Visakhapatnam Branch
of SIRC
INBOUND INVESTMENTFEMA PROVISIONS
23rd October 2008
CA Manoj Shah
Shah & Modi
Phone :+ 91 22 2512 6399
E-Mail :manoj@shahmodi.com
“If you learn only methods you will be tied to
your methods, but if you learn principles you can
device your own methods.”
FEMA Overview
STRUCTURE OF THE FEMA (ACT)
 FEMA has in all 49 sections of which 9
(section 1 to 9) are substantive and the rest
are procedural/administrative.
 Section 46 of the Act grants power to Central Government
to makes rules and section 47 of the Act grants power to
RBI to make regulations to implements its provisions and
the rules made there under.
 Thus RBI is entrusted with the administration and
implementation of FEMA
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Difference in implementation of
Income Tax Act & FEMA
 Under Income Tax, issue is of taxability of income which
is determined for the full year, therefore generally
amendments are annual.
 Whereas FEMA regulations are there for undertaking
transaction itself, therefore clarity at the time of
undertaking transaction is a must and therefore
amendments keep pace with changes taking place in
economy.
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Current & Capital A/c Transactions
 Capital A/c transactions means a transaction which
alters assets or liabilities including contingent
liabilities outside Indian of person resident in
India and vice-versa. It’s a economic definition
rather than accounting or legal definition
 Current A/c transaction - transaction other than a
current a/c transaction
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Current & Capital Account Transaction
 Difference between concept of Capital Assets and
Capital A/c transaction
 e.g. Import of machinery on payment of cash.
From FEMA perspective it is current a/c
transaction ( to be looked from Balance of
payment position of Country)
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Current & Capital A/c transactions
 General Policy is
 Current A/c transactions are freely permitted unless
prohibited whereas Capital A/c transactions are prohibited
unless generally permitted.
 Current A/c transactions are regulated by Central
Government whereas Capital A/c transactions are regulated
by RBI
 Sec. 6(3) of FEMA, prescribes the class of capital a/c
transactions which are regulated.
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Sec. 6(4) & 6(5)
 Sec. 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
property was acquired, held or owned by such persons
when he was resident outside India or inherited from a
person who was resident outside India
 Sec. 6(5)- Similar provisions for Persons Resident Outside
India and assets held in India
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Inbound Investments
FEMA Provisions
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“If u want 1 year of prosperity grow grains,
If u want 10 year of prosperity grow trees
&
If u want 100 years of prosperity grow people”
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Destination India
A decade and a half ago the prospect of India
becoming a major player in the global economy
seemed a distant dream, only a theoretical
possibility. During the last 14 years there has
been a sea change not only in the world’s
perception about India’s future, but in our own
perception about ourselves. The world has
acknowledged the ‘arrival of India’. We no longer
discuss the future of India: we say “the future is
India”.
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Background of Inbound Investment
 FDI policy is formulated by Government of
India.
 FEMA regulations prescribe the mode of
investments i.e. manner of receipt of funds,
issue of shares/convertible debentures and
preference shares and reporting of the
investments to RBI.
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Inbound Investment – Check Points
NRI
Investor
(Other than citizen & entity of Pakistan)
Non-Resident
Prohibited Activities
Proposed Activity in India
Approval Route
Automatic Route
Mode of Remittance
NRE
Inward Remittance
Procedural Compliance at the
time of Investment
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Annual Compliance
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Inbound Investments
Non Corporate Entity
(Notification 24)
Corporate Entity
(Notification 20)
J/V, WOS
Establishment of Branch /
Liaison office/Project Office
(Notification 22)
Transfer of
existing Shares
To Non Resident
(Regulation 10A)
By Non Resident
(Regulation 9 & 10B)
Overview of
Inbound
Investments
A. Fresh Investment. Schedules
1. FDI Scheme.
i. Private / Direct Investment.
ii. ADR / GDR Issue.
2. Investment by FIIs under PIS.
3. Investment by NRIs under PIS.
4. Purchase & Sale of shares by NRIs on Non
Repatriable basis.
5. Purchase & Sale of Securities other than
Shares or CDs by Non Resident.
6. Investment in Venture Capital undertaking
by Regd. Foreign VC.
B. Right Shares. (Regulation 6)
C. Effect of Shares on Merger / Demerger.
(Regulation7)
D. ESOP. (Regulation 8)
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Foreign Direct Investment
(Schedule I - Notification 20)
Automatic
Route
Approval Route:
Activities Prohibited:
• Annexure A activities. • Retail Trading.
• Annexure B activities • Automatic Energy.
beyond sectoral cap.
• Lottery Business.
• Gambling & Betting.
• Housing & Real
Estate Business.
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Provisions of Notification No.20
Important Definitions:
 Capital - equity, Preference shares, Convertible Preference,
Convertible debentures
 Entity incorporated outside India - entity incorporated or
registered under the relevant statutes
 Govt. Approval - from SIA - DIPP or FIPB
 Investment on repatriation basis- sale proceeds net of taxes
eligible for repatriation out of India
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Notification No.20..
 Regulation 4- An Indian entity shall not issue any security to
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any person resident outside India or record in its books any
transfer of security from or to such person
Regulation 5 prescribes the various schemes under inbound
investment for NR and NRIs
Reg 6 & 7 Acquisition of Right Shares & under merger/demerger
Reg 8-Issue of shares under ESOP
Reg 9 & 10- provisions relating to transfer of shares by/to
Non Resident
Reg 11- Repatriation of sale proceeds
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Basic Framework
 Schedule 1 : FDI Scheme
 Schedule 2 : FII Scheme
 Schedule 3 : Portfolio Investment Scheme for NRI
(Repatriable)
 Schedule 4 : Investment Scheme for NRI (Non-repatriable)
 Schedule 5 : Investment Scheme for securities other than
share / convertible debentures
 Schedule 6 : Investment Scheme for Foreign Venture
Capital Investment
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Foreign Direct Investment
Available Financial Instruments
Equity Shares, Compulsorily Convertible Preference
Shares and compulsorily Convertible Debentures.
Not Available to Investors who are
Citizens of Pakistan OR Entities of Pakistan
Available with approval of FIPB (AP (DIR) No.22
dt.19/12/2007)
To Citizens & Entities of Bangladesh
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FDI Scheme
FDI Scheme can be categorized in following 3 segments:
 Sectors/activities where FDI is prohibited
 Sectors/activities which require Approval from Govt.Approval Route
 Sectors/activities which require procedural compliance and
intimation to RBI without any approval- Automatic Route
of RBI
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FDI Prohibited in following activities or
items
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Retail Trading (except single branded product retailing)
Atomic Energy
Lottery Business
Gambling and Betting
Housing and Real Estate business, (other than construction of
integrated township)
 Agriculture
(excluding
Floriculture,
Horticulture,
Development of seeds, Animal Husbandry, Pisiculture and
Cultivation of vegetables, mushrooms etc. under controlled
conditions and services related to agro and allied sectors) and
Plantations (Other than Tea plantations)
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FDI Prohibition…continued..
 Other activities prohibited are-Business of chit
fund and Nidhi company, trading in TDRs,
Construction of farm houses (in terms of
Notification No.1- Permissible Capital Account
Transactions)
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Automatic Route for FDI
Available in following cases:
 Company which is not engaged in items included in Annexure
A to Schedule I of Not.20 (Annex. A lists out activities which
are prohibited and automatic route is not available)
 Shares are issued up to the limits specified in Annexure B
(prescribes Sectoral cap) to Schedule I (provided activity
doesn’t require industrial license under Industries
(Development & Regulation Act) or under the locational policy
under Industrial Policy of 1991
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Automatic Route for FDI (Continue..)
 Shares are not issued by the Indian company with a view
to acquire existing shares of any Indian Company
 Shares can be issued to provider of technology, or against
royalty payment or against ECB, subject to sectoral
guidelines
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Approval Route for FDI
Activities/Sectors requiring prior approval of
Government:
 Proposals in which foreign collaborator has an existing
financial or technical collaboration in the same field (Press
Note 1 of 2005)
 Proposals falling outside sectoral policy/cap
 Activities listed in part A of Annexure A
 Investment in SSI unit manufacturing items reserved for
small scale sector
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Provisions for Certain Specific
Sectors
_________________________
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FDI in SSI units
 SSI unit can’t have more than 24% from any industrial
undertaking either foreign or domestic
 More than 24% FDI requires Government approval if
items are reserved for small scale sector, it will also require
industrial license.
 An SSI unit, not manufacturing items reserved for Small
sector, can have more than 24% equity by giving up SSI
status and can go under Automatic route.
 An EOU can have more than 24% equity participation
from Non Resident
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Trading Sector
Investment can be made under Automatic route for
 Up to 100% in Wholesale/ cash & carry trading (PN 7/2008)
 Up to 100% in Trading for exports
 (PN/4 of 2006)
Under approval from FIPB, investment is permitted
Up to 51% for Retail trade of “Single brand” products (PN/3-06)
Any addition to the product/product categories to be sold under
‘Single Brand’ would require a fresh approval of the Government.
Up to 100% for Items sourced from small scale sector
 Up to 100% for Test marketing of such product for which
company has approval CAfor
manufacture
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Construction Sector
100% FDI permitted under Automatic route in –
 Construction
Development projects including housing,
commercial premises, resorts educational institutions, recreational
facilities, city and regional level infrastructure, townships
Note: FDI is not allowed in Real Estate Business.
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Construction Sector.. Continued..
 Minimum area to be developed under each project:
 Development of serviced housing plots, a minimum land area
of 10 hectares
 Construction-development projects, a minimum built-up
area of 50,000 sq.mts
 Combination project, any one of the above two conditions
 Capitalization and lock-in requirements:
 Minimum capitalization of UDS 10 million for wholly owned
subsidiaries and USD 5 million for joint ventures with Indian
partners
 The funds would have to be brought in within six months of
commencement of business of the company
 Original investment cannot be repatriated before a period of
three years from completion of minimum capitalization
 Investor may be permitted to exit earlier with prior approval
of the Government through FIPB
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Construction Sector .. Continued..
 50% of the project to be developed within 5 years
 Investors not allowed to sell undeveloped plots*
 The project to conform to norms and standards as laid down
in applicable regulations
 Obtain all necessary approvals
 State Government/Municipal/Local Body concerned, which
approves the building/development plans, to monitor
compliance of above conditions

undeveloped plots” would mean where roads, water supply,
street lighting, drainage, sewerage, and other conveniences, as
applicable under prescribed regulations, have not been made
available. Investor needs to provide this infrastructure and
obtain completion certificate from concerned local body/service
agency before he would be allowed to dispose off serviced
housing plots.
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Construction Sector.. Continued..
 Exclusion from the applicability of Press Note
2 of 2005:
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Hotel & Tourism (Press Note 4 of 2001)
Hospitals (Press Note 2 of 2000)
Special Economic Zones (Special Economic
Zones Act, 2005)
Industrial Parks (PN 3/ 2008)
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Construction sector for NRIs
100% investment permitted under Automatic Route in
following:
 Development of serviced plots and construction of built-up
residential premises
 Investment in real estate covering construction of residential
and commercial premises including business centers and
offices
 Development of townships
 City and regional level urban infrastructure facilities,
including both roads and bridges
 Investment in manufacture of building materials
 Investment in participatory ventures in (a) to (e) above
 Investment in housing finance institutions which is also
opened to FDI as an NBFC.
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NBFC Sector- 100% under Automatic
Route in 18 activities
Minimum Capitalization Norms
Fund based NBFC
FDI up to 51% - US$ 0.5 million to be brought
upfront.
FDI above 51% to 75% - US$ 5 million to be
brought upfront.
FDI above 75% to 100% - US$ 50 million, of
which US$ 7.5 million upfront and balance in
24 months.
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Non-Fund
based NBFC
Minimum US$
0.5 million
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FDI Scheme- General Provisions
Issue Price
 Listed Company- As per SEBI guidelines
 Unlisted Company-CCI Valuation
 Dividend balancing requirement abolished
Rate of dividend on Preference shares
 Cannot exceed 300 basis points over the PLR of SBI
Mode of payment for inbound investment
 Inward remittance through banking channels
 Debit to NRE/FCNR A/c
 Capitalization of lumpsum fee, royalty and ECBs (other than
import dues deemed as ECB or Trade Credit)
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Acquisition of Right Shares
 NR may acquire equity/preference or CDs offered on right
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basis subject to following conditions:
Sectoral cap to be maintained
Existing shares were acquired in accordance with the
regulations
Price is not lower than the price which is offered to
resident shareholders
Same conditions to apply regarding repatriability as are
applicable to original shares
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Acquisition of shares after merger/demerger
 In case the percentage of shareholding likely to increase on
account of merger/de-merger, Govt., approval & RBI
approval needed
 New company should not carry on agricultural, plantation
or real estate business or trading in TDRs.
 To file a report in 30 days with RBI
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Issue of shares under ESOP
 Indian company can issue shares to employees of its J/V
or WOS abroad
 The scheme should be approved by SEBI
 Face value of the shares to be allotted under scheme to the
non resident employees not to exceed 5% of the paid up
capital
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PIS by NRIs
 Limit of 5% by single NRI, 10% by all NRIs (this can be
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increased to 24%) to be maintained
Payment to come from NRE/FCNR or NRO (in case of non
repatriable investment)
Delivery based purchase and sale permitted
Shares purchased under PIS cannot be transferred under
private arrangements to person resident in India or outside
India without prior approval of RBI
OCBs are not permitted after 29/11/2001 to invest in PIS
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Investment in Shares/CDs on non
repatriation basis by NRIs
 Scheme applies to investment other than PI
 NRIs may acquire without any limit, shares under public issue,
private placement or right issue
 Central Govt., approval needed if investor has previous JV or
technical collaboration or trade mark agreement in the same or
allied field
 Not permitted- investment in companies engaged in chit
fund/nidhi, agricultural/plantation or real estate business or
construction of farm house or dealing in TDRs
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Investment in securities other than shares
or CDs by Non Resident
 Scheme available to FIIs & NRIs
 Investment on repatriation basis in
- dated Govt., securities/treasury bills,
NCD and Units of Domestic MF
Other conditions on FII for composition of investment and
registration with SEBI
 NRIs can also invest in shares of Public Sector enterprise in
disinvestment process
 Investment on Non Repatriation basis by NRIs in – units of
money market funds in India or National Plan/Saving
Certificates.
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Procedure under Automatic Route
Intimation to Authorized Dealer
 within 30 days from receipt of funds in Annexure II
to Form FC-GPR
 Intimation to be filed along with KYC Report
(Annexure III to Form FC-GPR gives KYC Report)
 To file report in form FC-GPR (Part A of Annexure I)
within 30 days from the date of issue of shares
 Annual Return in FC-GPR (Part B of Annexure I) by
31st July
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Procedure under Approval Route
 Applications for NRI investment, EOU and
Retail Trading (Single Brand) should be
submitted to SIA in DIPP
 Applications for FDI other than above should
be submitted to FIPB unit, DEA, MoF
 Application in Form FC-IL
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Time Limit for issue of shares/CDs
 Notification No.170 dt. Nov 29, 2007,( AP (DIR)
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Series Circular No. 20 dated 14th Dec 07)
Shares & CDs to be issued within 180 days from the
date of receipt of inward remittance or date of debit to
NRE/FCNR A/c.
In case Share Application is outstanding beyond a
period of 180 days –
.. application to be made with sufficient reasons for
refunding share application
If 180 days have elapsed on Nov 28, 2007- approval
of RBI needed either for issue or for refund
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Transfer of Shares- without RBI
approval/ or any procedure
Transferor
PROI- other
than NRI &
OCB
Transferee
PROI
(including
NRI)
NRI/OCBs
NRI
Mode of Transfer
Sale or gift (prior approval
of Govt., by transferee, in
case transferee has
previous J/V or technical
collaboration in same field)
Sale or gift (conditions
same as above)
Note: above conditions not
to apply to IT sector &
certain international
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financial institutions/bank.
Transfers without any permission/procedural
compliance
Transferor
PROI
Transferee
Mode of Transfer for
shares/C.Deb., of Indian
Company
Person Res. Gift
in India
PROI
PROI
Indian
Company
Sell on Recognized Stock
Exchange
Under buy back/ capital
reduction scheme (other than
financial serv sector)
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Transfer of security with prior
permission
Transferor
Transferee
Mode
Person Resident
in India
Person Resident
Outside India
(Not being
erstwhile OCBs)
Gift
NRI
Non Resident
Sale
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Transfer of Shares/CDs by way of
Sales
 From Resident to Non Resident
 Applicable to industries of Annexure B to FDI
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schedule, except Banking, NBFC & Insurance and
Financial Services sector.
Transfer doesn’t fall under SEBI takeover regulations
(RBI approval for Fin services & SEBI takeover)
Sectoral caps are maintained (if not then first Govt.,
approval & then RBI approval)
From Non Resident to Resident
Applicable to other than those covered under Reg.9
Both the above categories of transfer are Subject to
P, D & R (pricing guidelines, Documentation &
Reporting Requirements)
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Pricing, documentation & reporting for
transfer by way of sale
 Transfer between resident & non resident
 Parties involved
 Seller (non resident/ resident)
 Buyer (non resident/ resident)
 Duly authorized agents of seller/ buyer
 AD Branch
 Indian Company
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Pricing Guidelines
 For transfer from Res to NR (non OCBs)
 Price shall not be less than
 Ruling market price for listed shares
 CA certified fair valuation as per CCI
guidelines for unlisted shares
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Pricing Guidelines
 For transfer from NR (including OCBs) to
Resident- In case of listed shares
 At prevailing price & sale effected through
merchant banker or registered stock broker
 In other cases- avg. (avg of daily high and
low) quotations of one week preceding the
date of appln with 5% variation
 Price could be higher up to a ceiling of 25%
as arrived above, if shares are sold to Indian
promoters for passing management control
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Pricing Guidelines (NR TO R). Contd..
 For thinly traded shares
 1- consideration per seller per company is up to INR
20.0 lacs- mutually agreed price between seller &
buyer, based on current valuation methodology and
valuation certificate from statutory auditors
 2- for consideration exceeding INR 20 lacs-at seller’s
option (a) higher of the price based on EPS multiple
or NAV linked to book value multiple OR (b)
prevailing market price in small lots so that entire
shareholding is sold in not less than 5 trading days
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Pricing Guidelines (NR TO R). Contd..
 In case of unlisted shares
 At a price lower of two valuations- one by
Statutory Auditors and other by CA or Cat-I
merchant banker registered with SEBI
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Documentation
 Form FC-TRS in quadruplicate
 For sale by person resident in India
 Consent letter from both seller & buyer or their agent
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(PoA in case signing by agent)
Share holding pattern after investment by Non
Resident
CA cert for valuation/ broker’s note
Undertaking from the buyer that he is eligible to
acquire shares and FDI limit complied with
Undertaking from FII/sub account that individual
ceiling prescribed by SEBI not breached
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Documentation
 For sale by person resident outside India
 Consent letter from both seller & buyer or their agent
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(PoA in case signing by agent)
Copies of RBI approval for NRI/OCBs to determine
investment on repatriation/non repatriation basis
Fair valuation certificate from CA
No objection/Tax clearance certificate from income
tax authority/ Chartered Accountant
Undertaking from buyer for adherence to pricing
guidelines.
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Reporting by AD
 R return for actual inflow/ outflow of forex
 Two copies of FC-TRS to FED

Recording of transfer in Indian company
 On submission of A.D. certified copy of FCTRS
 Note- Shares purchased under PIS cannot be
transferred by way of sale under private
arrangement
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Investment in Firm or 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 & dealing in land and immovable property
 Capital invested can’t be repatriated
 Income can however be repatriated
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Establishment of Branch or Liaison
office in India (Notification No 22)
Permitted activities for a branch in India of a person resident
outside India:
 Export/Import of goods.
 Rendering professional or consultancy services.
 Carrying out research work, in which the parent company
is engaged.
 Promotional technical of 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 IT and development of software in
India.
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Establishment Branch or Liaison office
in India (Notification No 22) Continue.
Permitted activities for a Liaison office in India of a person
resident outside India:
 Rendering technical support to the product supplied by
parent/group companies.
 Foreign airline/shipping company.
 For Liaison Office
 Representing in India the parent company/group company.
 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 company.
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Application to RBI for opening branch or
liaison office
 A person resident outside India desiring to
establish a branch or liaison office in India shall
apply to RBI, in form FNC 1.
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Remittance of profit or surplus
A person resident outside India shall produce following
documents to the authorised dealer through whom the
remittance is effected
 For remittance of profit of a branch:
 Certified copy of the audited balance sheet and profit and
loss account for the relevant year
 A CA’s Certificate certifying:
• The manner of arriving at the remittable profit
• That the entire remittable profit has been earned by
undertaking the permitted activities, and
• That the profit does not include any profit on
revaluation of the asset of the branch
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Remittance of profit or surplus
Continue…
 For remittance of surplus on completion of project
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Certified copy of the final audited project account
A CA’s 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’s certificate stating that
sufficient funds have been set aside for meeting all
Indian tax liabilities
Auditor’s certificate stating that no statutory liabilities
in respect of the project are outstanding
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FIRST DESERVE
AND THEN
DESIRE
THANK YOU
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