1. Shah & Modi CHARTERED ACCOUNTANTS FEMA – New Vision & Approach The Committee on Economic, Commercial Laws & WTO of the ICAI jointly with NIRC October 18 th, 2014 CA Manoj Shah

2. CHARTERED ACCOUNTANTS Shah & Modi 2 Transition from Foreign Exchange Regulation Act, 1973 to Foreign Exchange Management Act, 1999 Post liberalization (i.e. New Industrial policy of 1991) there was need to remove shackles of regulatory and legal provisions. Need to consolidate and amend the law relating to foreign exchange with the objectives of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India. Need to take various steps to make ‘New Industrial Policy’- workable and meaningful. Industrial licensing was made pragmatic and objective- oriented. It was decided to review provisions of Foreign Exchange Regulation Act, 1973 (FERA).

3. CHARTERED ACCOUNTANTS Shah & Modi 3 Transition from Foreign Exchange Regulation Act, 1973 to Foreign Exchange Management Act, 1999 Intention was to bring provisions of FERA in line with emerging trends of liberalization so as to remove obstacles in the inward flow of foreign exchange and foreign investment. Accordingly, on June 1, 2000, the Foreign Exchange Management Act, 1999 (FEMA) brought in force to replace the then existing FERA. It is an act to manage the foreign exchange of India as opposed to FERA which was enacted to regulate/control the foreign exchange.

4. CHARTERED ACCOUNTANTS Shah & Modi 4 Structure of FEMA Applies to the whole of India and all branches, offices and agencies outside India which are owned or controlled by a person resident in India. FEMA has 49 sections of which 9 (section 1 to 9) are substantive and the rest are procedural/ administrative Section 46 of FEMA grants power to Central Government to make rules to carry out the provision of FEMA Section 47 of FEMA grants power to RBI to make regulations to implement its provisions and the rules made there under RBI is entrusted with the administration and implementation of FEMA

5. CHARTERED ACCOUNTANTS Shah & Modi 5 Substantive Provisions SectionDescription 1 Application and Commencement of FEMA 2 Definitions 3 to 9 Provisions relating to Regulations and Management of Foreign Exchange 10 to 12 Provisions relating to Authorized Person 13 to 15 Provisions relating to Contraventions and Penalties 16 to 38 Provisions relating to Adjudication, Appeal and Directorate of Enforcement 39 to 49 Miscellaneous Provisions

6. CHARTERED ACCOUNTANTS Shah & Modi 6 Some of the important definitions Authorized Person Capital Account Transaction Current Account Transaction Export Foreign Exchange Person Person Resident in India Person resident outside India Repatriate to India Security Transfer

7. CHARTERED ACCOUNTANTS Shah & Modi 7 Current and Capital Account Transaction Capital Account transaction means a transaction which alters assets or liabilities including contingent liabilities outside India of person resident in India and vice-versa. It’s an economic definition rather than an accounting or legal definition. Current Account transaction is transaction other than a capital account transaction. Current Account transactions are freely permitted unless prohibited - they are regulated by Central Government. Capital Account transactions are prohibited unless generally permitted - they are regulated by RBI.

8. CHARTERED ACCOUNTANTS Shah & Modi 8 FEMA looks transaction from Balance of payment position of Country Examples -  Import of machinery on payment of cash - Current A/c transaction  Machinery is purchased on hire - Capital A/c transaction. There is an obligated to make future payment to the non-resident  Consideration for goods & Services – Current A/c transaction  Transaction represents a creation or acquisition of wealth shares, loans or immovable properties – Capital A/c transaction  Option Premium paid on NASDAQ - ??? Current and Capital Account Transaction

9. CHARTERED ACCOUNTANTS Shah & Modi 9 Capital Account Transaction  RBI has been empowered under section 6(2) of FEMA to specify, in consultation with the Central Government, any class or classes of Capital account transactions which are permissible [i.e. the transactions which are not included under section 6(3)].  Section 6(3) of FEMA specifies the class of capital account transactions which are regulated by RBI.  Every transaction listed in this section is regulated by a corresponding notification

10. CHARTERED ACCOUNTANTS Shah & Modi 10 Notifications under FEMA Notifications are issued by the Central Government in the Official Gazette Section 47 of FEMA grants power to RBI to make regulations. RBI had initially issued 25 notifications, covering capital account transaction prescribed in Sec 6(3) & certain miscellaneous provisions 15 related to capital account transactions, 1 on Export of goods and services and 9 for other regulations As on date, the total number of notifications issued by RBI stand at 298. The same term is defined differently in different notifications For e.g. Person of Indian Origin (PIO) is defined differently in 3 notifications namely:  FEMA 13/2000-RB pertaining to remittance of assets  FEMA 21/2000-RB pertaining to the acquisition and transfer of immovable property in India  FEMA 24/2000-RB pertaining to investment in a firm or proprietary concern in India

11. CHARTERED ACCOUNTANTS Shah & Modi 11 Sr. No. TransactionsCorresponding Notification 1Permissible Capital Account TransactionsNotification No. 1 dated May 7, 2000 – Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2004 2Transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India Notification No. 2 dated May 3, 2000 - Foreign Exchange Management (Issue of Security in India by a branch, office or agency of a person resident outside India) Regulations, 2000 3Any borrowing or lending in foreign exchange in whatever form or by whatever name called Notification No. 3 dated May 3, 2000 - Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 4Any 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 Notification No. 4 dated May 3, 2000 - Foreign Exchange Management (Borrowing and Lending in Rupees) Regulations, 2000 5Deposits between persons resident in India and persons resident outside India Notification No. 5 dated May 3, 2000 - Foreign Exchange Management (Deposit) Regulations, 2000 Capital Account Transaction

12. CHARTERED ACCOUNTANTS Shah & Modi 12 Capital Account Transaction Sr. No. TransactionsCorresponding Notification 6Export, import or holding of currency or currency notes Notification No. 6 dated May 3, 2000 - Foreign Exchange Management (Export and Import of Currency) Regulations, 2000 7Transfer of immovable property outside India, other than a lease not exceeding five years, by a person resident in India Notification No. 7 dated May 3, 2000 - Foreign Exchange Management (Acquisition and Transfer of Immovable Property outside India) Regulations, 2000 8Giving 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 (ii)by a person resident outside India Notification No. 8 dated May 3, 2000 - Foreign Exchange Management (Guarantees) Regulations, 2000 9 InsuranceNotification No. 12 dated May 3, 2000 - Foreign Exchange Management (Insurance) Regulations, 2000 10Remittance of AssetsNotification No. 13 dated May 3, 2000 - Foreign Exchange Management (Remittance of Assets) Regulations, 2000

13. CHARTERED ACCOUNTANTS Shah & Modi 13 Capital Account Transaction Sr. No. TransactionsCorresponding Notification 11Transfer or issue of any Foreign SecurityNotification No. 120 dated July 07, 2004 - Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 12Transfer or issue of any security by a person resident outside India Notification No. 20 dated May 3, 2000 - Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 13Acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India Notification No. 21 dated May 3, 2000 - Foreign Exchange Management (Acquisition and transfer of Immovable Property in India) Regulations, 2000 14Establishment in India of Branch or Office or other place of business Notification No. 22 dated May 3, 2000 - Foreign Exchange Management (Establishment in India of Branch or Office or other place of business) Regulations, 2000 15 Investment in Firm or Proprietary Concern in India Notification No. 24 dated May 3, 2000 - Foreign Exchange Management (Investment in Firm or Proprietary Concern in India) Regulations, 2000

14. CHARTERED ACCOUNTANTS Shah & Modi 14 Capital Account Transaction Notification FEMA - 1/2000-RB dated 3-5-2000: Relates to permissible capital account transaction Capital account transactions of a person may be classified under the following heads, namely- A. Transaction, specified in Schedule I, of a person resident in India B. Transactions, specified in Schedule II, of a person resident outside India Subject to the provisions of the Act or the rules or the regulations or directions or orders made or issued thereunder, any person may sell or draw foreign exchange to or from an authorized person for a capital account transaction specified in the Schedules

15. CHARTERED ACCOUNTANTS Shah & Modi 15 Capital Account Transaction Schedule I: Classes of capital account transactions of persons resident in India a)Investment by a person resident in India in foreign securities b)Foreign currency loans raised in India and abroad by a person resident in India c)Transfer of immovable property outside India by a person resident in India d)Guarantees issued by a person resident in India in favour of a person resident outside India e)Export, import and holding of currency/currency notes f)Loans and overdrafts (borrowings) by a person resident in India from a person resident outside India

16. CHARTERED ACCOUNTANTS Shah & Modi 16 Capital Account Transaction g)Maintenance of foreign currency accounts in India and outside India by a person resident in India h)Taking out of insurance policy by a person resident in India from an insurance company outside India. i)Loans and overdrafts by a person resident in India to a person resident outside India. j)Remittance outside India of capital assets of a person resident in India. k)Sale and purchase of foreign exchange derivatives in India and abroad and commodity derivatives abroad by a person resident in India.

17. CHARTERED ACCOUNTANTS Shah & Modi 17 Capital Account Transaction Schedule II: Classes of capital account transactions of persons resident outside India. a)Investment in India by a person resident outside India, that is to say, i. Issue of security by a body corporate or an entity in India and investment therein by a person resident outside India; & ii. Investment by way of contribution by a person resident outside India to the capital of a firm or a proprietorship concern or an association of persons in India. b)Acquisition and transfer of immovable property in India by a person resident outside India. c)Guarantee by a person resident outside India in favour of, or on behalf of, a person resident in India. e)Import and export of currency/currency notes into/from India by a person resident outside India. Deposits between a person resident in India and a person resident outside India. f)Foreign currency accounts in India of a person resident outside India. g)Remittance outside India of capital assets in India of a person resident outside India.

18. CHARTERED ACCOUNTANTS Shah & Modi 18 Capital Account Transactions - Prohibited No person resident outside India shall make investment in India, in any form, in any Company or partnership firm or proprietary concern or any entity, whether incorporated or not, which is engaged or proposes to engage - i.In the business of chit fund, or ii.As Nidhi Company, or iii.In agricultural or plantation activities, or iv.In real estate business, or construction of farm houses, or v.In trading in Transferable Development Rights (TDRs) For the purpose of this regulation 'real estate business' shall not include development of townships, construction of residential/commercial premises, roads or bridges

19. CHARTERED ACCOUNTANTS Shah & Modi 19 Capital Account Transaction Section 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 currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India Section 6(5) – a person resident outside India may hold, own, transfer or invest in Indian currency, security or any immovable property situated in India if such currency, security or property was acquired, held or owned by such person when he was resident in India or inherited from a person who was resident in India

20. CHARTERED ACCOUNTANTS Shah & Modi Capital Account Transaction under Section 6(4) RBI has vide its A.P. (DIR Series) Circular No. 90 dated January 9, 2014 clarified that the following transactions shall be covered under section 6(4) of FEMA, 1999: a)Foreign currency accounts opened and maintained by such a person when he was resident outside India; b)Income earned through employment or business or vocation outside India taken up or commenced, or from investments made, or from gift or inheritance received while such a person was resident outside India; c)Foreign exchange including any income arising there from, and conversion or replacement or accrual to the same, held outside India acquired by way of inheritance from a person resident outside India; A person resident in India may freely utilize all their eligible assets abroad as well as income on such assets or sale proceeds thereof received after their return to India for making any payments or to make any fresh investments abroad without approval of RBI. 20

21. CHARTERED ACCOUNTANTS Shah & Modi Other Notifications 21 Sr. No. Corresponding Notification 1Realisation, Repatriation and Surrender of Foreign Exchange Notification No. 9 dated May 3, 2000 - Foreign Exchange Management (Realisation, Repatriation and Surrender of Foreign Exchange) Regulations, 2000 2Foreign Currency Accounts by a Person Resident in India Notification No. 10 dated May 3, 2000 - Foreign Exchange Management ( Foreign Currency Accounts by a Person Resident in India) Regulations, 2000 3Possession and retention of Foreign Currency Notification No. 11 dated May 3, 2000 - Foreign Exchange Management (Possession and Retention of Foreign Currency) Regulations, 2000 4 Manner of Receipt and PaymentNotification No. 14 dated May 3, 2000 - Foreign Exchange Management ( Manner of Receipt and Payment) Regulations, 2000 5 Inclusion of Debit cards, ATM Cards and such other instruments in the definition of ‘currency’ Notification No. 15 dated May 3, 2000 under section 2 (h) of FEMA

22. CHARTERED ACCOUNTANTS Shah & Modi Other Notifications 22 Sr. No. Corresponding Notification 6 Receipt from, and payment to, Non- Resident in India Notification No. 16 dated May 3, 2000 – under section 3 of FEMA 7 Dealing with Nepal/ BhutanNotification No. 17 dated May 3, 2000 - under section 3 of FEMA 8 Post Office as Authorized PersonNotification No. 18 dated May 3, 2000 - under section 3 of FEMA 9 Foreign Exchange Derivative Contracts Notification No. 14 dated May 3, 2000 - Foreign Exchange Management ( Foreign Exchange Derivative Contracts) Regulations, 2000

23. CHARTERED ACCOUNTANTS Shah & Modi Other Notifications 23 Sr. No. Corresponding Notification 1 Export of Goods and ServicesNotification No. 23 dated May 3, 2000 – Foreign Exchange Management ( Export of Goods and Services) Regulations, 2000 Withdrawal of General Permission to OCBs Notification No. 101 dated October 3, 2003 - Foreign Exchange Management ( Withdrawal of General Permission to Overseas Corporate Bodies) Regulations, 2000

24. CHARTERED ACCOUNTANTS Shah & Modi 24 A NALYSIS OF S EC 3 OF FEMA Sec 3- Dealings in Foreign Exchange: Save as otherwise provided in the Act- No person shall 3(a) Deal in or transfer any foreign exchange or foreign security to any person not being an authorised person Analysis of Sec 3(a): Deal in is a wide term and should include- purchase, acquire, borrow, sell or otherwise transfer or lend or to exchange with (FERA’s corresponding Sec 8(1) had expansive meaning which specifically all these types of transactions) It must be noted that contravention under clause (a) of Section 3 cannot be compounded by RBI but only by Directorate of Enforcement.

25. CHARTERED ACCOUNTANTS Shah & Modi 25 3(b)-no person shall- Make any payment to, or for the credit of Any person resident outside India (NR) in any manner Intention is to prohibit direct and indirect payment to NR However, a resident individual may make a gift or grant loan to an NRI who is a close relative, in rupees by way of crossed cheque/electronic transfer to NRO A/c vide Notification No. 237 dated 25.09.2012 w.r.e.f. 16.09.2011 Close relative shall have the same meaning as that of ‘relative’ under the Companies Act, 1956 The amount so paid must be within the permissible limit specified under LRS A NALYSIS OF S EC 3 OF FEMA

26. CHARTERED ACCOUNTANTS Shah & Modi 26 3(c) Receive otherwise through an A.D. any payment by order or on behalf of any NR in any manner Expln to above- where a resident receives any payment without corresponding inward remittance than such payment would be regarded as having been received otherwise than through authorised person 3(d) enter into any financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire, any asset outside India by any person A NALYSIS OF S EC 3 OF FEMA

27. CHARTERED ACCOUNTANTS Shah & Modi Dealings with Nepal/Bhutan As per Notification No. 17 dated May 03, 2000 of FEMA, the clauses 3(b),(c) and (d) of section 3 shall not apply to any transaction entered into in Indian rupees by or with: 1.A person who is a citizen of India, Nepal or Bhutan resident in Nepal or Bhutan or 2.A branch situated in Nepal or Bhutan of any business carried on by a company or a corporation incorporated in any of the three nations or 3.A branch situated in Nepal or Bhutan of any business carried on as partnership or otherwise by a citizen of any of the three nations. 27

28. CHARTERED ACCOUNTANTS Shah & Modi 28 Current Account Transaction Current account transaction is a transaction other than a capital account transaction Current account transactions are governed by Foreign Exchange Management (Current Account Transaction) Rules, 2000 ("Current Account Transactions Rules"). Current account transactions are divided into 3 schedules in Current Account Transactions Rules:- Schedule I – Prohibited Transactions Schedule II – Transactions requiring prior approval of Government of India Schedule III – Transactions requiring prior approval of RBI

29. CHARTERED ACCOUNTANTS Shah & Modi 29 Current Account Transaction Illustrative transactions : Schedule I :  Remittance out of lottery winnings  Remittance of income from racing/riding etc., or any other hobby  Remittance for purchase of lottery tickets, banned/prescribed magazines, football pools, sweepstakes etc. Schedule II:  Cultural tours  Remittance of container detention charges exceeding the rate prescribed by Director General of Shipping

30. CHARTERED ACCOUNTANTS Shah & Modi 30 Current Account Transaction Schedule III:  Gift remittance exceeding US$ 5,000 per remitter/donor per annum  Donation exceeding US$ 10,000 per remitter/ donor per annum  Release of exchange for meeting expenses for medical treatment abroad exceeding the estimate from the doctor in India or hospital or hospital/doctor abroad. Note: Drawal of foreign exchange by resident individuals towards remittance of gift or donations as per this Schedule III shall be within the limit specified under the proviso of Reg. 4 (i.e. US$ 1,25,000)  Remittances exceeding five percent of the investment brought into India or US$ 1,00,000 whichever is higher, by an entity in India by way of reimbursement of pre-incorporation expenses.

31. CHARTERED ACCOUNTANTS Shah & Modi 31 Capital Account Convertibility There is no formal definition of Capital Account Convertibility but Tarapore committee (set up in 1997) defined it as freedom to convert local financial assets into foreign financial assets and vice versa at market determined rate of exchange Current Account Convertibility - it allows free inflow and outflow for all purposes other than capital purposes. It allows residents to pay and receive trade & service related payments. India has adopted Current Account Convertibility in terms of Article 8 of IMF Agreement in 1994.

32. CHARTERED ACCOUNTANTS Shah & Modi 32 A.P. (Dir Series) Circulars and Master Circulars Directions issued by RBI u/s. 10(4) and 11(1) of FEMA to Authorized Persons (AP) These directions are called – A.P. (Dir Series) Circulars APs are Authorized Dealers, Money Changers and banks who are authorized to deal in Foreign Exchange These Circulars are operational instructions to AP by RBI Legal validity of these Circulars have been upheld in the case of Prof. Krishnaraj Goswami v. RBI, [2007 (6) Bom. CR 565] Court upheld the power of RBI to issue such Circulars based on powers conferred to RBI u/s. 10(4) & 11(1) & negated the contention that RBI has no jurisdiction to issue such Circulars Master Circulars issued by RBI every year on 1 st July to subsumes the position as on date and consolidates all the existing circulars (subject wise).

33. CHARTERED ACCOUNTANTS Shah & Modi 33 Residential Status under FEMA Under FEMA residential status is of two types:  Person resident in India  Person resident outside India Under FERA, citizenship was considered as deciding factor FEMA lays emphasis on 'residing' which denotes permanency

34. CHARTERED ACCOUNTANTS Shah & Modi PERSON RESIDENT IN INDIA [Sec. 2(v)(i) of FEMA]: Residing in India for > 182 days during the course of preceding F.Y. but doesn’t include  going out of India or staying outside India for taking up employment for carrying business or vocation for any other purpose in such circumstances as would indicate his intention to stay outside India for uncertain period  coming to India or staying outside India otherwise than for taking up employment for carrying business or vocation for any other purpose in such circumstances as would indicate his intention to stay in India for uncertain period PERSON RESIDENT OUTSIDE INDIA[Sec. 2(w) of FEMA]: a person who is not resident in India. 34 Residential Status under FEMA

35. CHARTERED ACCOUNTANTS Shah & Modi Person to be resident in India, has to reside in India for more than 182 days during the previous financial year Exclusion to this is - if a person stays outside India for employment, for vocation or for any other purpose for uncertain period, then even if he has resided in India for more than 182 days he will become a ‘person resident outside India’ Moreover a person to be treated as person resident in India he has to satisfy not only the condition of period of stay (i.e. 182 days) but has to also comply with the conditions of the 'purpose' of stay i.e. for taking up employment, carrying on business or vocation in India or for any other purpose which would indicate his intention to stay in India for an uncertain period 35 Residential Status under FEMA

36. CHARTERED ACCOUNTANTS Shah & Modi 36 RBI may ignore the arithmetic condition (i.e. of 182 days) and treat the person who comes to or stays in India for any of the three purposes set out in section 2(v)(i)(B) as ‘person resident in India’ even though he may not have resided in India for a period of 182 days or more during the preceding financial year. However legal tenability of such a view cannot be said to be free from doubt. RBI has a very narrow approach towards non resident acquiring immovable property in India. It gives a weighted significance to the arithmetic condition of staying in India for more than 182 days during the preceding financial year. RBI does not determine the residential status. Under FEMA, residential status is determined by operation of law. The onus is on an individual to prove his / her residential status, if questioned by any authority. Residential Status under FEMA

37. CHARTERED ACCOUNTANTS Shah & Modi Residential Status under FEMA Further, Schedule III of current account transaction rules specifying transactions which require prior RBI approval includes remittance made for maintenance of close relatives abroad exceeding US$ 100000, per year per recipient, by a person who is a resident but not permanently resident in India For the purpose of this item, a person resident in India on account of his employment or deputation of a specified duration (irrespective of length thereof) or for a specific job or assignment, the duration of which does not exceed 3 years, is considered to be a person resident but not permanently resident in India. 37

38. Shah & Modi CHARTERED ACCOUNTANTS Liberalized Remittance Scheme (LRS)

39. CHARTERED ACCOUNTANTS Shah & Modi LRS for Resident Individuals A resident individual (including minors) is allowed to remit up to USD 1,25,000 (w.e.f June 3, 2014) per financial year (April- March) for any permitted current or capital account transactions or a combination of both. With effect from July 7, 2013, the scheme is available for remittances for acquisition of immovable property directly or indirectly outside India The permissible transactions under this scheme include acquisition of shares- both listed and unlisted of an overseas company/ debt instrument/ mutual funds/ any other asset outside India, etc. For undertaking transactions under this Scheme, resident individuals may use the prescribed application-cum-declaration form. PAN number is mandatory to make remittances under the Scheme. 39

40. CHARTERED ACCOUNTANTS Shah & Modi The limit of USD 1,25,000 under the Scheme also includes remittances towards gift and donation by a resident individual. A resident individual is permitted to gift in rupee to his NRI/PIO close relative under the LRS and credit the same to his NRO A/c. [A.P.(DIR Series) Circular No.17 dated September 16, 2011] A.P. (DIR Series) Circular No. 90 dated March 06, 2012:  Remittances under the facility can be consolidated in respect of family members subject to individual family members complying with the terms and conditions of the scheme;  Remittances under the scheme can be used for purchasing objects of art subject to the provisions of other applicable laws such as the extant Foreign Trade Policy of the Government of India. 40 LRS for Resident Individuals

41. Shah & Modi CHARTERED ACCOUNTANTS Inbound Investments

42. CHARTERED ACCOUNTANTS Shah & Modi Foreign Direct Investment Policy FDI framework is governed by FEMA as well as Consolidated FDI policy- CFDIP CFDIP is issued by Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce CFDIP lays down the sectors in which FDI is allowed under Automatic Route or Approval Route and the Sectors which are prohibited for FDI FDI under Approval Route is governed by FIPB which is a part of Department of Economic Affairs, Ministry of Finance FIPB consists of Secretaries from various Ministries, such as Finance, DIPP, External Affairs, Depart of Commerce etc. In case of conflict with FDI Policy vis-à-vis FEMA, the FEMA notifications will prevail 42

43. CHARTERED ACCOUNTANTS Shah & Modi Foreign Direct Investment Policy At times there could be delay on the part of RBI in amending Notification dealing with FDI while there are changes in FDI policy as pronounced by DIPP However validity of CFDIP has been upheld by SC in a PIL- M.L. Sharma V UOI, writ petition (Civil) 417 of 2012, order dated 15th Oct, 2012. In above petition, SC upheld the amendments to the FDI policy on Retail Trading but asked Govt to bring the FEMA Notifications up to date with FDI policy, though AP (Dir Series) Circulars were issued by RBI with regard to opening up of Retail Trading 43

44. CHARTERED ACCOUNTANTS Shah & Modi 44 Inbound Investments - Process * A citizen or entities of Bangladesh can invest with approval of FIPB. Further, a citizen or entities of Pakistan can invest, subject to approval of FIPB, in sectors/activities other than defence, space and atomic energy and sectors/ activities prohibited for foreign investment

45. CHARTERED ACCOUNTANTS Shah & Modi 45 Schemes for inbound investment Schedule 1 Foreign Direct Investment (FDI) Scheme Schedule 2 Purchase/Sale of Shares and/or Convertible Debentures of an Indian Company by a registered Foreign Institutional Investor under Portfolio Investment Scheme Schedule 3 Purchase/Sale of Shares and/or Convertible Debentures by a NRI on a Stock Exchange in India on repatriation and/or non-repatriation basis under Portfolio Investment Scheme Schedule 4 Purchase and Sale of Shares/Convertible Debentures by NRI, on Non- Repatriation basis Schedule 5 Purchase and Sale of Securities other than Shares or Convertible Debentures of an Indian Company by a Person Resident Outside India Schedule 6 Investment in an Indian Venture Capital Undertaking by a Registered Foreign Venture Capital Investor Schedule 7 Indian Depository Receipts by eligible companies resident outside India Schedule 8 Scheme for investment by Qualified Foreign Investors in Equity Shares Schedule 9 Scheme for Acquisition/Transfer by a person resident outside India of Capital Contribution or Profit Share of Limited Liability Partnerships (LLP)

46. CHARTERED ACCOUNTANTS Shah & Modi 46 Types of Instruments Types of instruments permitted:  Equity shares  Fully, compulsorily and mandatorily convertible debentures  Fully, compulsorily and mandatorily convertible preference shares  Partly paid up equity shares and warrants [A.P. (DIR Series) Circular No. 3 dated July 14, 2014] Remittance received by an Indian company via issuance of Depository Receipts (DRs) and Foreign Currency Convertible Bonds (FCCBs) are treated as FDI and counted towards FDI. On and from December 2013 onwards, optionality clauses are allowed in equity shares and compulsory and mandatorily convertible preference shares/debentures to be issued to a person resident outside India under FDI scheme.

47. CHARTERED ACCOUNTANTS Shah & Modi 47 Pricing Guidelines FOR ISSUE OF SHARES – The issue price shall not be less than  In case of listed Company- price as per SEBI guidelines  In case of unlisted Company – fair value determined as per any internationally accepted pricing methodology on arm’s length basis. However, investment in an Indian Company, by way of a subscription to MOA can be made at face value, without resorting to any valuation. The price/conversion formula of convertible capital instruments should be determined upfront at the time of issue of such instruments Extension of date /period for conversion of CCDs into equity shares requires prior approval. FOR RIGHT ISSUE OF SHARES -  In case of listed companies, at a price as determined by the company  In case of unlisted companies, at a price which is not less than the price at which the offer on right basis is made to resident shareholders

48. CHARTERED ACCOUNTANTS Shah & Modi FOR TRANSFER OF SHARES (under a private arrangement) - From R to NR – the price shall not be less than  In case of listed companies, the price at which the preferential allotment of shares can be made under the SEBI guidelines, as applicable, provided the same is determined for such duration as specified therein, preceding the relevant date, which shall be the date of purchase or sale of shares  In case of unlisted Company – price not less than the fair value worked out as per any internationally accepted pricing methodology for valuation of shares on arm’s length. From NR to R – the price of shall not be more than the minimum price at which the transfer of shares can be made from R to NR as given above 48 Pricing Guidelines..contd

49. CHARTERED ACCOUNTANTS Shah & Modi Inward remittance through banking channels Debit to NRE/FCNR (B) Account Capitalization of lumpsum fee, royalty and ECBs (other than import dues deemed as ECB or Trade Credit) Capitalization of import of capital goods/ machinery/ equipment (excluding second-hand machinery) and pre- operative/ pre-incorporation expenses (including payments of rent etc.) - This requires Government Approval Capitalization of any other funds payable by the investee company, remittance of which does not require prior permission of government [A.P. (DIR Series) circular No. 31 dated September 17, 2014]. 49 Mode of Payment

50. CHARTERED ACCOUNTANTS Shah & Modi A Registered Foreign Portfolio Investors (RFPI) may purchase on repatriation basis, following securities either directly from registered stock broker or recognised stock exchange:  Dated government securities/treasury bills.  Listed non convertible debentures/bonds issued by Indian Company.  Commercial papers issued by Indian Company.  Units of domestic mutual funds.  Securities receipts issued by Asset Restructuring Companies.  Listed and unlisted non convertible debentures/bonds issued by an Indian company in the infrastructure sector (as defined in ECB).  Non convertible debentures/bonds issued by an Non Banking Financial Companies categorised as Infrastructure Finance companies. 50 Schedule 5 - Purchase and Sale of Securities other than shares or convertible debentures.

51. CHARTERED ACCOUNTANTS Shah & Modi In case of merger or amalgamation of two or more Indian companies or reconstruction by way of demerger, transferee company will issue shares to transferor company resident outside India subject to following:  Percentage shareholding of person resident outside India shall not exceed the percentage specified in approval granted by Central government or Reserve Bank  Transferor company or transferee or new company shall not engage in agriculture, plantation or real estate business or trading in TDRs  Transferee or new company to file a report with RBI within 30 days. Full details of shares held by persons resident outside India in transferor and transferee or new company before and after merger/amalgamation/demerger. 51 Regulation 7 – Issue and acquisition of shares after Merger / Demerger / Amalgamation

52. CHARTERED ACCOUNTANTS Shah & Modi 52 FDI in Partnership Firm / Proprietary Concern Permitted to NRIs/PIOs PIOs who are not citizen of Bangladesh, Pakistan or Sri Lanka Firm should not undertake - Print Media, Agricultural/ Plantation & real estate business Capital invested cannot be repatriated Income can however be repatriated

53. CHARTERED ACCOUNTANTS Shah & Modi 53 FDI : E - Commerce Activity Discussion paper on E-commerce by Department of Industrial Promotion and Policy (DIPP) dated 7 th January 2014 defines E-commerce as – “ Sale or purchase of goods and services conducted over network of computers or TV channels by methods specifically designed for the purpose” Types of E-commerce activities: Business 2 Business (B2B) and Business 2 Consumer (B2C)

54. CHARTERED ACCOUNTANTS Shah & Modi 54 FDI : E - Commerce Activity (Contd…) FDI Policy guidelines for E-commerce activity:  covered under Automatic route with 100% equity cap.  E-commerce activities refer to the activity of buying and selling by a company through e-commerce platform.  Only B2B activity is allowed.  Retail Trading or B2C activity is prohibited.

55. CHARTERED ACCOUNTANTS Shah & Modi 55 FDI : E - Commerce Activity (Contd…) Types of Business models: E-commerce business has evolved to give way to two types of business models viz. Market Place Model and Inventory Based Model.  Market Place Model: It provides platform for business transactions between buyers and sellers. It works as “facilitator” of e-commerce.  Inventory Based Model: In this model ownership of goods and services and market place vests with the e-commerce site.

56. Shah & Modi CHARTERED ACCOUNTANTS Establishment of Liaison / Branch Offices in India

57. CHARTERED ACCOUNTANTS Shah & Modi Regulated by Notification No. FEMA 22/ 2000-RB dated 3rd May 2000. Available Routes:  Reserve Bank Route —Principal business of the foreign entity falls under sectors where FDI is permissible under 100% automatic route.  Government Route — Business other than above. Applications from entities falling under this category and those from NGOs/ NPOs/ Government Bodies/ Departments are considered by RBI in consultation with the Ministry of Finance, Government of India. 57 Background

58. CHARTERED ACCOUNTANTS Shah & Modi RBI has freely permitted establishment of a branch/unit in SEZs to undertake manufacturing and service activities and banking company, subject to certain conditions. No person, being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China, without prior permission of RBI, shall establish in India, a branch or a liaison office or a project office or any other place of business by whatever name called. Applications from entities registered in / resident of Hong Kong and Macau, for establishment of Liaison/ Branch/ Project Offices or any other place of business by whatever name called shall also require prior approval from Reserve Bank of India. [A.P.(DIR Series) Circular No.93 dated 15 th January,2014] Application shall be made in Form FNC. Branch offices (BO) / Liaison offices (LO) established with the RBI's approval will be allotted a Unique Identification Number (UIN). The BOs / LOs shall obtain PAN in India. 58 Background

59. CHARTERED ACCOUNTANTS Shah & Modi Additional criteria: 59 For BO => a profit making track record during the immediately preceding 5 F.Y.s in the home country. For LO => a profit making track record during the immediately preceding 3 F.Y.s in the home country. Track Record For BO => > USD 100,000 or its equivalent. For LO => USD 50,000 or its equivalent. Net Worth * *Net Worth = Total of paid-up capital + free reserves - less intangible assets, as per the latest Audited Balance Sheet or Account Statement certified by CPA or any Registered Accounts Practitioner by whatever name Conditions

60. CHARTERED ACCOUNTANTS Shah & Modi Permissible Activities for LOs LOs can undertake the following activities in India: Representing in India the parent company / group companies. Promoting export / import from / to India. Promoting technical/financial collaborations between parent/group companies and companies in India. Acting as a communication channel between the parent company and Indian companies. 60

61. CHARTERED ACCOUNTANTS Shah & Modi Companies incorporated outside India and engaged in manufacturing or trading activities are allowed to set up BOs in India with specific approval of RBI. Such BOs are permitted to represent the parent/ group companies and undertake the following activities in India: i.Export / Import of goods. ii.Rendering professional or consultancy services. iii.Carrying out research work, in areas in which the parent company is engaged. iv.Promoting technical or financial collaborations between Indian companies and parent or overseas group company. v.Representing the parent company in India and acting as buying / selling agent in India. 61 Permissible Activities for BOs

62. CHARTERED ACCOUNTANTS Shah & Modi vi. Rendering services in information technology and development of software in India. vii. Rendering technical support to the products supplied by parent/group companies. viii. Foreign airline / shipping company. Normally, the BO should be engaged in the activity in which the parent company is engaged. Prohibited Activities for BOs:  Retail trading activities of any nature.  Manufacturing or processing activities in India, directly or indirectly. Profits earned by the BOs are freely remittable from India, subject to payment of applicable taxes. 62 Permissible Activities for BOs – contd…

63. CHARTERED ACCOUNTANTS Shah & Modi Setting up of overseas branch by Person Resident in India It is considered as a Current Account transaction. Regulated by Notification No. 10 dealing with Foreign Currency Accounts by person resident in India. An Indian Entity may open, hold and maintain a Foreign Currency Account in the bank outside India in the name of its office or branch set up outside India. 63

64. CHARTERED ACCOUNTANTS Shah & Modi Setting up of overseas branch by Person Resident in India This is subject to the following conditions: 1. Total remittance made within a year shall not exceed- a. 15% of the average annual turnover of the Indian Entity during the last two financial years or 25% of the net worth whichever is higher to meet initial expenses for set up and b. 10% of the average turnover during the last financial years to meet recurring expenses 2. The branch is set up for conducting normal business of the Indian Entity. 64

65. Shah & Modi CHARTERED ACCOUNTANTS Overseas Direct Investments (ODI)

66. CHARTERED ACCOUNTANTS Shah & Modi Significance of ODI Promoting global business by Indian entrepreneurs. Promote economic and business co-operation between India and other countries. Transfer of technology and skill, share R & D. Access to global market and promote brand image. Increase in exports of Plant & Machinery and goods and services Source of Foreign Exchange Earnings – dividend, royalty, technical know-how and other entitlements. 3

67. CHARTERED ACCOUNTANTS Shah & Modi ODI Statistics 67 Source: www.rbi.org.in

68. CHARTERED ACCOUNTANTS Shah & Modi Statutory Basis Section 6(3)(a) of FEMA, 1999 read with FEM (Permissible Capital Account Transactions), Regulations, 2000. FEMA 120 Master Circular AP (DIR Series) Circulars issued by RBI from time to time FAQs on ODI released by RBI (as updated from time to time) FAQs on Liberalised Remittance Scheme – applicable for resident individuals. 68

69. CHARTERED ACCOUNTANTS Shah & Modi Meaning of ODI Investment by an Indian party, either under Automatic or Approval route, by way of contribution to capital or subscription to the MOA of foreign entity or by way of purchase of existing shares of foreign entity either by  Investment through stock exchange; or  Private placement; or  Market purchase; or  Investment in a Joint Venture or Wholly Owned Subsidiary abroad. But does not include Portfolio Investment. 69

70. CHARTERED ACCOUNTANTS Shah & Modi Eligible Investor An Indian Party who is  A company incorporated in India; or  A body created under act of Parliament: or  A partnership firm registered under the Indian Partnership Act, 1932  Limited Liability Partnership incorporated under LLP Act, 2008 (permitted vide Circular No. 131 dated 19.05.2014/FEMA 299 dated 24.03.2014) 70

71. CHARTERED ACCOUNTANTS Shah & Modi Eligible Investor (Contd…) Special Cases (primarily under approval route)  Proprietary Firm  Trust / Society  Un-incorporated Entities Issue: Resident Individual is also permitted to invest in companies abroad under ODI scheme. But the definition above does not include resident individual as Indian Party. 71

72. CHARTERED ACCOUNTANTS Shah & Modi Financial Commitment Financial Commitment means the amount of direct investments outside India by an Indian party -  By way of contribution to equity shares or CCPS of the JV/WOS abroad  Contribution to the JV/WOS as preference shares (for reporting to be treated as loan)  As loan to its JV/WOS abroad  100% of the amount of corporate guarantee issued on behalf of its overseas JV/WOS and  50% of the amount of performance guarantee issued on behalf of its overseas JV/WOS 72

73. CHARTERED ACCOUNTANTS Shah & Modi Financial Commitment (Contd…)  Bank guarantee/standby letter of credit issued by a resident bank on behalf of an overseas JV/WOS of the Indian party, which is backed by counter guarantee / collateral by the Indian party  Creation of charge (pledge/mortgage/hypothecation) on the movable / immovable property or other financial assets Indian party / its group concern (Note: the amount and period of guarantee should be specified upfront). 73

74. CHARTERED ACCOUNTANTS Shah & Modi Routes Automatic RouteApproval Route 74

75. CHARTERED ACCOUNTANTS Shah & Modi Automatic Route No prior RBI approval required for making direct investment in JV/WOS abroad. Overseas JV/WOS to be engaged in bonafide business. Investment in Financial sector should comply additional conditions Indian party not on RBIs Exporters Caution list/list of defaulters/under investigation by an Authority such as ED, SEBI etc. Submission of Form Annual Performance Report in respect of all overseas investments. 75

76. CHARTERED ACCOUNTANTS Shah & Modi Automatic Route (contd…) 3 June ’14 onwards(Circular No. 138 of 2013)  LRS limit enhanced to USD 1,25,000. 3 July ‘14 onwards (Circular No. 1 of 2014)  Financial Commitment limit restored to 400% Net Worth of Indian Party – subject to USD 1 billion per FY. 76

77. CHARTERED ACCOUNTANTS Shah & Modi Approval Route Cases Not covered under Automatic route. Specific application to RBI with necessary documents in Form ODI through AD Bank. RBI would consider following factors:  Prima facie viability of JV/WOS outside India  Contribution to external trade and other benefits which will accrue through such investment. 77

78. CHARTERED ACCOUNTANTS Shah & Modi Approval Route (contd…)  Financial position and business track record of Indian Party and foreign Entity, and  Expertise and experience of the Indian party in the same and related line of activity of the JV/WOS outside India. 78

79. CHARTERED ACCOUNTANTS Shah & Modi Overseas Investment – Resident Individuals ODI route introduced by FEMA 263 dated 05.08.2013 for resident individuals  JV/WOS to be engaged in bonafide business activities except real estate / banking / financial services  ODI in “non-co-operative countries and territories” as per FATF not permitted.  Resident individual not to be on RBI cautions list/defaulters list 79

80. CHARTERED ACCOUNTANTS Shah & Modi Overseas Investment – Resident Individuals (Contd…)  Limit of investment in JV/WOS as per LRS limit (currently USD 1,25,000 per annum).  Investment made by EEFC/RFC account also included in prescribed LRS limit  JV/WOS to be operating company – No step down subsidiary to be acquired or set up by JV/WOS  Valuation as applicable to ODI by companies. 80

81. CHARTERED ACCOUNTANTS Shah & Modi Overseas Investment – Resident Individuals (Contd…)  Reporting and Post investment conditions – write off not permitted in cases of disinvestments. Issue – When ODI? When LRS?  LRS for portfolio investments – listed as well as unlisted shares /Cir No. 32 dated 04.09.2013 81

82. CHARTERED ACCOUNTANTS Shah & Modi Overseas Investment by LLPs Select Issues  Net Worth Whether both current and capital account of partners to be considered for calculating Net Worth? How to apply concept of Free Reserves? Whether benefit of Net Worth a holding/subsidiary company available?  RBI FAQ Qn. No. 27 – this benefit not available to partnership firms 82

83. CHARTERED ACCOUNTANTS Shah & Modi Overseas Investment by LLPs (Contd…)  Reasons for this exclusion? Whether also for LLP?  Indian party definition includes partnership firm / LLP  Conversion of Indian investing Company into LLP Implications of conversion after 7 May 2014 – ODI compliant with regulations Implications on conversion before 7 May 2014 – ODI non compliant regulations? 83

84. CHARTERED ACCOUNTANTS Shah & Modi ODI in Financial Services Sector Indian company in Financial Service Sectors can make investment in JV/WOS abroad in the financial services sector only if:  It has earned net profit during three preceding financial years from financial services sector  It is registered with appropriate regulatory authority in India  It has obtained approval for undertaking such activities  Has fulfilled the prudential norms relating to capital adequacy 84

85. CHARTERED ACCOUNTANTS Shah & Modi ODI - Core Investment Companies RBI DNBS Notification No. DNBS (PD) CC. No. 311/03.10.001/2012-13 dated 6 th December 2012 CICs desirous of making investment in Financial Service Sector (FS) are required to obtain and hold Certificate of Registration and comply with CIC framework for prior RBI approval (applies even to exempted CICs) Exempted CICs making overseas investment in non FS sector do not require registration or prior DNBS approval. Only reporting within 30 days to be done. Whether exempted CICs are regulated FS sector or Unregulated FS sector especially when they are investing in non FS sector – whether RBI DNBS approval required or RBI ODI approval required? 85

86. CHARTERED ACCOUNTANTS Shah & Modi Modes of Funding - ODI Funding Modes Drawal of foreign exchange from AD bank Swap of shares Capitalizati on of export dues Proceeds of ECB/FCCB In exchange of ADR / GDR Balance in EEFC account Proceeds raised through ADR/GDR 86

87. CHARTERED ACCOUNTANTS Shah & Modi Compliances 87 Board Resolution for Investment in overseas entity Step 1 Valuation of shares only if it is acquisition of existing company Step 2 Reporting in Form ODI within 30 days from the remittance Step 3 RBI will allot UIN for investment in entity. Second remittance to the JV/WOS cannot be made unless UIN for the first remittance is received. Step 4 Filing of share certificate with AD bank within 6 months Step 5 Post investment changes need to be reported within 30 days Step 6

88. CHARTERED ACCOUNTANTS Shah & Modi Transfer of shares of JV/WOS - No Write Off An Indian Party may transfer by way of sale to another Indian Party who complies with the provision of Regulation 6, or to a person resident outside India without prior RBI approval if: Sale does not result in write off of investment Sale is through stock exchange In case of non listed entity, transfer is not happening at price less than determined by CPA/CA No outstanding dues from overseas entity Overseas entity is in operation for a period of more than one year and has filed APR Indian party is not under investigation by CBI/ED/SEBI/ERDA or any other regulatory authority. 88

89. CHARTERED ACCOUNTANTS Shah & Modi Transfer of shares of JV/WOS - Write Off An Indian Party may transfer by way of sale to another Indian Party where disinvestment is less than the investment amount and: where the JV/WOS is listed overseas where Indian party is listed on stock exchange in India and has net worth less than INR 100 crore where Indian party is not listed and investment is less than USD 10 million where Indian party is listed with net worth less than INR 100 crore but investment does not exceed USD 10 million. 89

90. CHARTERED ACCOUNTANTS Shah & Modi Restructuring of Balance sheet of JV/WOS Write off of capital (equity/preference shares) and other receivables such as loans, royalty, technical fee etc. upto 25% of equity investment in JV/WOS is allowed under Automatic route provided:  Indian party is listed and has set up WOS or holds 51% shares in JV  Copy of Balance sheet showing loss in overseas JV/WOS and projections for next five years indicating benefits accruing to Indian party is submitted to AD. This needs to be reported within 30 days to RBI In case of unlisted Indian party holding more than 51% shares, write off to the extent of 25% of equity investment is allowed under Approval route. 90

91. CHARTERED ACCOUNTANTS Shah & Modi Case Study 91 Indian Company merges with another Indian company:  I Co 1. has existing investment in F Co.  I Co 1. got merged with other Indian company I Co. 2  Existing investment percentage of new net worth of merged I Co. is more than 100% I Co. 1 F Co. I Co. 2 Gets merged into Holds investment in

92. CHARTERED ACCOUNTANTS Shah & Modi Case Study (Contd…) 92 Issue: I Co. 1 has validly carried on ODI process and has been allotted UIN from the RBI. If I Co. 1 gets merged into another Indian company I Co. 2, do we just have to intimate RBI about the merger or a new UIN would be allotted in this case? Also, whether this intimation is to be routed through Authorized Dealer or we could directly submit it to the regional office?

93. CHARTERED ACCOUNTANTS Shah & Modi Case Study (Contd…) 93 Procedure: I Co. 1 has to report the disinvestment (from the WOS by way of merger) in Form ODI Part IV. I Co. 2 has to report the investment (in the WOS by way of merger) in Form ODI Part I & II. All the reporting to be done to RBI through the designated AD bank.

94. CHARTERED ACCOUNTANTS Shah & Modi Q &A… Q uestions … 94

95. CHARTERED ACCOUNTANTS Shah & Modi THANK YOU FIRST DESERVE AND THEN DESIRE!! 95