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INBOUND INVESTMENT- FEMA PROVISIONS

Visakhapatnam Branch of SIRC. INBOUND INVESTMENT- FEMA PROVISIONS. 23 rd October 2008 CA Manoj Shah Shah & Modi Phone :+ 91 22 2512 6399 E-Mail :manoj@shahmodi.com.

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INBOUND INVESTMENT- FEMA PROVISIONS

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  1. Visakhapatnam Branch of SIRC INBOUND INVESTMENT- FEMA PROVISIONS 23rd October 2008 CA Manoj Shah Shah & Modi Phone :+ 91 22 2512 6399 E-Mail :manoj@shahmodi.com

  2. “If you learn only methods you will be tied to your methods, but if you learn principles you can device your own methods.”

  3. 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 CA Manoj Shah - Shah & Modi

  4. 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. CA Manoj Shah - Shah & Modi

  5. 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 CA Manoj Shah - Shah & Modi

  6. 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) CA Manoj Shah - Shah & Modi

  7. 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. CA Manoj Shah - Shah & Modi

  8. 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 CA Manoj Shah - Shah & Modi

  9. Inbound InvestmentsFEMA Provisions CA Manoj Shah - Shah & Modi

  10. “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” CA Manoj Shah - Shah & Modi

  11. 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”. CA Manoj Shah - Shah & Modi

  12. 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. CA Manoj Shah - Shah & Modi

  13. Inbound Investment – Check Points NRI Investor (Other than citizen & entity of Pakistan) Non-Resident Prohibited Activities Proposed Activity in India Approval Route Automatic Route NRE Mode of Remittance Inward Remittance Procedural Compliance at the time of Investment Annual Compliance CA Manoj Shah - Shah & Modi

  14. 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) Overview of Inbound Investments CA Manoj Shah - Shah & Modi

  15. Foreign Direct Investment (Schedule I - Notification 20) Automatic Route • Approval Route: • Annexure A activities. • Annexure B activities beyond sectoral cap. • Activities Prohibited: • Retail Trading. • Automatic Energy. • Lottery Business. • Gambling & Betting. • Housing & Real Estate Business. CA Manoj Shah - Shah & Modi

  16. 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 CA Manoj Shah - Shah & Modi

  17. Notification No.20.. • Regulation 4- An Indian entity shall not issue any security to 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/de-merger • 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 CA Manoj Shah - Shah & Modi

  18. 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 CA Manoj Shah - Shah & Modi

  19. 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 CA Manoj Shah - Shah & Modi

  20. 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 CA Manoj Shah - Shah & Modi

  21. FDI Prohibited in following activities or items • 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) CA Manoj Shah - Shah & Modi

  22. 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) CA Manoj Shah - Shah & Modi

  23. 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 CA Manoj Shah - Shah & Modi

  24. 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 CA Manoj Shah - Shah & Modi

  25. 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 CA Manoj Shah - Shah & Modi

  26. Provisions for Certain Specific Sectors_________________________ CA Manoj Shah - Shah & Modi

  27. 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 CA Manoj Shah - Shah & Modi

  28. 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 for manufacture CA Manoj Shah - Shah & Modi

  29. 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. CA Manoj Shah - Shah & Modi

  30. 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 CA Manoj Shah - Shah & Modi

  31. 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. CA Manoj Shah - Shah & Modi

  32. Construction Sector.. Continued.. • Exclusion from the applicability of Press Note 2 of 2005: • 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) CA Manoj Shah - Shah & Modi

  33. 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. CA Manoj Shah - Shah & Modi

  34. NBFC Sector- 100% under Automatic Route in 18 activities CA Manoj Shah - Shah & Modi

  35. 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) CA Manoj Shah - Shah & Modi

  36. Acquisition of Right Shares • NR may acquire equity/preference or CDs offered on right 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 CA Manoj Shah - Shah & Modi

  37. Acquisition of shares after merger/de-merger • 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 CA Manoj Shah - Shah & Modi

  38. 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 CA Manoj Shah - Shah & Modi

  39. PIS by NRIs • Limit of 5% by single NRI, 10% by all NRIs (this can be 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 CA Manoj Shah - Shah & Modi

  40. 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 CA Manoj Shah - Shah & Modi

  41. 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. CA Manoj Shah - Shah & Modi

  42. 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 CA Manoj Shah - Shah & Modi

  43. 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 CA Manoj Shah - Shah & Modi

  44. Time Limit for issue of shares/CDs • Notification No.170 dt. Nov 29, 2007,( AP (DIR) 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 CA Manoj Shah - Shah & Modi

  45. Transfer of Shares- without RBI approval/ or any procedure CA Manoj Shah - Shah & Modi

  46. Transfers without any permission/procedural compliance CA Manoj Shah - Shah & Modi

  47. Transfer of security with prior permission CA Manoj Shah - Shah & Modi

  48. Transfer of Shares/CDs by way of Sales • From Resident to Non Resident • Applicable to industries of Annexure B to FDI 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) CA Manoj Shah - Shah & Modi

  49. 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 CA Manoj Shah - Shah & Modi

  50. 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 CA Manoj Shah - Shah & Modi

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