningPetroleum & Natural GasCash & Carry wholesale tradingExisting Airports beyond 74%Asset Reconstruction Companies - 49%BroadcastingTelecom Service beyond 49% upto 74%Private Sector Banking beyond 49%Print MediaTea SectorDefence - 26%Atomic energyLottery, betting and gamblingBusiness of chit fundNidhi companyTrading in Transferable Development RightsCigars, cheroots, cigarillos and cigarettesReal estate businessFDI in agricultural activities is prohibited except floriculture, horticulture, apiculture and cultivation of vegetables and mushrooms under controlled conditions, development and production of seeds, and planting material; Animal husbandry, Pisciculture, Aquaculture under controlled conditions; and services related to agro and allied sectorsBanking - Private Sector beyond 49%Banking - Public Sector – 20%
13 Question BreakCan FDI be received in a business / venture which is not incorporated under any law in India?FDI in trust also not allowed
14 Single Brand Retail Trading 100% permitted under approval routeConditionsSingle brand products onlyProduct should be sold under same brand internationallyProducts are branded during manufacturingOnly one non-resident entity, whether owner of the brand or otherwise, permitted to undertake single brand product retail trading for the specific brand (earlier condition that foreign investor should be owner of brand deleted)Retail trading by means of e-commerce not permittedApplication for approval to indicate the product / product categories proposed to be sold under a “single brand”Fresh approval required for any addition to product / product categoryFor proposals beyond 51%, mandatory sourcing of at least 30% of value of manufactured / processed products from India preferably from MSMEs, village and cottage industries, artisans and craftsmenFirst compliance over a period of 5 years from the year of receipt of 1st tranche of FDI. Subsequently on an annual basis
15 Multi Brand Retail Trading 51% permitted under approval routeConditionsMinimum amount to be brought in – USD 100 million50% of the total FDI brought in shall be invested in ‘backend infrastructure’ within 3 years of the first tranche of FDI. It will include capital expenditure on all activities, excluding that on frond-end units (clarified to include investment towards processing, distribution, quality control, storage etc.)At least 30% of value of manufactured / processed products purchased to be sourced from Indian small industries/village and cottage industries, artisans and craftsmen. First compliance over a period of 5 years from the year of receipt of 1st tranche of FDI. Subsequently, on an annual basisRetail sales outlets to be set up only in areas meeting specified criteriaGovernment will have the first right to procurement of agricultural productsRetail trading by means of e-commerce not permittedSpecified areas where retail outlets may be set up:Retail sales locations may be set up only in cities with a population of more than 1 million as per 2011 Census and may also cover an area of 10 kms around the municipal or urban agglomeration limits of such cities.Retail sales locations may be set up in States and Union territories not having cities with population of more than 1 million as per 2011 Census in the cities of the choice of such State / Union territory, preferably the largest city and may also cover an area of 10 kms around the municipal or urban agglomeration limits of such cities.Retail locations will be restricted to conforming areas as per the Master / Zonal Plans of the concerned cities and provision will be made for requisite facilities such as transport connectivity and parking.For the rest of India, current FDI policy regime for Trading will continue. As per the current FDI regime for Trading, 100% FDI is allowed upto wholesale cash and carry point from which franchise / small retailers are able to source products for sale to the public at large.Following states have given their concurrence to allow FDI in MBRT: Andhra Pradesh Assam Delhi Haryana Jammu & Kashmir Maharashtra Manipur Rajasthan Uttarakhand Daman & Diu and Dadra & Nagar Haveli (Union Territories)Expenditure on land and rent will not be counted for the purpose of ‘backend infrastructure’
16 Multi Brand Retail Trading ~ Issues… Whether entire capital of 100 million to be brought upfront or within specified time frameWhether investment in purchase of existing business would be considered towards meeting the minimum investment criteriaContinuous requirement to invest 50% in backend capital expenditure may be difficult to achieveMandatory sourcing of 30% from small scale industriesChallenges in achieving economies of scale and consistency in qualityIncrease in cost on account of procurement in small quantity and training of multiple suppliersChallenges associated with switching to another supplier when small scale supplier outgrows its size
17 Transfer of SharesTransfer of shares from NR to R or R to NR freely permitted subject to sectoral restrictionsHowever transfer of shares from NRI to NR requires prior permission of RBIDeferred paymentTransfer from R to NR – Prior approval required from RBITransfer from NR to R – No specific provisionReporting in form FC TRS to be done within 60 days from date of receipt of consideration (initial/final?)Reduction of share capital – no specific reporting requirementLiquidation of companiesProceeds can be remitted to NR only after receipt of approval of official Liquidator ~ Liquidator would grant final approval only after remittance is made
18 Question BreakCan a foreign company (other than FII/QFI) buy/sell Indian shares on the stock market
19 Indirect Foreign Investment Direct InvestmentAny non-resident investment in an Indian companyIndirect Foreign InvestmentInvestment in an Indian company by another Indian company having foreign investment.Investing companyAn Indian company holding only investment in other Indian company/(ies), directly or indirectly, other than for trading of such holding / securities.
20 Indirect Foreign Investment Owned by RIC and ICIf more than 50% of the equity interest is beneficially owned by RIC and ICs which are owned and controlled ultimately by RICsControl by RIC and ICIf RIC and IC which are owned and controlled by RIC have the power to appoint majority of its directorsWhether indirect foreign investment by investing company in Indian company counted?YesNot countedNREsShareholding of investing company into Indian company will not be considered as foreign investmentIn this case, foreign investment will be NILOverseasIndiaRICs / ICsSay, 51%Say, 49%Investing CompanySay, 26% / 80%Indian Company
21 Indirect Foreign Investment Owned by RIC and ICIf more than 50% of the equity interest is beneficially owned by RIC and ICs which are owned and controlled ultimately by RICsControl by RIC and ICIf RIC and IC which are owned and controlled by RIC have the power to appoint majority of its directorsWhether indirect foreign investment by investing company in Indian company counted?YesNoCountedProportionate theory will not applyShareholding of investing company into Indian company will be considered as foreign investmentIn this case, 80%NREsOverseasIndiaRICs / ICsSay, 49%Say, 51%Investing Company80%Indian Company
22 Indirect Foreign Investment Exception – if operating-cum-investing company / investing company invests 100% in Indian company then the foreign investment limited to the foreign investment in the operating cum investing / investing companyIt is clarified that this exception is being made since the downstream investment of a 100% owned subsidiary of the holding company is akin to investment made by the holding company and the down Stream investment should be a mirror image of the holding company.In this case, 51%NREsOverseasIndiaRICs / ICsSay, 49%Say, 51%Investing* CompanySay, 100%Indian Company*Including operating-cum-investing company
23 Issues in Indirect Foreign Investment Operating-cum-investing Indian company is owned or controlled by NREsOperating-cum-holding company holds 95% in its subsidiaryWhether indirect foreign investment will be considered in Indian Company?Whether loan or investment in redeemable preference shares will be allowed?NREsOverseasIndiaRICs / ICsSay, 26%Say, 74%Operating-cum-Investing CompanySay, 95%Indian CompanyThe Indirect Foreign Investment rules only cover cases of Operating-cum-Investing companies which own 100% of Indian Company
24 Question BreakCan Downstream Investment be made using internal accruals?
25 Investment in Limited Liability Partnership (‘LLP’) FDI in LLPs is permissible under the approval route where operating in sectors / activities where 100% FDI is allowed under the automatic routeNo FDI linked performance conditionsFDI in agricultural/plantation activity, print media or real estate not allowedNo FDI by FII and FVCIDownstream investment by IC having FDI allowed, if both (the IC and LLP) operate in 100% automatic sectorNo downstream investment by LLP with FDIAn LLP is not allowed to make an outbound investment under the automatic route. It would need to access the approval route which could be ordinarily granted (ROC does not allow LLPs to register if they have investments as part of their objects).RBI approval would be needed for a company wanting to convert itself into an LLP if it holds overseas investmentsFDI linked performance conditions - such as ‘NBFC’ or “Development of Townships, Housing, Built up infrastructure and Construction-development projectLLP with a body corporate that is a designated partner or nominates an individual to act as a designated partner in accordance with the provisions of Section 7 of the LLP Act, 2008, such a body corporate should only be a company registered in India under the Companies Act, 1956 and not any other body, such as an LLP or a trust.
26 Issues on Indirect Investment in LLP Operating-cum-investing Indian company is owned or controlled by NREsOperating-cum-holding company holds 95% in its subsidiaryDoes LLP have any foreign investment (direct or indirect)?- No?Can LLP make any downstream investment?- Yes?NREsOverseasIndiaRICs / ICsSay, 26%Say, 74%Operating-cum-Investing CompanySay, 95%LLP.??A Co
28 Discussion points Conversion of ECB into Equity End-use Conversion permissible even though the ECB is not due for repaymentEnd-usePermitted end-use includes investment in new projects and modernization / expansion of existing production unitsCan proceeds of ECB be used for acquiring an industrial undertaking on a slump sale basis
30 Background Outbound investments are regulated by Reserve Bank of India ("RBI")Under section 6(3)(a) of the FEMARBI has the power to prohibit, restrict or regulate the transfer or issue of any foreign security by a person resident in IndiaRBI has issued Foreign Exchange Management (Transfer or issue of any foreign security) Regulations, 2004to regulate acquisition and transfer of a foreign security by a person resident in India i.e. investment by Indian entities in overseas joint ventures (“JV”) and wholly owned subsidiaries (“WOS”) as also investment by a person resident in India in shares and securities issued outside IndiaFEMA 120/RB-2004 dated July 7, 2004RBI also issues annual Master Circular on "Direct Investment by Residents in Joint Venture (JV) / Wholly Owned Subsidiary (WOS) Abroad " that deals with Outbound investment of IndiaLatest Master Circular on Direct Investment by Residents in Joint Venture (JV)/ Wholly Owned Subsidiary (WOS) Abroad dated 02 July 2012FAQ on Overseas Direct Investment updated on June 20, 2012
31 Outbound investment under the automatic route An Indian party can invest upto 400% of its net worth (as per last audited Balance Sheet) in JV / WOS for any bona fide activity permitted as per the law of the host country, if certain other specified conditions are satisfied.For the purpose of reckoning the net worth of 400%, the Indian party may use the net worth of its parent company (holding at least 51% in Indian company) or its subsidiary company (in which 51% is held by the Indian Company) to the extent holding or subsidiary have not availed of by the holding company or subsidiary company independently.Discussion PointsDoes the 400% net worth criterion apply only at the time of making the investment or through out the period of investment (fall in net worth)?Net worth of indirect parent and subsidiary cannot be consideredJV not defined ~ level of investment / contribution?Net worth means paid up capital (including preference shares) and free reserves
32 Other Points JV / WOS through a Special Purpose Vehicle Direct investment through the medium of a SPV is permitted under the Automatic Route for the purpose of investment in JV / WOS overseasCan an Indian company have more than one SPV for making investment in various JV / WOSLoan not permitted to step down subsidiary unless Indian company has equity investment in step down ~ extent of equity investment required not specifiedNo clarity on whether Indian resident can be a beneficiary of a foreign trust ~ discretionary vs. non discretionary trust ~ whether a capital account transactionDesignated Authorized DealerIn case the JV/WOS is being set up abroad by two or more Indian promoters, then all Indian promoters would be required to route all transactions in respect of that JV/WOS only through one ‘designated authorized dealer’
33 ExpatriatesWhether foreign citizens and other persons permanently resident in India allowed to invest abroad out of foreign currency resourcesIn terms of section 6(4) of FEMA person resident in India can continue to hold or invest in foreign assets if such asset was held when the person was a resident outside IndiaRBI Circular 37 of 19/10/2011 clarifies that under section 6(4), person resident in India can reinvest out of proceeds of assets sold outside India and income and sale proceeds of assets need not be brought to IndiaWhether above relaxation applies to foreign citizens (heading of Circular only refers to NRIs)As per ODI regulations, only persons not permanently resident in India allowed to purchase foreign securities from foreign resources outside India – Whether persons permanently resident in India (including foreign citizens) not allowed to invest out of foreign resources inspite of relaxation under Circular 37
35 Current Account Transaction Rules Any person may sell or draw foreign exchange to or from an authorised person if such sale or drawal is a current account transaction, unless restricted by RBIFEM( Current Account Transactions) Rules, 2000Transactions for which foreign exchange withdrawal is prohibited (Schedule I)Transactions require approval of the Central Government ( Schedule II)Transactions require approval of Reserve Bank of India (Schedule III)
36 Current Account Transaction Rules… Rule 3 [Schedule I] Transaction prohibited(Illustrative)Remittance out of lottery winningsRemittance of income from racing/riding etc, or any other hobbyRemittance for purchase of lottery tickets, banned/prescribed magazines, football pools, sweepstakes etcPayment of commission on exports made towards equity investment in Joint Ventures/Wholly Owned Subsidiaries abroad of Indian companiesRemittance of interest income on funds held in Non-resident Special Rupee Scheme Account
37 Current Account Transaction Rules… Rule 4 - Approval of the Central Government(Illustrative)Cultural ToursRemittance of hiring charges of transponders by:(a) TV Channels Ministry of Information and Broadcasting;(b) Internet Service Providers Ministry of Communication and Information TechnologyRemittance of prize money/sponsorship of sports activity abroad by a person other than International / National / State Level sports bodies, if the amount involved exceeds USD 1,00,000Advertisement in foreign print media for the purposes other than promotion of tourism, foreign investments and International bidding (exceeding USD 10,000) by a State Government and its Public Sector UndertakingsMulti-model transport operators making remittance to their agents abroad
38 Current Account Transaction Rules Rule 5 – Approval of the Reserve Bank(Illustrative)Release of exchange exceeding USD 10,000 or its equivalent in one financial year for one or more private visits to any country (except Nepal and Bhutan)Gift remittance exceeding USD 5,000 per financial year per remitter or donor other than resident individualExchange facilities exceeding USD 100,000 for persons going abroad for employmentExchange facilities for emigration exceeding USD 100,000 or amount prescribed by country of emigration.Remittance for maintenance of close relatives abroad(i) exceeding net salary (after deduction of taxes, contribution to provident fund and other deductions) of a person who is resident but not permanently resident in India and—(a) is a citizen of a foreign State other than Pakistan; or(b) is a citizen of India, who is on deputation to the office or branch or subsidiary or joint venture in India of such foreign company(ii) exceeding USD 100,000 per year per recipient, in all other cases
39 Foreign Exchange Compliance Travel AbroadPurposeForeign Exchange ComplianceWhen can foreign exchange be drawn for going abroadNot before 60 days prior to the date of travelOne or more private visit to any countryForeign currency notes equivalent to USD 3,000Total foreign currency drawal upto USD 10,000.Exchange facilities for persons going abroadUpto USD 1,00,000Exchange facilities for emigrationUpto USD 1,00,00 or amount prescribed by country of emigrationFor business travel, or attending a conference or specialized training, study tour, or for maintenance expenses of a patient going abroadUpto USD 25,000 per visit, for a person, irrespective of period of stayFor meeting expenses for medical treatment abroadUpto USD 1,00,000 or amount as per the estimate from a hospital/doctor in India/abroad, whichever is higherFor studies abroadUpto USD 1,00,000 per academic year or as per the estimate from the institution abroad, whichever is higher
40 Drawal of currency permissible Travel Abroad…PurposeDrawal of currency permissibleMaximum amount in INR that could be carried while on a visit abroad and brought back on returnINR 7,500Maximum cash in foreign currency that could be carried while on a visit abroad and brought back on returnForeign currency notes equivalent to USD 3,000 while going abroadOn return, without any limit. However, if the aggregate value of foreign exchange exceeds USD 10,000 or foreign currency notes alone exceeds USD 5,000, it should be declared to the Customs Authorities at the Airport in the Currency Declaration Form on arrival in India.Maximum amount that can be paid in cash for drawing foreign exchangeUpto Rs 50,000If the Rupee equivalent exceeds Rs. 50,000, entire payment should be made by way of a crossed cheque / banker’s cheque / pay order / demand draft, etc.
41 ExpatriatesEmployees of foreign companies on deputation to Indian subsidiary / branch / joint venture allowed to receive salary directly in foreign bank account subject to payment of tax in IndiaWhether Indian company to whom the employees are deputed can directly pay salary into the foreign bank accountEmployees who are (i) citizens of foreign State or (ii) citizens of India on deputation to office/branch/subsidairy/joint venture in India can make remittance for close relatives outside India as under:Upto net salary if the employment is for a specific duration (irrespective of length) or a specific job which does not exceed a duration of three yearsUpto USD 100,000 in other cases
43 BackgroundUnder the LRS, all resident individuals, including minors are allowed to freely remit up to USD 2,00,000 per financial year for any permissible current or capital account transaction, which is given belowConsolidation of remittance facility in respect of family members, subject to compliance with the terms and conditions of the scheme.Permissible usage of LRS (Illustrative)Usage prohibited (Illustrative)Current account transactionsPermitted capital account transactionsRemittance for purchase of objects of art subject to other relevant regulationsRemittance of funds for acquisition of ESOP (this is in addition to acquisition of ESOPs linked ADR / GDR)Repayment of loan availed abroad as an NRIRemittance for any purpose specifically prohibited under Schedule-I (like purchase of lottery tickets/sweep stakes, proscribed magazines, etc.) or any restricted items;Remittances for purchase of FCCBs issued by Indian companies in the overseas secondary market;Remittance by a resident individual for setting up a company abroad;Remittances directly or indirectly to countries identified by the FATF as ‘non co-operative countries and territories’No need to repatriate to India the income generated from property acquired abroad out of LRS
44 IssuesWhether remittance can be made under LRS for investment in unlisted (private) companiesSpecific restriction for remittance towards setting up new companiesNo specific restriction / permission for acquisition of stake in private companies ~ not a “permissible capital account transaction”However remittance allowed for acquisition of immovable property abroad which is also not a permissible capital account transactionForm 15CA/CB required even if the remittance is not taxable ~ variance in practice followed by BanksCases where Banks have insisted on form A2 even though not required under LRSCases of compounding of offences where individuals used LRS for purchase of majority stake in private companies as per Report of Committee to review the facilities for individualsRemittance for travel, medical, studies etc. (except gift and donation) over and above limit under LRS
45 IssuesRupee gift by resident to NRI relative allowed under LRS ~ amount to be credited to NRO accountDoes it circumvent restriction of USD 5,000 for gifts under current account rules considering NRI can remit USD 1 million out of NRO account balanceLoans to non residents not permitted except to NRI/PIO close relatives subject to conditionsLimit of USD 200,000 cannot be exceeded even if proceeds of investments bought back to India
46 Glossary FEMA Foreign Exchange Management Act, 1999 Capital Account RegulationsThe Foreign Exchange Management (Permitted Capital Account Transactions), Regulations 2000RICResident Indian CitizensICIndian CompaniesNRENon Resident EntitiesFIIForeign Institutional InvestorsFVCIForeign Venture Capital
47 Section 2(e) – Definition - Capital Account Transaction “Capital account transaction" means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India, and includes transactions referred to in sub-section (3) of section 6
48 Section 6(3) - Capital Account Transaction “Without prejudice to the generality of the provisions of sub-section (2), the Reserve Bank may, by regulations prohibit, restrict or regulate the following,—transfer or issue of any foreign security by a person resident in India;transfer or issue of any security by a person resident outside India;transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India;any borrowing or lending in foreign exchange in whatever form or by whatever name called;any borrowing or lending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India;deposits between persons resident in India and persons resident outside India;export, import or holding of currency or currency notes;transfer of immovable property outside India, other than a lease not exceeding five years, by a person resident in India;acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India;giving of a guarantee or surety in respect of any debt, obligation or other liability incurred,—i. by a person resident in India and owed to a person resident outside India; orii. by a person resident outside India”
49 Section 2(j) – Definition - Current Account Transaction “current account transaction" means a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transaction includes,—payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business,payments due as interest on loans and as net income from investments,remittances for living expenses of parents, spouse and children residing abroad, andexpenses in connection with foreign travel, education and medical care of parents, spouse and children;