FEMA – New Vision & Approach
The Committee on Economic, Commercial Laws
& WTO of the ICAI jointly with NIRC
October 18th , 2014
Shah & Modi
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CA Manoj Shah
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 objectiveoriented.
 It was decided to review provisions of Foreign Exchange
Regulation Act, 1973 (FERA).
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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.
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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
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Substantive Provisions
Section
Description
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
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Some of the important definitions
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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
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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.
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Current and Capital Account Transaction
 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 - ???
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Capital Account Transaction
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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
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Notifications under FEMA
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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:
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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
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Capital Account Transaction
Sr.
No.
1
2
3
4
5
Transactions
Corresponding Notification
Permissible Capital Account Transactions
Notification No. 1 dated May 7, 2000 – Foreign
Exchange Management (Permissible Capital Account
Transactions) Regulations, 2004
Transfer or issue of any security or foreign Notification No. 2 dated May 3, 2000 - Foreign
security by any branch, office or agency in Exchange Management (Issue of Security in India by a
India of a person resident outside India
branch, office or agency of a person resident outside
India) Regulations, 2000
Any borrowing or lending in foreign Notification No. 3 dated May 3, 2000 - Foreign
exchange in whatever form or by Exchange Management (Borrowing or Lending in
whatever name called
Foreign Exchange) Regulations, 2000
Any borrowing or lending in rupees in
whatever form or by whatever name
called between a person resident in India
and a person resident outside India
Deposits between persons resident in
India and persons resident outside India
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Notification No. 4 dated May 3, 2000 - Foreign
Exchange Management (Borrowing and Lending in
Rupees) Regulations, 2000
Notification No. 5 dated May 3, 2000 - Foreign
Exchange Management (Deposit) Regulations, 2000
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Capital Account Transaction
Sr.
No.
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7
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Transactions
Corresponding Notification
Export, import or holding of currency or Notification No. 6 dated May 3, 2000 - Foreign Exchange
currency notes
Management (Export and Import of Currency)
Regulations, 2000
Transfer of immovable property outside Notification No. 7 dated May 3, 2000 - Foreign Exchange
India, other than a lease not exceeding Management (Acquisition and Transfer of Immovable
five years, by a person resident in India
Property outside India) Regulations, 2000
Giving of a guarantee or surety in respect Notification No. 8 dated May 3, 2000 - Foreign Exchange
of any debt, obligation or other liability Management (Guarantees) Regulations, 2000
incurred (i) by a person resident in India and
owed to a person resident outside India
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(ii) by a person resident outside India
Insurance
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Remittance of Assets
Notification No. 12 dated May 3, 2000 - Foreign
Exchange Management (Insurance) Regulations, 2000
Notification No. 13 dated May 3, 2000 - Foreign
Exchange Management (Remittance of Assets)
Regulations, 2000
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Capital Account Transaction
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No.
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Transactions
Corresponding Notification
Transfer or issue of any Foreign Security
Notification No. 120 dated July 07, 2004 - Foreign
Exchange Management (Transfer or Issue of Security by
a Person Resident Outside India) Regulations, 2000
Notification No. 20 dated May 3, 2000 - Foreign
Exchange Management (Transfer or Issue of Security by
a Person Resident Outside India) Regulations, 2000
Notification No. 21 dated May 3, 2000 - Foreign
Exchange Management (Acquisition and transfer of
Immovable Property in India) Regulations, 2000
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Transfer or issue of any security by a
person resident outside India
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Acquisition or transfer of immovable
property in India, other than a lease not
exceeding five years, by a person resident
outside India
Establishment in India of Branch or Office Notification No. 22 dated May 3, 2000 - Foreign
or other place of business
Exchange Management (Establishment in India of
Branch or Office or other place of business) Regulations,
2000
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15
Investment in Firm
Concern in India
or
Proprietary Notification No. 24 dated May 3, 2000 - Foreign
Exchange Management (Investment in Firm or
Proprietary Concern in India) Regulations, 2000
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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, namelyA. Transaction, specified
B.
in Schedule I, of a person resident in India
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
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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
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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.
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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.
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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.
ii.
iii.
iv.
v.
In the business of chit fund, or
As Nidhi Company, or
In agricultural or plantation activities, or
In real estate business, or construction of farm houses, or
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
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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
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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.
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Other Notifications
Sr.
No.
1
Corresponding Notification
Realisation , Repatriation and Surrender Notification No. 9 dated May 3, 2000 - Foreign Exchange
of Foreign Exchange
Management (Realisation, Repatriation and Surrender of
Foreign Exchange) Regulations, 2000
2
Foreign Currency Accounts by a Person Notification No. 10 dated May 3, 2000 - Foreign Exchange
Resident in India
Management ( Foreign Currency Accounts by a Person
Resident in India) Regulations, 2000
3
Possession
Currency
of
Foreign Notification No. 11 dated May 3, 2000 - Foreign Exchange
Management (Possession and Retention of Foreign
Currency) Regulations, 2000
4
Manner of Receipt and Payment
Notification No. 14 dated May 3, 2000 - Foreign Exchange
Management ( Manner of Receipt and Payment)
Regulations, 2000
5
Inclusion of Debit cards, ATM Cards and Notification No. 15 dated May 3, 2000 under section 2 (h)
such other instruments in the definition of of FEMA
‘currency’
and
retention
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Other Notifications
Sr.
No.
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Corresponding Notification
Receipt from, and payment to, Non- Notification No. 16 dated May 3, 2000 – under section 3
Resident in India
of FEMA
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Dealing with Nepal/ Bhutan
Notification No. 17 dated May 3, 2000 - under section 3
of FEMA
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Post Office as Authorized Person
Notification No. 18 dated May 3, 2000 - under section 3
of FEMA
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Foreign Exchange Derivative Contracts
Notification No. 14 dated May 3, 2000 - Foreign
Exchange Management ( Foreign Exchange Derivative
Contracts) Regulations, 2000
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Other Notifications
Sr.
No.
1
Corresponding Notification
Export of Goods and Services
Notification 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
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ANALYSIS OF SEC 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.
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ANALYSIS OF SEC 3 OF FEMA
3(b)-no person shallMake 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
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ANALYSIS OF SEC 3 OF FEMA
 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
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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.
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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
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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
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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.
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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.
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A.P. (Dir Series) Circulars
and Master Circulars
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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 1st July to
subsumes the position as on date and consolidates all the
existing circulars (subject wise).
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Residential Status under FEMA
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Under FEMA residential status is of two types:
 Person resident in India
 Person resident outside India
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Under FERA, citizenship was considered as deciding
factor
FEMA lays emphasis on 'residing' which denotes
permanency
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Residential Status under FEMA
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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
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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
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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 resident34
in India.
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Residential Status under FEMA
 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
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Residential Status under FEMA
 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.
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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.
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Liberalized Remittance
Scheme (LRS)
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LRS for Resident Individuals
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A resident individual (including minors) is allowed to remit up
to USD 1,25,000 (w.e.f June 3, 2014) per financial year (AprilMarch) 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.
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LRS for Resident Individuals
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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:
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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.
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Inbound Investments
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Foreign Direct Investment Policy
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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
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Foreign Direct Investment Policy
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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
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Inbound Investments - Process
Proposed
Activity in India
Investor*
(NRI/ Nonresident)
•Prohibited
Activities
•Approval Route
•Automatic
Route
Mode of
Remittance
•NRE
•Inward
Remittance
Procedural
Compliance
at the time of
Investment
Annual
Compliance
* 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
44
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Schemes for inbound investment
Schedule 1
Schedule 2
Schedule 3
Schedule 4
Schedule 5
Foreign Direct Investment (FDI) Scheme
Purchase/Sale of Shares and/or Convertible Debentures of an Indian
Company by a registered Foreign Institutional Investor under Portfolio
Investment Scheme
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
Purchase and Sale of Shares/Convertible Debentures by NRI, on NonRepatriation basis
Purchase and Sale of Securities other than Shares or Convertible Debentures
of an Indian Company by a Person Resident Outside India
Schedule 7
Investment in an Indian Venture Capital Undertaking by a Registered
Foreign Venture Capital Investor
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)
Schedule 6
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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.
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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
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Pricing Guidelines..contd
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
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Mode of Payment





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 preoperative/ 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].
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Schedule 5 - Purchase and Sale of Securities other
than shares or convertible debentures.

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.
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Regulation 7 – Issue and acquisition of shares after
Merger / Demerger / Amalgamation

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.
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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
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FDI : E - Commerce Activity
 Discussion paper on E-commerce by Department of
Industrial Promotion and Policy (DIPP) dated 7th
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)
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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.
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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.
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Establishment of
Liaison / Branch Offices
in India
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CHARTERED ACCOUNTANTS
Background
 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.
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Background






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 15th 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.
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Conditions

Additional criteria:
Track
Record
For BO =>
a profit making track
record during the
immediately
preceding 5 F.Y.s in
the home country.
Net
Worth *
For BO =>
> USD 100,000 or its
equivalent.
For LO =>
a profit making track
record during the
immediately
preceding 3 F.Y.s in
the home country.
For LO =>
USD 50,000 or its
equivalent.
*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
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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.
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Permissible Activities for BOs

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.
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Permissible Activities for BOs – contd…
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.
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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.
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CHARTERED ACCOUNTANTS
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 exceeda. 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.
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CHARTERED ACCOUNTANTS
Overseas Direct Investments
(ODI)
Shah & Modi
CHARTERED ACCOUNTANTS
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.
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CHARTERED ACCOUNTANTS
ODI Statistics
Source: www.rbi.org.in
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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.
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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.
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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)
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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.
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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
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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).
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Routes
Automatic Route
Approval Route
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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.
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CHARTERED ACCOUNTANTS
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.
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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.
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CHARTERED ACCOUNTANTS
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.
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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
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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.
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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
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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
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Overseas
Investment
LLPs (Contd…)
by
 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?
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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
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ODI Core Investment Companies




RBI DNBS Notification No. DNBS (PD) CC. No.
311/03.10.001/2012-13 dated 6th 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?
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Modes of Funding - ODI
Proceeds
raised
through
ADR/GDR
Balance in
EEFC
account
Drawal of
foreign
exchange
from AD
bank
Swap of
shares
Funding
Modes
In
exchange of
ADR /
GDR
86
Capitalizati
on of
export dues
Proceeds of
ECB/FCCB
Shah & Modi
CHARTERED ACCOUNTANTS
Compliances
Step 1
• Board Resolution for Investment in overseas entity
Step 2
• Valuation of shares only if it is acquisition of
existing company
Step 3
Step 5
• Reporting in Form ODI within 30 days from the
remittance
• 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.
• Filing of share certificate with AD bank within 6
months
Step 6
• Post investment changes need to be reported within
30 days
Step 4
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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.
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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.
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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.
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Case Study
Indian
Company
merges with another
Indian company:
I Co. 1
I Co. 2
Holds
investment
in
 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%
Gets
merged into
F Co.
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Case Study (Contd…)
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?
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Case Study (Contd…)
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.
93
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Q &A…
Questions …
94
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CHARTERED ACCOUNTANTS
THANK YOU
95
FIRST DESERVE
AND
THEN DESIRE!!
Shah & Modi
CHARTERED ACCOUNTANTS