FEMA – Inbound and Outbound
CA. Ashesh Safi
Seminar on International Taxation
10 November 2012
Contents
• Inbound investment
‒ Inflows into India
‒ FDI statistics
‒ Overall framework
‒ Exchange Control Regulations
‒ Liaison office / Branch office
‒ Project office
‒ Subsidiary
‒ Comparative Analysis
• Outbound investment
‒ Exchange Control Regulations
‒ Definitions
‒ Overseas Direct Investment (ODI) Guidelines
‒ Transfer of shares
2
Inflows into India
•
India has been ranked at the 3rd place in global foreign direct investments in 2011
(Source: UNCTAD)
•
Inflows for the period April 2012 to August 2012 is US$ 8.17 billion which is 60% less than
the corresponding figures of the earlier year
•
Services, Telecom and Construction sectors continue to bag the inflows
3
FDI Inflows in India
123120
98642
97320
56390
12871
44580
24584
18654
Source: www.dipp.nic.in
Apr-Aug 12
2011-12
2010-11
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2002-03
2003-04
10064 14653
10733
Years
4
165146
142829
2001-02
180,000.00
170,000.00
160,000.00
150,000.00
140,000.00
130,000.00
120,000.00
110,000.00
100,000.00
90,000.00
80,000.00
70,000.00
60,000.00
50,000.00
40,000.00
30,000.00
20,000.00
10,000.00
2000-01
INR in crores
FDI Statistics
Inbound Investment :
Overall Framework
5
Inbound Investment – Overall Framework
Exchange Control
Regulations
Competition Law
Entry / Exit Regulations Reporting
Corporate
Law
Industrial and
Other Laws
Indirect Tax Laws
India Business
Regulatory
Compliances
Monitoring
SEBI
Direct Tax Laws
Employment Related
Laws
6
Exchange Control Regulations
7
Exchange Control Regulation
Investments into India
Inbound
investment
regulated by
Section 6(3)(b) of
FEMA
Section 6(6) of
FEMA
• RBI has the power to prohibit, restrict or regulate the transfer or issue of any
security by a person resident outside India
• RBI has the power to prohibit, restrict or regulate the establishment in India of a
branch, office or other place of business by a person resident outside India for
carrying out any activity relating to such branch, office or other place of business
Regulation
• RBI has issued FEM (Establishment in India of Branch or Office or Other Place
of Business) Regulation, 2000 and FEM (Transfer or issue of security by a
person resident outside India) Regulations, 2000
Master Circular
• RBI issues annual Master Circular on "Foreign Investments in India" that deals
with inbound investment in India – latest one is dated 2 July 2012
Consolidated FDI
Policy
8
• Reserve Bank of India (RBI)
• Department of Industrial Policy & Promotion (FC Section), Ministry of
Commerce, Government of India
• 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
Exchange Control Regulation
Forms of Business Entities in India
Foreign Investor
Incorporated
entities
Direct presence
Liaison
Office
Branch
Office
Project
Office
Foreign Exchange Management
(Establishment in India of Branch or Office or
Other Place of Business) Regulation, 2000
9
Subsidiary
Partnerships
Joint
Venture
LLP
Foreign Exchange Management (Transfer or
Issue of Security by a Person Resident Outside
India) Regulation, 2000 and FDI Policy
Liaison Office / Branch Office
10
Liaison Office / Branch Office
Exchange Control implications
• Overview
• Permissible Activities
• Approval Route
• Additional Criteria for RBI Sanction
• Setting up procedure and timeline
• Application for undertaking additional activities or additional liaison offices
• Compliance Procedures on a Regular Basis
• Repatriation of Funds, Closure of LO / BO and Transfer of assets
11
Liaison Office / Branch Office
Overview
Liaison Office
Branch Office
Liaison Office (LO) is in the nature of a
representative office to act as channel of
communication between head office abroad and
parties in India
Section 2(9) of Companies Act, 1956
Branch Office (BO) in relation to a company
means• any establishment described as a branch by
the company; or
• any establishment carrying on either the
same or substantially the same activity as
that carried on by the head office of the
company, or
• any establishment engaged in any
production, processing or manufacture
but does not include any establishment specified
in any order made by the Central Government
Regulated by the Foreign Exchange Management (Establishment in India of Branch or Office or
Other Place of Business) Regulations, 2000
Prior approval of RBI is required
12
Liaison Office / Branch Office
Permissible Activities
Liaison Office
Branch Office
•
•
•
•
•
•
•
13
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
Export / Import of goods
Rendering professional or consultancy services
Carrying out research work, in areas in which the
parent company is engaged
• Promoting technical or financial collaborations
between Indian companies and parent or
overseas group company.
• Representing the parent company in India and
acting as buying / selling agent in India
• Rendering services in information technology and
development of software in India.
• Rendering technical support to the products
supplied by parent/group companies
• Foreign airline / shipping company
Normally, the BO should be engaged in the activity in
which the parent company is engaged.
Liaison Office / Branch Office
Approval Route
The applications for establishing a LO / BO in India are considered by RBI under two routes:
Approval
Route
RBI Route
If principal business of the foreign entity falls under
sectors where 100 % FDI is permissible under the
automatic route
14
Government
Route
If principal business of the foreign entity falls
under sectors where 100% FDI is not
permissible or sectors where conditions are
stipulated
Liaison Office / Branch Office
Additional Criteria for RBI Sanction
Liaison Office
Branch Office
Track Record
• A profit making track record during the
immediately preceding 3 financial years in
the home country
Track Record
• A profit making track record during the
immediately preceding 5 financial years in the
home country
Net Worth
• Net Worth as per last Audited Balance Sheet
should not be less than USD 50,000 or its
equivalent
• Net Worth: Total of paid-up capital and free
reserves, less intangible assets as per the
latest Audited Balance Sheet or Account
Statement certified by a Certified Public
Accountant or any Registered Accounts
Practitioner by whatever name called
Net Worth
• Net Worth as per last Audited Balance Sheet
should not be less than USD 100,000 or its
equivalent
• Net Worth: Total of paid-up capital and free
reserves, less intangible assets as per the latest
Audited Balance Sheet or Account Statement
certified by a Certified Public Accountant or any
Registered Accounts Practitioner by whatever
name called
Applicant not satisfying the aforesaid eligibility criteria and are subsidiaries of other
companies can submit a Letter of Comfort from their parent company
15
Liaison Office / Branch Office
Setting up procedure and timeline
Liaison Office
Branch Office
Approval
• Approval initially granted for a period of 3
years and may be extended
•
Approval valid till revoked
Procedure on setting up
Application should be forwarded by the foreign entity through a designated Authorized Dealer (AD)
Category - I bank, in Form FNC to the Chief General Manager-in-Charge, along with the prescribed
documents including:
• English version of certificate of incorporation/registration and Memorandum and Articles of
Association attested by the Indian Embassy/Notary public in the country of registration
• Latest Audited balance sheet of the applicant entity
• Letter of Comfort, if applicable
•
16
LO / BO established with the RBI’s approval will be allotted a Unique Identification Number (UIN)
and also required to obtain Permanent Account Number (PAN)
Liaison Office / Branch Office
Application for undertaking additional activities or additional LO / BO
•
Request for establishing additional LO / BO may be submitted to RBI through the
designated AD Category -I bank by filing duly signed Form FNC
‒
•
•
17
No document to be submitted with Form FNC unless there is change
If the number of offices exceeds 4, applicant has to justify the need for additional office
Applicant to identify one of its offices in India as the Nodal office, which will coordinate the
activities of all offices in India
Liaison Office / Branch Office
Compliance Procedures on Regular Basis
Liaison Office
Branch Office
Annual Activity Certificate
• An Annual Activity Certificate (AAC) alongwith audited balance sheet as at 31 March is to be filed on or
before 30 September of every year to the following.
̶ Designated AD Category I bank; and
̶ Directorate General of Income Tax (International Tax), New Delhi
• In case the year end is different than 31 March, the AAC can be submitted within 6 months from the due
date of balance sheet
• Combined AAC can be filed in case of multiple LO / BO
• PAN is required to be quoted in AAC
Additional information to Director General of Police
• Additional information to be provided to Director General of Police (DGP) of state concerned in which
LO / BO has established its office in India within 5 working days of LO / BO being functional. Such
details mainly include;
̶ Details of head of office in India
̶ List of Personnel employed, including foreigners in Indian Office
̶ List and Details of foreigner other than employees who visited Indian office in connection with the
activities of the Company
̶ Details of contact with Government Departments/PSU/Civil Society bodies/Trusts/ NGO
• More than one LO / BO, reporting for all in each states is required
• To be also filed annually alongwith copy of AAC report
• To file the above details with AD Bank as well
18
Liaison Office / Branch Office
Repatriation of Funds, Closure of LO / BO and Transfer of assets
Liaison Office
Branch Office
Repatriation of funds
•
Not applicable, since no income generating
activity is carried out
•
Repatriation of the profits is permissible subject to
payment of income tax and production of audited
financial statement and Chartered Accountants
certificate
Closure of LO / BO
•
Request to be submitted to AD
•
Report from ROC to be furnished regarding compliance with provisions of Companies Act, 1956
Transfer of assets
•
19
Transfer of assets of LO / BO to subsidiaries or other LO / BO or any other entity is allowed with
specific approval from RBI
Liaison Office / Branch Office
Income tax implications
•
Tax implications
•
Income tax – Recent Developments for LO
•
Income tax – Recent Cases
20
Liaison Office / Branch Office
Tax implications
Particulars
Liaison Office
Branch Office
Taxability
•
•
•
•
LO is restricted from earning any
income in India
Generally, not liable to tax in India
•
•
Non-Resident under Act
Taxable on its income arising or deemed to
arise or income accruing or deemed to
accrue in India. Deduction allowed for head
office expenditure u/s 44C upto 5% of
adjusted GTI
Taxable @ 40% (plus applicable surcharge
and cess)
Qualify as a PE under the tax treaty
Tax audit
Not applicable
Yes
MAT provisions
Not applicable
Yes
Filing of tax return
Possible to take view that income tax return
is not required to be filed. However, may
consider to file a NIL return. Further, Form
49C is required to be filed electronically
within 60 days from the end of financial
year.
Yes
Transfer pricing
Not applicable
Yes
Requirement to
deduct tax
Yes
Yes
Dividend
Distribution Tax
Not applicable
Not applicable
Branch Profit Tax
Not applicable
No; however, may apply in DTC
Liaison Office
Income tax – Recent Cases
Metal One
Corporation - [2012]
22 taxmann.com 77
(Delhi - Trib.)
22
Liaison Office of foreign company in India is not a PE in India in view
of Article 5(6)(e) of Indo-Japan Tax Treaty since there was no
violation noticed by RBI and AO could not brought on record
information that the activity was beyond limits prescribed by RBI.
Rolls Royce Plc – 339
ITR 147 (Del HC)
The appellant was marketing and selling goods in India through Rolls
Royce India Limited`s (UK company) offices in India. The High Court
concurred with the ruling of the Tribunal in holding that the offices of
RRIL, a liaison office, in India constituted a PE of the appellant and
hence, a percentage of the profits for the marketing activities were
attributable to such PE in India
Columbia Sportswear
Company – 337 ITR
407 (AAR)
Liaison Office of a non-resident taxpayer would qualify as its business
connection and PE in India if the activities of the Liaison Office are not
confined to the purchase of goods in India for the purpose of export
Project Office
23
Project Office (1)
•
General permission is granted to a foreign company to establish a Project Office (PO) in
India to execute an awarded project.
•
A foreign company may open a PO in India provided it has secured a contract from an
Indian company to execute a project in India and
‒ the project is funded directly by inward remittance from abroad; or
‒ the project is funded by a bilateral or multilateral International Financing Agency; or
‒ the project has been cleared by an appropriate authority; or
‒ a company or entity in India awarding the contract has been granted Term Loan by a
Public Financial Institution or a bank in India for the project.
•
Further, the foreign company is required to report to the concerned Regional Office of RBI
under whose jurisdiction the project office is set up, giving the following details
‒ Name and address of the Foreign Company
‒ Reference Number and date of letter awarding the contract referred to in clause (ii) of
Regulation 5
‒ Total amount of contract
‒ Address and tenure of PO
‒ Nature of Project undertaken
24
Project Office (2)
•
PO shall not undertake or carry on any other activity other than the activity relating and
incidental to execution of the project.
•
Repatriation of the surplus is permissible subject to payment of income tax and production
of the following documents
‒ Certified copy of the final audited project accounts.
‒ CA certificate showing the manner of arriving at the remittable surplus
‒ Income-tax assessment order or either documentary evidence showing payment of
income-tax and other applicable taxes, or a CA certificate stating that sufficient funds
have been set aside for meeting all Indian tax liabilities; and
‒ Auditor`s certificate stating that no statutory liabilities in respect of the Project are
outstanding.
•
PO except in certain instances is normally considered as a permanent establishment of
the parent company in India and the income attributable to the activities carried out by PO
in India may be subject to tax in India.
•
Taxable at the rate of foreign company and MAT provisions are applicable
•
Furthermore, the transactions between the PO and its parent/associate companies would
have to be in accordance with the prevalent transfer pricing guidelines in India.
25
Subsidiary
26
Subsidiary
Diagrammatic presentation
Foreign Investments
FDI
Automatic
route
PROI
Portfolio
Investments
Venture Capital
Investments
Govt
Route
FII
Other
investments(G
-sec, NCDs,
etc.)
FIIs
NRI, PIO,
QFI
SEBI regd.
FVCIs
VCF, IVCUs
27
Investment on non
repartriable basis
NRI, PIO,
QFI
NRI, PIO
Subsidiary
Entry Route
Investing in India
Automatic route
• Inform RBI within 30 days of
remittance / Issue of shares.
28
Approval route
• FIPB prior approval
• Application for approval with
FIPB.
• Inform RBI within 30 days
Subsidiary
Sectoral view
Sectors – Automatic Route
(Illustrative)
• Agriculture & Animal
•
•
•
•
•
husbandry
NBFC (subject to minimum
capitalization norms)
Sectors – Prior Approval
(Illustrative)
•
•
Insurance – 26%
Special Economic Zones
Alcohol Distillation
• Mining
• Petroleum & Natural Gas
• Cash & Carry wholesale
Existing Airports beyond
•
Atomic energy
74%
•
Lottery, betting and
Asset Reconstruction
Companies - 49%
•
Broadcasting
•
Telecom Service beyond
Private Sector Banking up to
49%
Sectors – Negative List
(Illustrative)
49% - 74%
•
Print Media
•
Tea Sector
•
Defence - 26%
gambling
•
Business of chit fund
•
Nidhi company
•
Trading in Transferable
Development Rights
•
and cigarettes
trading
•
29
Cigars, cheroots, cigarillos
Real estate business
Subsidiary
Types of Instruments
•
Indian Companies can issue subject to pricing guidelines / valuation norms and reporting
requirements
Equity Shares
•
Fully and mandatorily
convertible preference
shares
Fully and mandatorily
convertible debentures within
a specified time
Issue other types of preference shares such as non-convertible, optionally convertible or
partially convertible, which have to be in accordance with the External Commercial
Borrowings (ECB) guidelines
Price/Conversion formula of convertible capital instruments to be determined upfront at the
time of issue of the instruments
30
Subsidiary
FDI in Multi Brand Retail Trading (1)
•
FDI upto 51% is permitted under Government route vide Press Notes no. 4 & 5 dated
September 20, 2012 subject to compliance with the following conditions
•
Certain salient features of the policy
‒ Minimum investment – USD 100 million
‒ Backend Infrastructure
• At least 50% of total FDI brought shall be invested in 'backend infrastructure' within 3 years of the
1st tranche of FDI.
• ‘Back-End Infrastructure’ will include capital expenditure on all activities, excluding that on front-end
units. For instance, back-end infrastructure will include investment made towards processing,
manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, warehouse, agriculture market produce infrastructure etc.
• Expenditure on land cost and rentals, if any, will not be counted for purposes of ‘backend
infrastructure’.
31
Subsidiary
FDI in Multi Brand Retail Trading (2)
•
Location for retail sales
‒ in cities with a population of more than 1 million as per 2011 Census and also covers an area of 10
kms around the municipal or urban agglomeration limits of such cities.
‒ In the 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 are restricted to conforming areas as per the Master / Zonal Plans of the concerned
cities and provision is made for requisite facilities such as transport connectivity and parking.
‒ For the rest of India, current FDI policy regime for Trading will continue i.e. 100% FDI is allowed in
wholesale cash and carry trading.
•
•
Compliance with applicable state / UT laws / regulations is required
At least 30% of the procurement of manufactured / processed products should be sourced
from Indian ‘small industries’ having investment in plant & machinery upto USD 1 million
‒ This valuation of USD 1 million refers to the value at the time of installation without providing for
depreciation.
‒ If at any point in time, the valuation is exceeded, the industry shall not qualify as a 'small industry' for
this purpose.
32
Subsidiary
FDI in Multi Brand Retail Trading (3)
•
5 year period is given for meeting the requirement of sourcing of 30%.
‒
•
Retail sales outlets may be set up only in those States / Union Territories which have
agreed or agree in future to allow FDI in MBRT under the FDI policy. Subject to FDI policy
and location requirements, the respective State government to decide where a multi-brand
retailer, with FDI, is permitted to establish its sales outlets within the State.
Following states have given their concurrence to allow FDI in MBRT:
•
‒
‒
‒
‒
33
Accordingly, the 1st compliance will be based on an average of 5 years total value of the
manufactured / processed products purchased beginning 1st April of the year during which the 1st
tranche of FDI is received. Thereafter, the mandatory procurement requirement has to be complied
on an annual basis.
Andhra Pradesh
Maharashtra
Assam
Manipur
Delhi
Rajasthan
Haryana
Uttarakhand
Jammu & Kashmir
Daman & Diu and Dadra & Nagar Haveli (Union Territories)
Agricultural products – first right with the Government
Foreign companies to self-certify and ensure compliance of the stipulated conditions which could be
cross checked as and when required.
Foreign Investors are required to maintain accounts, duly certified by statutory auditors
Retail trading, in any form, by means of e-commerce, is not permissible for companies with FDI,
engaged in the activity of MBRT.
Subsidiary
FDI in Multi Brand Retail Trading (4)
•
•
•
34
Agricultural products – first right with the Government
Foreign companies to self-certify and ensure compliance of the stipulated conditions which
could be cross checked as and when required.
Retail trading, in any form, by means of e-commerce, is not permissible for companies
with FDI, engaged in the activity of MBRT
Subsidiary
FDI in Civil Aviation Sector
•
Foreign airlines are allowed to invest, in the capital of Indian Companies (other than in Air
India Limited) operating scheduled and non-scheduled air transport services, upto 49% of
their paid up capital, subject to following conditions:
‒ It shall be made under Government approval route.
‒ 49% limit will subsume FDI and FII Investment.
‒ Investments shall be compliant of the relevant Securities laws such as SEBI (Issue of Capital and
Disclosure Requirements) Regulations, SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, as well as other applicable rules and regulations.
‒ A Scheduled Operator’s Permit can be granted only to a company:
• registered in India and has its principal place of business within India;
• whose Chairman and at least 2/3rd Directors are citizens of India; and
• whose substantial ownership and effective control is vested in Indian nationals.
‒ All foreign nationals likely to be associated with the Indian Scheduled and Non-Scheduled air
transport services, as a result of such investment, shall be cleared from security view point before
deployment.
‒ All technical equipment that might be imported into India shall require clearance from the relevant
authority in the Ministry of Civil Aviation, GOI.
35
Subsidiary
FDI in Power Exchanges
• FDI in Power Exchanges which are registered under the Central Electricity Regulatory
Commission (Power Market) Regulations, 2010 is permitted
• FDI upto 49% is permitted as under
‒ 26% - under FDI route with prior approval from Government; and
‒ 23% - for FII investments under automatic route
• FII purchases shall be restricted to secondary market only;
• The foreign investment to be in compliance with SEBI Regulations, other applicable laws
and other conditions
36
Subsidiary
FDI in Pharma sector
• Initially 100% FDI in Pharmaceutical sector was permitted under automatic route
• The Government of India vide press note No. 3 (2011 series) revised the investment limit as
follows:
‒ FDI in green field investment in the pharmaceuticals sector - up to 100 per cent, under the automatic
route
‒ FDI in brownfield investment (i.e. investments in existing companies), in the pharmaceutical sector up to 100 per cent under the Government approval route
‒ Recent report on recommendations of DEA constituted panel on FDI allowing for 49% investment
under the automatic route for brownfield investments. Proposal with PMO.
• Action proposed due to acquisition of various Indian pharmaceutical companies by multinational
foreign corporations
37
Subsidiary
Issuance of fresh shares
•
38
Indian company may issue fresh shares/ convertible debentures under the FDI Scheme to
a person resident outside India, who is eligible for investment in India, subject to
compliance with the extant FDI policy and the FEMA Regulation
Subsidiary
Acquisition by way of transfer of existing shares (1)
Transferor
Transferee
Mode of Transfer
Person resident outside India –
other than NRI & OCB
Person resident outside India
(including NRI but excluding
OCB)
Sale or gift; transfer by or to
erstwhile OCB require prior
approval of RBI
Non-resident Indian
Non-resident Indian
Sale or gift
Person resident outside India
Person resident in India
Gift or sale under private
arrangement subject to
conditions
Person resident outside India
Person resident in India
Sell on recognised stock
exchange
Person resident in India
Person resident outside India
Sell under private arrangement
subject to conditions
Prior approval required for transaction not covered above
39
Subsidiary
Acquisition by way of transfer of existing shares (2)
Government Approval required
• Transfer by resident to non residents by way of sale or otherwise requires government
approval if
‒
‒
Share of companies engaged in sector falls under the Government Route ; or
Transfer results in breaching of the applicable sectoral cap
RBI permission required
• Transfer by residents to non residents by way of sale where the NR acquirer proposes
deferment of payment of the consideration.
• Transfer by a person resident in India, who intends to transfer any security, by way of gift
to an NR
• Transfer from NRI to NR requires the prior approval of the RBI
40
Subsidiary
Issue of Rights/ Bonus Shares
•
An Indian company may issue Rights/Bonus shares to existing non-resident shareholders,
subject to adherence to sectoral cap, reporting requirements etc.
•
Such issue should be in compliance with other laws/ statues like the Companies Act,
1956, SEBI (Issue of Capital and Disclosure Requirements), Regulations 2009, etc.
•
Issue of right shares to OCBs
41
‒
Specific prior permission from RBI need to be taken for issuing rights shares to erstwhile OCBs
‒
However Bonus shares can be issued to erstwhile OCBs without approval from the RBI, provided
the OCB is not on the adverse list of the RBI
Subsidiary
Issue of Shares under Employee Stock Option Scheme
•
An Indian company can issue shares to its employees or employees of its joint venture or
wholly owned subsidiary abroad
•
Citizens of Bangladesh can invest with the prior approval of the FIPB
•
Shares can be issued directly or through a trust subject to the following conditions that
42
‒
the scheme has been drawn in terms of the relevant regulations issued by the SEBI
‒
the face value of shares to be allotted does not exceed 5% of the paid-up capital of the issuing
company
Subsidiary
Conversion of ECB/Lump sum Fee
•
General permission granted for conversion of ECB into shares / convertible debentures
provided:
‒
Activity is covered under the Automatic Route or Government approval has been obtained
‒
FDI is within sectoral caps
‒
Pricing guidelines are followed
‒
Compliance under any other statute and regulation in force
Conversion is available for ECBs due for payment or not, as well as secured / unsecured
loans availed from non-resident collaborators
•
43
General permission granted for issue of shares/ preference shares against lump sum
technical know-how fee, royalty, etc
‒
Pricing guidelines of RBI/SEBI should be followed
‒
Compliance with applicable tax laws
Subsidiary
Import of capital goods by SEZs into Equity/Import payables
•
Issue of equity shares by units of SEZs to non-residents against import of capital goods is
permitted subject to valuation by committee consisting of Development Commissioner and
the appropriate Customs officials
•
Issue of equity shares against import of capital goods/ machinery/ equipment allowed
under approval route
44
‒
Import be in accordance with the EXIM policy and the FEMA regulations
‒
Independent valuation, preferably by an independent valuer from the country of import
‒
Application to indicate beneficial ownership and identity of importer company as well as overseas
entity
‒
Applications be made within 180 days from the date of shipment of good
Subsidiary
Pre-incorporation/Share Swap
•
Issue of equity shares against pre-operative / pre-incorporation expenses (including
payment of rent etc.) allowed under approval route subject to following:
‒
‒
‒
‒
•
45
Submission of FIRC for remittance of funds by the overseas promoters for the expenditure incurred
Verification and certification of expenses done by statutory auditor
Payments being made directly by the foreign investor to the company
Applications for capitalisation be made within the period of 180 days from the date of incorporation
of the company
Issue of shares to a non-resident against shares swap can be done by obtaining the
approval of FIPB
Subsidiary
Pricing guidelines (1)
•
•
Fresh issue of shares, issue against payment of lumpsum technical know how fee/ royalty,
conversion of ECB into Equity, capitalization of pre-incorporation expenses/ import
payables (with prior approval of government)
‒
For listed company, price as per SEBI guidelines
‒
For unlisted company, price not less than FMV of shares determined by a SEBI registered
Merchant Banker or a CA as per the Discounted Cash Flow (DCF) Method
Preferential Allotment
‒
•
46
Issue price shall not be less than the price as applicable to the transfer of shares from resident to
non-resident
Right Shares
‒
If listed, price as determined by the company
‒
If unlisted, price not less than the price at which the offer on right basis is made to a resident
shareholder
Subsidiary
Pricing guidelines (2)
•
Acquisition / transfer of existing shares (private arrangement) i.e. from resident to a nonresident (i.e. incorporated non-resident entity other than erstwhile OCB, foreign national,
NRI, FII)
‒
‒
•
For listed companies, negotiated price which shall not be less than the price certified by SEBI
registered Merchant Banker or CA
For unlisted companies, negotiated price which shall not be less than the FMV to be determined by
the SEBI registered Merchant Banker or CA as per the DCF Method
Issue price of convertible capital instruments to be determined upfront
‒ the price at the time of conversion should not be lower than the fair value at the time of issuance of
such instruments
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Subsidiary
Reporting Requirements
Sr.
Particulars
Compliance requirement
1
Intimation with
• Details of inward remittance are
respect to inward
required to be reported to RBI
remittance
within 30 days from the date of
receipt of remittance in Advance
Reporting Form
2
Issue / Allotment
of shares
3
4
5
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Documents to be attached / required
• Advance Reporting Form
• Foreign Inward Remittance Certificate
(FIRC)
• Know Your Customer (KYC) report on
the non-resident investor from the
overseas bank remitting the amount
• Share Certificates
• Shares are required to be issued /
allotted within 180 days from the
date of receipt of remittance
Intimation with
• Post issue of shares, Part A of
• Part A of Form FC-GPR
respect to issue
Form FC-GPR is required to be
• Certificate from Company Secretary
of shares
filed with RBI within 30 days from • Valuation report from Statutory Auditor
the date of issue / allotment of
or Chartered Accountant determining the
shares
price of shares to be issued
• FIRC
Annual return of • Annual return on Foreign Liabilities • Annual Return on Foreign Liabilities and
Foreign Liabilities
and Assets is required to be filed
Assets
th
and Asset
in the specified format by 15
July of each year
Reporting of
• Post transfer of shares, reporting
• Form FC-TRS
transfer of shares
in Form FC-TRS to be submitted
to AD bank within 60 days from
the date of receipt of amount
Comparative Analysis
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Comparative Analysis(1)
Liaison Office
• Can only undertake liaising / representing / promoting / communicating activities
• Local expenses have to be met through inward remittances
Branch Office
• Can undertake activities – export / import of goods, professional / consultancy
services, research work, technical / financial collaborations, buying / selling agent,
IT services / development of software, technical support, foreign airline & shipping
company
• Cannot undertake retail trading activities, manufacturing / processing activities.
• Can acquire property but not for leasing / renting
Subsidiary/JV
• Can carry out any activity specified in the memorandum of articles (subject to
FDI guidelines)
• Funding may be through equity, other forms of permitted capital infusion or
internal accruals
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Comparative Analysis(2)
Particulars
Liaison Office
Branch Office
Subsidiary
Setting up
(FEMA
regulations)
RBI approval
required.
RBI approval
required.
Incorporation of company, subsequent
to obtaining requisite approval, if any
Activities
Only those activities
which have been
permitted by RBI
Only those activities
which have been
permitted by RBI
Can undertake any manufacturing,
processing or service activity (In case
of subsidiary of foreign company, only
those activities in which direct
investment is permitted as per the FDI
policy of Government of India).
Rate of tax on
income
Not Applicable
41.20%/42.024%
30.90%/32.445%
Repatriation of
profits
Not Applicable
Possible
(subject to payment
of tax)
Possible
(subject to Dividend Distribution Tax)
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Outbound Investment
52
Exchange Control Regulation
Investments outside India
Outbound
investment
regulated by
Section 6(3)(a) of
FEMA
53
• Reserve Bank of India
• Department of Industrial Policy & Promotion (FC Section), Ministry of
Commerce, Government of India
• RBI has the power to prohibit, restrict or regulate the transfer or issue of any
foreign security by a person resident in India
Regulation
• RBI has issued FEM (Transfer or issue of any foreign security) Regulation,
2004
Master Circular
• RBI issues annual Master Circular on “Direct Investments by Resident in
Joint Ventures (JV) / Wholly Owned Subsidiary (WOS) Abroad" that deals
with outbound investment outside India – latest one is dated 2 July 2012
Definition
•
Section 2(e) of the Regulation
‒
•
Section 2(f) of the Regulation
‒
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“Direct investment outside India” investment by way of contribution to the capital or subscription to
the Memorandum of Association of a foreign entity or by way of purchase of existing shares of a
foreign entity either by market purchase or private placement or through stock exchange, but does
not include portfolio investment.
"Financial commitment" means the amount of direct investment by way of contribution to equity
and loan and 100% of the amount of guarantees issued by an Indian party to or on behalf of its
overseas Joint Venture Company or Wholly Owned Subsidiary.
Overseas Direct Investment (ODI) Guidelines
•
No approval for investment by Indian companies in WOS/JV abroad provided:
‒
‒
•
Can invest up to 400% of net worth as per last audited balance sheet
‒
‒
‒
•
Net worth means paid-up capital and free reserves as on date of last audited balance sheet
Net worth of holding/ subsidiary can also be considered (if 51% shareholding);
No limit for investment out of EEFC / ADR / GDR proceeds
Limit of financial commitment of 400% covers:
‒
‒
‒
‒
55
Bona fide business activity; and
Investment not in real estate or banking business
100% of the capital of WOS/JV or loan granted to WOS/JV;
100% of guarantees issued to or on behalf of WOS/JV excluding performance guarantee
100% of bank guarantee issued by resident bank on behalf of WOS / JV provided bank guarantee
is backed by counter guarantee / collateral by Indian company
50% of performance guarantee issued by Indian company provided the invocation of performance
guarantee results in outflow, breaching limit of financial commitment
Overseas Direct Investment (ODI) Guidelines
•
Investment in overseas company through SPV is permitted under Automatic Route unless
the name of Indian party appears on RBI Exporters caution list / list of defaulters to the
banking system circulated by the RBI India or under investigation by any
investigation/enforcement agency or regulatory body
‒
•
Loan / guarantee can be given only if Indian company has some equity participation in
WOS/JV
‒
•
•
If no equity, RBI approval may be required
Specific approval of RBI is required for creating charge on immovable / movable property
and other financial assets in favour of non-resident entity
Other conditions to be satisfied
‒
‒
‒
‒
56
If name appears, prior approval of RBI is required
Indian party should not be on the RBI Exporters caution list / list of defaulters to the banking
system circulated by the RBI India or under investigation by any investigation/enforcement agency
or regulatory body.
All transactions relating to the investment should be routed through only one branch of an AD Bank
To report such acquisition in Form ODI to the AD bank for submission to RBI within 30 days from
the date of transactions
If investment is by firm, the partners of firm should hold shares if required by the host country
regulations
Overseas Direct Investment (ODI) Guidelines
•
Valuation of investment in shares of existing company
Particulars
Valuation by
If investment exceeds USD 5
mn
Valuation of shares by Category I Merchant Banker registered with
SEBI or an Investment banker / Merchant banker outside India
registered with appropriate authority in the host country
In all other cases
Valuation by a Chartered Accountant or Certified Public Accountant
•
Indian company is obliged to
‒
‒
‒
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Receive share certificates within 6 months of the date of remittance;
Repatriate all dues receivable (dividend etc) within 60 days of due date;
To submit Annual Performance Report within 3 months of finalization of accounts of WOS/ JV in the
prescribed format
Transfer of shares
•
Transfer by way of sale of shares in WOS/JV permitted under automatic route subject to
following conditions
‒
‒
‒
‒
‒
‒
•
Transfer by way of pledge of shares of WOS/JV as security for availing facilities from AD
bank or Indian financial institution permitted
‒
•
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Sale does not result in any write off of the investment made;
If the shares are listed, sale should be through stock exchange;
If the shares are unlisted, share price should not be less than the fair value certified by a CA / CPA,
based on the latest audited financial statements;
Indian party does not have any outstanding dues such as dividend, royalty, technical know-how
fees, etc;
Overseas SPV should have been in operation for at least one full year and Annual Performance
Report along with audited accounts for that year has been submitted to RBI;
Indian party is not under investigation by CBI / DoE / SEBI / IRDA or any other regulatory authority
in India
Pledge of shares with overseas lender permitted if lender is regulated and supervised as a bank
and ODI limit is adhered to
Transfer of shares should be reported to AD bank within 30 days from the date of
divestment
Glossary (1/2)
AAC
AD
ADR
BO
DCF
DBOD
DR
EOU
FCCB
FDI
FEMA
FMV
FIPB
INR
JV
LO
Annual Activity Certificates
Authorized Dealer
American Depository Receipts
Branch Office
Discounted Cash Flow
Department of Banking Operations and Development
Depository Receipts
Export oriented Unit
Foreign Currency Convertible Bonds
Foreign Direct Investment
Foreign Exchange Management Act
Fair Market Value
Foreign Investment Promotion Board
Indian National Rupee
Joint Venture
Liaison Office
Glossary (2/2)
NR
Non Resident
NRI
Non Resident Indian
PE
Permanent Establishment
RBI
Reserve Bank of India
SAST
Substantial Acquisition of Shares and Takeovers
SEBI
Securities and Exchange Board of India
SEZs
Special Economic Zones
STP
Software Technology Park
UNCTAD United Nations Conference on Trade and Development
WOS
Wholly Owned Subsidiary
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Thank You
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