Foreign Investment in India

1
Foreign Investment in IndiaCompoundingS
ome Issues for consideration

• By Neeta Behramfram
• RBI, New Delhi

2
BASICS

• What is Foreign Investment ?
• Why Foreign Investment ?
• Types of Foreign Investment
• i) Foreign Direct Investment
• Strategic long term relationship or lasting
  interest
• ii) Foreign Portfolio Investment
• - Higher returns

3
Legal and Regulatory framework

• Foreign investment in India is governed by of
  Section 6 (3) of the Foreign Exchange Management
  Act, 1999, which covers Capital Account
  Transactions.
• Regulations - Notification No. FEMA 20/2000-RB
  dated May 3, 2000 covers the aspects relating to
  Foreign investment in India.
• prescribes the mode of investments i.e. manner of
  receipt of funds, issue of shares / type of
  instruments and reporting of the investments to
  the Reserve Bank.
• Press Notes
• Press Releases
• Clarifications

4
Circulars

• RBI issues notifications and AP (DIR Series)
  circulars from time to time which the procedural
  and operational aspects.
• These generally follow the changes made in the
  FDI policy or the procedural changes to be
  brought in.

5
FDI Policy

• Foreign Direct Investment (FDI) in India is
  governed by the FDI Policy announced by the
  Government of India and the provisions of FEMA)
  1999.
• Consolidated policy announced by Dept. of
  Industrial Policy and Promotion (DIPP), Ministry
  of Commerce and Industry on 31st March and 30th
  September
• Last policy annoucement on 31.1.2011 effective
  from 1.4.2011

6
FDI Policy 2011

• Three new issues
• Convertible instruments the conversion cn be
  based on a formula decided upfront
• Pre-incorporation expenses can be capitalised
  with approval from FIPB
• Import dues can be capitalised by companies not
  in SEZs with approval from FIPB.

7
FEMA 20

• The six schedules of the FEMA notification No.
  20 dt.3.5.2000 prescribe the mode of investments
  by different class of investors and the
  reporting to RBI.
• Schedule 1
• Foreign Direct Investment by persons
• resident outside India.
• The reporting requirement under para 9(1)(A) and
  9 (1)(B) of Schedule 1

8
Schedules

• Schedule 2
• Foreign Portfolio investment by FIIs registered
  with SEBI.
• Reporting to RBI by SEBI on a daily basis.
• Schedule 3
• Investment by NRIs on a Stock Exchange in
  India under Portfolio Investment Scheme.

9
Schedules

• Schedule 4
• Investment by NRIs on Non-Repatriation basis.
• No reporting to RBI in FCGPR
• Schedule 5
• Other investments (G-Sec, NCDs, etc) by FIIs and
  NRIs

10
Schedules

• Schedule 6
• Foreign Venture Capital Investments (SEBI
  registered) in IVCF/ IVCU
• RBI permission for opening of special accounts
  with designated AD Cat. I bank
• Concessions regarding pricing, compliance with
  Press Note 1 of 2005
• Reporting to Central Office through Custodian
  Bank

11
Reporting of inflow

• Under para 9 (1) (A) of Schedule 1
• Through AD Cat I bank within 30 days from date of
  receipt of inward remittance by normal banking
  channel / debit to NRE/FCNR account
• In prescribed format along with FIRC and KYC
  report on remitter / investor
• Purpose of remittance in FIRC
• UIN is allotted

12
Allotment of equity instruments

• In terms of AP (DIR Series) circular No. 20 dated
  14. 12.2007, time limit of 180 days from the
  date of receipt of inward remittance for
  allotment of equity instruments against all
  remittances pending allotment for less than 180
  days as on 29.11.2007 and those received
  subsequently.
• Non-allotment within 180 days / allotment after
  lapse of 180 days without RBI approval
  contravention of Para 8 of schedule 1 of FEMA 20

13
Reporting of allotment

• In form FCGPR within 30 days from date of
  allotment through AD cat.I bank
• Along with Fair valuation certificate from CA
• Certificate from CS in stipulated format
• Copy of FIPB appoval, if under approval route
• In case of allotment against inflow received
  prior to June 1, 2008, FIRC and KYC

14
FCGPR

• Complete in all respect
• Correct NIC code
• Post issue share structure must tally for
  un-listed companies
• UIN for inflow
• Declaration part of FCGPR Press Note 1 of 2005,
  SSI unit, rights issue, bonus issue

15
FCGPR

• Real estate development Undertaking regarding
  compliance with Press Note 2 of 2005.
• In cases of merger/amalgamation No inflow,
• Copy of Court order required which would give
  the ratio for allotment.
• Conversion of ECB no inflow reported to Regional
  Office but FCGPR filed with RO along with CA
  certificate and copy of ECB returns submitted to
  Central Office, Mumbai.

16
Issues for clarification

• Investment under Schedule 4
• Whether an NRI, under Sch. 4 of FEMA 20, can
  invest in Multiple Brand Retail trading, Lottery,
  Gambling/Betting etc. as well ?
• Whether any reporting / compliances requirements
  under Sch. 4 of FEMA 20 ?

17
Issues for clarification

• Whether FC-TRS formalities shall be required for
  transfer of shares from Resident to Non-Residents
  when the shares transferred shall be held by the
  Non Resident on Non-Repatriation basis?
  Consideration shall be paid by the Non Resident
  from his NRO account.
• Once a resident goes out of India for uncertain
  period, his/her Indian account is automatically
  termed as NRO Account. If the NRI makes
  investment out of this NRO account, will it be
  treated as FDI and called for compliance of
  FC-GPR etc.

18
Issues for clarification

• Intimation to RBI for inward remittance - Can
  intimation to AD be made from a designated Bank /
  Branch (handling FC-GPR) which is different from
  receiving Bank / Branch?
• Filing of FC-GPR - Can consolidated form be filed
  through a Bank/Branch consolidating all
  remittances received by different Banks /
  Branches of same Bank?

19
Reporting to RBI

• Time limit of 30 days under para 9 (1)(A) and
  9(1)(B) of Sch. 1 to FEMA 20 i.e. intimation of
  receipt of funds/Form FC-GPR at RBI Regional
  office or at AD.
• Is there any relaxation in genuine cases of delay
  by AD forwarding papers to RBI?

20
Utilisation of FDI funds refund

• In cases where money is utilized and thereafter
  refunded within 180 days from the date of receipt
  of the inward remittance, whether this would mean
  temporary funding by foreign investor/collaborator
  in contravention of ECB guidelines.
• Are there any reporting requirements when refund
  is made?

21
Issues for clarification

• An engineering consultancy services company has
  been awarded a turnkey contract for erection of a
  plant. While reporting in FC GPR, how the same
  should be dealt with as Services and Turnkey
  Erection Contract may fall in different NIC
  Codes?
• If an NRI makes investment out of NRE account,
  what will be the position?

22
Query

• Whether a Section 25 Company limited by Shares
  (not for Profit Company) and carrying out
  activities akin to consultancy in social sector
  can issue shares under Automatic Route or under
  Approval Route?

23
Queries

• Whether a Company who was granted approval to set
  up an IT project some 11 years back by FIPB/ SIA
  also need to file Annual Return of Assets
  Liabilities each year by July 15?
• Does the merger of an overseas wholly owned
  subsidiary (no shares would be issued to overseas
  entity/shareholders post merger) with its Indian
  parent require any prior approval from RBI?  The
  overseas entity, as part of its assets, holds
  investment in Indian companies, cash and
  intangibles and does not hold any immovable
  property overseas.

24
Queries - Rights Shares

• Whether non-existing non-resident shareholders
  allowed to apply for issue of additional shares /
  convertible debentures / preference shares over
  and above their rights share entitlements?
• Is it possible for unlisted private/public
  entities to allot additional allocation to the
  non-resident investor/collaborator of
  unsubscribed portion of rights issue belonging to
  the promoters group, where the price of shares
  offered on rights basis is much below the pricing
  guidelines/ norms of RBI/SEBI?

25
Queries - Rights Shares

• The price of shares offered on rights basis by
  the Indian company to non-resident shareholders
  in the case of shares of a company not listed on
  a recognised stock exchange in India, shall be at
  a price which is not less than the price at which
  the offer on right basis is made to the resident
  shareholders. Then why RBI insists on valuation
  certificate as per DCF? Can the shares be
  allotted for less than the DCF value?

26
Transfer of Securities

• W.e.f. October 2004, general permission fo
  transfer of shares from Resident to Non Resident
  (except in financial services sector, investment
  under Approval route and OCBs)
• Gen. Permission for transfer by way of sale or
  gift from NR to Resident
• Gen. Permission for transfer from NRIs to NRIs
• Reporting in FCTRS within 60 days for above
  transfers.
• Gen. Permission also for NR (other than NRIs/
  OCBs) to NR - No reporting in FCTRS

27
Issues for clarification

• Can a NRI residing in US sell shares of an Indian
  software company to a US Citizen or a US Company
  without taking prior approval of RBI and retain
  sale proceeds abroad?
• Can a Resident Indian sell shares of an Indian
  software company to a US Citizen or a US Company
  without taking prior approval of RBI?

28
Basics - OCB

• Overseas Corporate Bodies (OCBs) - a company,
  partnership firm, society and other corporate
  body owned directly or indirectly to the extent
  of at least sixty per cent by Non-Resident
  Indians and includes overseas trust in which not
  less than sixty per cent beneficial interest is
  held by NRIs
• OCBs have been de-recognised as a class of
  investors in India with effect from September 16,
  2003.

29
OCB

• Erstwhile OCBs which are incorporated outside
  India and are not under adverse notice of RBI can
  make fresh investments (including on rights
  basis) as incorporated non-resident entities -
• with the prior approval of Government of India if
  the investment is through Government Route
• with the prior approval of Reserve Bank if the
  investment is through Automatic Route.

30
OCB

• However, no permission required for issue of
  bonus shares.
• For disinvestment by OCBs permission of RBI
  required to open NRO account to credit sale
  proceeds.
• Prior permission required even for transfer of
  shares.

31
Issues for clarification

• Can a NRI sell shares of an Indian software
  company to an OCB without taking prior approval
  of RBI?
• Can an OCB sell shares of an Indian software
  company to a US Citizen or a US Company
  without taking prior approval of RBI?

32
Issues for clarification

• Creating voting rights disproportionate to
  shareholding (differential voting rights)
  Ownership by non-resident entities is defined
  in relation to the equity interest which is
  beneficially owned by the non-residents and not
  as per voting rights. Unlisted public and private
  companies have created structures in sectors
  under automatic route like minimum capitalization
  (NBFC and Real Estate) and Telecom sector up to
  49, wherein differential voting shares with
  different nominal amounts have been used to
  attract lower voting rights but with
  dis-proportionate higher paid-up share values
  thereby misrepresent actual beneficially
  interest.
• Is this permitted or are there any checks at RBI
  to flag such structuring?

33
Issues for clarification

• FDI in the Insurance sector, as prescribed in the
  Insurance Act, 1999, is allowed under the
  automatic route. This will be subject to the
  condition that Companies bringing in FDI shall
  obtain necessary license from the Insurance
  Regulatory Development Authority for
  undertaking insurance activities. The Insurance
  Regulatory Development Authority (Insurance
  Brokers) Regulations, 2002 prescribe a cap of 26
  for foreign investment for licensing of the
  activity. The Insurance Regulatory Development
  Authority (Licensing of Corporate Agents)
  Regulations, 2002 has no restrictive clause on
  foreign investment.
• Whether Insurance sector would include the
  Insurance Broking and the Insurance Corporate
  Agents? And FDI caps/norms for each one of
  them?

34
Issues for clarification

• Whether downstream investments can be made by
  Indian companies (with FDI) in unincorporated
  joint venture Special Purpose Vehicle e.g.
  partnership firm, AoP (prevalent in real estate
  and infrastructure businesses)?

35
Issues for clarification

• Why does a subscriber to Memorandum of
  Association called for chartered accountants
  certificate by DCF method, when any way that has
  to be at face value?
• Is it possible for unlisted private/public
  entities to allot additional allocation to the
  non-resident investor/collaborator of
  unsubscribed portion of rights issue belonging to
  the promoters group, where the price of shares
  offered on rights basis is much below the pricing
  guidelines/ norms of RBI/SEBI?

36
Query - pricing

• Recent example in public domain being JT
  International India Pvt. Ltd. engaged in
  manufacture of cigarette, a prohibited sector,
  which on 25.03.2010 allotted 100,00,000 equity
  shares to JT International Holding BV,
  Netherlands _at_ Rs. 299 per shares and on the same
  date, allotted to Indian Resident 100,00,000
  equity shares _at_ Re. 1 only (without any premium).
  The shares were neither allotted on Rights Issue
  basis nor as Private Placement/ Preferential
  Allotment.

37
Continue

• Another example is a company engaged in Private
  Security Agencies to which the Private Security
  Agencies (Regulation) Act, 2005 apply, reduced
  foreign paid-up share capital from 100 to 49 by
  issuing shares on March 30, 2010 to three Indian
  companies owned by lawyers/consultants advisors
  to the said Company by issuing shares at par
  nominal value of Rs. 10 each whereas book value
  as per last audited accounts as on March 31, 2009
  was Rs. 2042 and earnings per share of Rs. 72 per
  share. The new shares are to rank parri-passu
  with existing shares. The shares were allotted on
  Private Placement/ Preferential Allotment basis.

38
Continue

• Recently in an approved single brand retail case
  with 51 FDI, the Indian JV partner was a private
  limited company owned by an advocate advising the
  foreign investor. 51 shares were allotted to
  foreign investor at a premium of Rs. 182 whereas
  the Indian JV partner was allotted at par value
  of Rs. 10 each share. The company has four
  foreign national directors i.e. controlled by
  foreigners/entity. Interest free unsecured has
  been provided by the foreign investor. In reality
  Indian JV partner is dormant.
• How does RBI look into these cases from valuation
  and Policy perspective?

39
Procedural aspects

• Is there a procedure for issue of Duplicate FIRC?
  Is it possible to amend the purpose of inward
  remittance in FIRC to reflect true intend post
  issue of original FIRC by Bank?
• In case of inconsistencies between the Master
  Circular dated July 01, 2011 issued by RBI
  vis-à-vis the Consolidated FDI Policy Circular 1
  of 2011 dated March 31, 2011 which one will
  prevail
• i) Sector-specific policy under FDI Circular
  over Master Circular, and
• ii) Procedures and specific requirements for RBI
  approval under Master Circular over FDI Policy.

40
Other issues

• What are the consequences if an Indian software
  company has shown foreign currency in hand in its
  Balance Sheet at the close of the financial year
  which were returned by its employee on returning
  back from foreign travel?
• If an Indian company is a part of a group of
  companies, adjustment of amount
  receivable/payable within the group.

41
Other issues

• An Indian Company has been awarded turnkey
  project in US by an Offshore Company. Supply of
  components and engineering services will be
  provided by Offshore companies in US and in other
  foreign jurisdictions. Consideration shall be
  paid both in forex and INR. How to repatriate the
  funds to Offshore companies for supply of
  components and rendering engineering services
  overseas directly?

42
Compounding of contraventions

• What does it mean?
• Settle an offence committed by the contravener
  through imposition of a monetary penalty without
  going in for litigation after the contravener
  acknowledges having committed the contravention

43
Compounding of contraventions

• The procedure for compounding of contraventions
  under FEMA, 1999 have been framed with a view to
  provide comfort to the citizens and corporate
  community by minimizing transaction costs, while
  taking severe view of willful, malafide and
  fraudulent transactions.

44
Nature and scope

• The nature of contravention is ascertained
  keeping in view the following indicative points
• a) whether the contravention is technical
  and / or minor in nature
• b) whether the contravention is serious in
  nature and
• c) whether the contravention, prima facie,
  involves money-laundering, national and
  security concerns involving serious
  infringement of the regulatory framework.

45
Contraventions

• Delay in submission of returns /statements to
  Central Office, Mumbai like
• i)Indian Company issuing shares under ADR / GDR
  Scheme
• ii) Annual Activity Certificate by Branch
  Office
• iii) APR - Annual Performance Report (APR) on
  the functioning of Indian Joint Venture (JV)
  /Wholly Owned Subsidiaries (WOS).

46
Contraventions

• Delay in submission of returns/statements to RO
  like
• i) Inflow of share application / subscription
  money.
• ii)Reporting of issue of shares by the company
  to a Person Resident outside India.
• iii)Annual Activity Certificate by Liaison
  Office/Project Office.

47
Contraventions

• Cases of contravention involving
• Money Laundering,
• national security concerns,
• Involving serious infringements of the regulatory
  frame work,
• the cases where the cases for compounding have
  not been filed within the stipulated period in
  the memorandum issued by RBI
• Will be referred to under Section 37 of FEMA to
  DoE or to the Anti-Money Laundering Authority
  instituted under the PMLA, 2002.

48
Compounding

• Contraventions relating to any transaction under
  FEMA but requiring approval or permission from
  the Government Department concerned or any
  Statutory Authority as the case may be, would not
  be compounded UNLESS the required approval is
  obtained from the authorities concerned.

49
Compounding

• An application for compounding of a contravention
  to be submitted to the Compounding Authority
  either on being advised of a contravention
  through a memorandum or suo moto on being made or
  becoming aware of the contravention.

50
Penalty

• The following factors, are taken into
  consideration for arriving at the quantum of
  penalty
• the amount of gain of unfair advantage, wherever
  quantifiable, as a result of the contravention.
• the amount of loss caused to any authority /
  agency / exchequer
• economic benefits accruing to the contravener
  from delayed compliance or compliance avoided

51
Penalty

• the repetitive nature of the contravention, the
  track record and / or history of non-compliance
  of the contravener
• contraveners conduct in undertaking the
  transaction and disclosure of full facts in the
  application and submissions made during the
  personal hearing and
• any other factor considered relevant and
  appropriate

52
Quantum of penalty

• up to thrice the sum involved in such
  contravention where the amount is quantifiable
• up to Rupees Two lakh, where the amount is not
  quantifiable
• where the contravention is a continuing one,
  further penalty which may extend to Rupees Five
  thousand for every day after the first day during
  which the contravention continues (Section 13(1),
  Chapter IV of FEMA,

53
Compounding
Foreign Direct investment Foreign Direct investment
1. Filing of report beyond 30 days of receiving foreign remittance
2. Filing of Form FC-GPR beyond 30 days of allotment of shares
3. Filing of Annual Report of Assets Liabilities by July 15
4. Filing of Form FC-TRS after 60 days for transfer of shares from resident to non-resident and vice-versa
5. Allotment not made within 180 days either refund or allot shares and then approach for compounding
54
Compounding
Overseas investment Overseas investment
1. Report to RBI after 30 days regarding post-investment changes in JV/WOS aboard
2. Filing evidence with RBI regarding investment abroad-after 6 months of making the investment.
3. Filing of Annual Performance Report after 60 days of finalization of accounts of the JV/WOS
Other than Procedural lapses Other than Procedural lapses
4. Cases falling under Financial Services sector
5. Overseas regulatory approval not obtained
55
General General
1 Loan taken by a resident individual from an NRI relative on non-repatriable basis.
2 Loan taken by an entity in India from an NRI on non-repatriable basis-where the NRI and persons holding at least 51 of the share in the Indian entity, are relatives.
3 If an Indian company is a part of a group of companies, adjustment of amount receivable/payable within the group.
56
ECB
1 1. ECB 2 not filed/delayed
2 2. End use whether satisfied
3 3. Eligible lender
4 4. Drawal of loan before registration number is allotted

57
Non Quantifiable contraventions Non Quantifiable contraventions Non Quantifiable contraventions
1. 1. Liaison office continuing beyond approved period
2. 2. Liaison office carrying activities which are permitted for LO First convert into Branch office and go for compounding
Quantifiable contraventions Quantifiable contraventions Quantifiable contraventions
1 Liaison office received remittances post expiry of approval date Liaison office received remittances post expiry of approval date
     
Not Compoundable Not Compoundable Not Compoundable
ODI investment routed back to India as FDI Round tripping ODI investment routed back to India as FDI Round tripping ODI investment routed back to India as FDI Round tripping
Prohibited sector Prohibited sector Prohibited sector
Unwinding the transactions in cases where such transactions are not permissible under FEMA, 1999 before Compounding Unwinding the transactions in cases where such transactions are not permissible under FEMA, 1999 before Compounding Unwinding the transactions in cases where such transactions are not permissible under FEMA, 1999 before Compounding
58
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• THANK YOU