FEMA – Inbound and Outbound

1. FEMA – Inbound and Outbound CA. Ashesh Safi Seminar on International Taxation 10 November 2012

2. Contents • Inbound investment • Inflows into India • FDI statistics • Overall framework • Exchange Control Regulations • Liaison office / Branch office • Project office • Subsidiary • Comparative Analysis • Outbound investment • Exchange Control Regulations • Definitions • Overseas Direct Investment (ODI) Guidelines • Transfer of shares

3. Inflows into India • India has been ranked at the 3rd place in global foreign direct investments in 2011 (Source: UNCTAD) • Inflows for the period April 2012 to August 2012 is US$ 8.17 billion which is 60% less than the corresponding figures of the earlier year • Services, Telecom and Construction sectors continue to bag the inflows

4. FDI Statistics INR in crores Years Source: www.dipp.nic.in

5. Inbound Investment : Overall Framework

6. Inbound Investment – Overall Framework Exchange Control Regulations Corporate Law Competition Law Entry / Exit Regulations - Reporting India Business Industrial and Other Laws Indirect Tax Laws Regulatory Compliances Monitoring SEBI Direct Tax Laws Employment Related Laws

7. Exchange Control Regulations

8. Exchange Control RegulationInvestments into India Inbound investment regulated by Reserve Bank of India (RBI) Department of Industrial Policy & Promotion (FC Section), Ministry of Commerce, Government of India Section 6(3)(b) of FEMA RBI has the power to prohibit, restrict or regulate the transfer or issue of any security by a person resident outside India Section 6(6) of FEMA RBI has the power to prohibit, restrict or regulate the establishment in India of a branch, office or other place of business by a person resident outside India for carrying out any activity relating to such branch, office or other place of business Regulation RBI has issued FEM (Establishment in India of Branch or Office or Other Place of Business) Regulation, 2000 and FEM (Transfer or issue of security by a person resident outside India) Regulations, 2000 Master Circular RBI issues annual Master Circular on "Foreign Investments in India" that deals with inbound investment in India – latest one is dated 2 July 2012 Consolidated FDI Policy Ministry of Commerce and Industry (Department of Industrial Policy and Promotion), Government of India (GOI) has released Consolidated FDI Policy vide Circular 1 of 2012 dated 10 April 2012 which is effective from the same date

9. Exchange Control RegulationForms of Business Entities in India Foreign Investor Direct presence Incorporated entities Partnerships Liaison Office Branch Office Project Office LLP Joint Venture Subsidiary Foreign Exchange Management (Establishment in India of Branch or Office or Other Place of Business) Regulation, 2000 Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulation, 2000 and FDI Policy

10. Liaison Office / Branch Office

11. Liaison Office / Branch OfficeExchange Control implications • Overview • Permissible Activities • Approval Route • Additional Criteria for RBI Sanction • Setting up procedure and timeline • Application for undertaking additional activities or additional liaison offices • Compliance Procedures on a Regular Basis • Repatriation of Funds, Closure of LO / BO and Transfer of assets

12. Liaison Office / Branch OfficeOverview

13. Liaison Office / Branch OfficePermissible Activities

14. Liaison Office / Branch OfficeApproval Route • The applications for establishing a LO / BO in India are considered by RBI under two routes: Approval Route RBI Route Government Route

15. Liaison Office / Branch OfficeAdditional Criteria for RBI Sanction • Applicant not satisfying the aforesaid eligibility criteria and are subsidiaries of other companies can submit a Letter of Comfort from their parent company

16. Liaison Office / Branch OfficeSetting up procedure and timeline

17. Liaison Office / Branch OfficeApplication for undertaking additional activities or additional LO / BO • Request for establishing additional LO / BO may be submitted to RBI through the designated AD Category -I bank by filing duly signed Form FNC • No document to be submitted with Form FNC unless there is change • If the number of offices exceeds 4, applicant has to justify the need for additional office • Applicant to identify one of its offices in India as the Nodal office, which will coordinate the activities of all offices in India

18. Liaison Office / Branch OfficeCompliance Procedures on Regular Basis

19. Liaison Office / Branch OfficeRepatriation of Funds, Closure of LO / BO and Transfer of assets

20. Liaison Office / Branch OfficeIncome tax implications • Tax implications • Income tax – Recent Developments for LO • Income tax – Recent Cases

21. Liaison Office / Branch OfficeTax implications

22. Liaison Office Income tax – Recent Cases • Metal One Corporation - [2012] 22 taxmann.com 77 (Delhi - Trib.) Liaison Office of foreign company in India is not a PE in India in view of Article 5(6)(e) of Indo-Japan Tax Treaty since there was no violation noticed by RBI and AO could not brought on record information that the activity was beyond limits prescribed by RBI. The appellant was marketing and selling goods in India through Rolls Royce India Limited`s (UK company) offices in India. The High Court concurred with the ruling of the Tribunal in holding that the offices of RRIL, a liaison office, in India constituted a PE of the appellant and hence, a percentage of the profits for the marketing activities were attributable to such PE in India • Rolls Royce Plc– 339 ITR 147 (Del HC) Columbia Sportswear Company – 337 ITR 407 (AAR) Liaison Office of a non-resident taxpayer would qualify as its business connection and PE in India if the activities of the Liaison Office are not confined to the purchase of goods in India for the purpose of export

23. Project Office

24. Project Office (1) • General permission is granted to a foreign company to establish a Project Office (PO) in India to execute an awarded project. • A foreign company may open a PO in India provided it has secured a contract from an Indian company to execute a project in India and • the project is funded directly by inward remittance from abroad; or • the project is funded by a bilateral or multilateral International Financing Agency; or • the project has been cleared by an appropriate authority; or • a company or entity in India awarding the contract has been granted Term Loan by a Public Financial Institution or a bank in India for the project. • Further, the foreign company is required to report to the concerned Regional Office of RBI under whose jurisdiction the project office is set up, giving the following details • Name and address of the Foreign Company • Reference Number and date of letter awarding the contract referred to in clause (ii) of Regulation 5 • Total amount of contract • Address and tenure of PO • Nature of Project undertaken

25. Project Office (2) • PO shall not undertake or carry on any other activity other than the activity relating and incidental to execution of the project. • Repatriation of the surplus is permissible subject to payment of income tax and production of the following documents • Certified copy of the final audited project accounts. • CA certificate showing the manner of arriving at the remittable surplus • Income-tax assessment order or either documentary evidence showing payment of income-tax and other applicable taxes, or a CA certificate stating that sufficient funds have been set aside for meeting all Indian tax liabilities; and • Auditor`s certificate stating that no statutory liabilities in respect of the Project are outstanding. • PO except in certain instances is normally considered as a permanent establishment of the parent company in India and the income attributable to the activities carried out by PO in India may be subject to tax in India. • Taxable at the rate of foreign company and MAT provisions are applicable • Furthermore, the transactions between the PO and its parent/associate companies would have to be in accordance with the prevalent transfer pricing guidelines in India.

26. Subsidiary

27. SubsidiaryDiagrammatic presentation Foreign Investments FDI Portfolio Investments Venture Capital Investments Other investments(G-sec, NCDs, etc.) Investment on non repartriable basis Automatic route Govt Route FIIs NRI, PIO, QFI NRI, PIO PROI FII NRI, PIO, QFI SEBI regd. FVCIs VCF, IVCUs

28. SubsidiaryEntry Route Investing in India Automatic route Approval route • Inform RBI within 30 days of remittance / Issue of shares. • FIPB prior approval • Application for approval with FIPB. • Inform RBI within 30 days

29. SubsidiarySectoral view Sectors – Automatic Route (Illustrative) Sectors – Prior Approval (Illustrative) Sectors – Negative List (Illustrative) • Agriculture & Animal husbandry • NBFC (subject to minimum capitalization norms) • Insurance – 26% • Special Economic Zones • Alcohol Distillation • Private Sector Banking up to 49% • Mining • Petroleum & Natural Gas • Cash & Carry wholesale trading • Existing Airports beyond 74% • Asset Reconstruction Companies - 49% • Broadcasting • Telecom Service beyond 49% - 74% • Print Media • Tea Sector • Defence - 26% • Atomic energy • Lottery, betting and gambling • Business of chit fund • Nidhi company • Trading in Transferable Development Rights • Cigars, cheroots, cigarillos and cigarettes • Real estate business

30. SubsidiaryTypes of Instruments • Indian Companies can issue subject to pricing guidelines / valuation norms and reporting requirements • Issue other types of preference shares such as non-convertible, optionally convertible or partially convertible, which have to be in accordance with the External Commercial Borrowings (ECB) guidelines Price/Conversion formula of convertible capital instruments to be determined upfront at the time of issue of the instruments

31. SubsidiaryFDI in Multi Brand Retail Trading (1) • FDI upto 51% is permitted under Government route vide Press Notes no. 4 & 5 dated September 20, 2012 subject to compliance with the following conditions • Certain salient features of the policy • Minimum investment – USD 100 million • Backend Infrastructure • At least 50% of total FDI brought shall be invested in 'backend infrastructure' within 3 years of the 1st tranche of FDI. • ‘Back-End Infrastructure’ will include capital expenditure on all activities, excluding that on front-end units. For instance, back-end infrastructure will include investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc. • Expenditure on land cost and rentals, if any, will not be counted for purposes of ‘backend infrastructure’.

32. SubsidiaryFDI in Multi Brand Retail Trading (2) • Location for retail sales • in cities with a population of more than 1 million as per 2011 Census and also covers an area of 10 kms around the municipal or urban agglomeration limits of such cities. • In the states and Union territories not having cities with population of more than 1 million as per 2011 Census, in the cities of the choice of such State / Union territory, preferably the largest city and may also cover an area of 10 kms around the municipal or urban agglomeration limits of such cities. • Retail locations are restricted to conforming areas as per the Master / Zonal Plans of the concerned cities and provision is made for requisite facilities such as transport connectivity and parking. • For the rest of India, current FDI policy regime for Trading will continue i.e. 100% FDI is allowed in wholesale cash and carry trading. • Compliance with applicable state / UT laws / regulations is required • At least 30% of the procurement of manufactured / processed products should be sourced from Indian ‘small industries’ having investment in plant & machinery upto USD 1 million • This valuation of USD 1 million refers to the value at the time of installation without providing for depreciation. • If at any point in time, the valuation is exceeded, the industry shall not qualify as a 'small industry' for this purpose.

33. SubsidiaryFDI in Multi Brand Retail Trading (3) • 5 year period is given for meeting the requirement of sourcing of 30%. • Accordingly, the 1st compliance will be based on an average of 5 years total value of the manufactured / processed products purchased beginning 1st April of the year during which the 1st tranche of FDI is received. Thereafter, the mandatory procurement requirement has to be complied on an annual basis. • Retail sales outlets may be set up only in those States / Union Territories which have agreed or agree in future to allow FDI in MBRT under the FDI policy. Subject to FDI policy and location requirements, the respective State government to decide where a multi-brand retailer, with FDI, is permitted to establish its sales outlets within the State. • Following states have given their concurrence to allow FDI in MBRT: • Agricultural products – first right with the Government • Foreign companies to self-certify and ensure compliance of the stipulated conditions which could be cross checked as and when required. • Foreign Investors are required to maintain accounts, duly certified by statutory auditors • Retail trading, in any form, by means of e-commerce, is not permissible for companies with FDI, engaged in the activity of MBRT.

34. SubsidiaryFDI in Multi Brand Retail Trading (4) • Agricultural products – first right with the Government • Foreign companies to self-certify and ensure compliance of the stipulated conditions which could be cross checked as and when required. • Retail trading, in any form, by means of e-commerce, is not permissible for companies with FDI, engaged in the activity of MBRT

35. SubsidiaryFDI in Civil Aviation Sector • Foreign airlines are allowed to invest, in the capital of Indian Companies (other than in Air India Limited) operating scheduled and non-scheduled air transport services, upto 49% of their paid up capital, subject to following conditions: • It shall be made under Government approval route. • 49% limit will subsume FDI and FII Investment. • Investments shall be compliant of the relevant Securities laws such as SEBI (Issue of Capital and Disclosure Requirements) Regulations, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, as well as other applicable rules and regulations. • A Scheduled Operator’s Permit can be granted only to a company: • registered in India and has its principal place of business within India; • whose Chairman and at least 2/3rd Directors are citizens of India; and • whose substantial ownership and effective control is vested in Indian nationals. • All foreign nationals likely to be associated with the Indian Scheduled and Non-Scheduled air transport services, as a result of such investment, shall be cleared from security view point before deployment. • All technical equipment that might be imported into India shall require clearance from the relevant authority in the Ministry of Civil Aviation, GOI.

36. SubsidiaryFDI in Power Exchanges • FDI in Power Exchanges which are registered under the Central Electricity Regulatory Commission (Power Market) Regulations, 2010 is permitted • FDI upto 49% is permitted as under • 26% - under FDI route with prior approval from Government; and • 23% - for FII investments under automatic route • FII purchases shall be restricted to secondary market only; • The foreign investment to be in compliance with SEBI Regulations, other applicable laws and other conditions

37. SubsidiaryFDI in Pharma sector • Initially 100% FDI in Pharmaceutical sector was permitted under automatic route • The Government of India vide press note No. 3 (2011 series) revised the investment limit as follows: • FDI in green field investment in the pharmaceuticals sector - up to 100 per cent, under the automatic route • FDI in brownfield investment (i.e. investments in existing companies), in the pharmaceutical sector - up to 100 per cent under the Government approval route • Recent report on recommendations of DEA constituted panel on FDI allowing for 49% investment under the automatic route for brownfield investments. Proposal with PMO. • Action proposed due to acquisition of various Indian pharmaceutical companies by multinational foreign corporations

38. SubsidiaryIssuance of fresh shares • Indian company may issue fresh shares/ convertible debentures under the FDI Scheme to a person resident outside India, who is eligible for investment in India, subject to compliance with the extant FDI policy and the FEMA Regulation

39. SubsidiaryAcquisition by way of transfer of existing shares (1) Prior approval required for transaction not covered above

40. SubsidiaryAcquisition by way of transfer of existing shares (2) • Government Approval required • Transfer by resident to non residents by way of sale or otherwise requires government approval if • Share of companies engaged in sector falls under the Government Route ; or • Transfer results in breaching of the applicable sectoralcap • RBI permission required • Transfer by residents to non residents by way of sale where the NR acquirer proposes deferment of payment of the consideration. • Transfer by a person resident in India, who intends to transfer any security, by way of gift to an NR • Transfer from NRI to NR requires the prior approval of the RBI

41. SubsidiaryIssue of Rights/ Bonus Shares • An Indian company may issue Rights/Bonus shares to existing non-resident shareholders, subject to adherence to sectoral cap, reporting requirements etc. • Such issue should be in compliance with other laws/ statues like the Companies Act, 1956, SEBI (Issue of Capital and Disclosure Requirements), Regulations 2009, etc. • Issue of right shares to OCBs • Specific prior permission from RBI need to be taken for issuing rights shares to erstwhile OCBs • However Bonus shares can be issued to erstwhile OCBs without approval from the RBI, provided the OCB is not on the adverse list of the RBI

42. SubsidiaryIssue of Shares under Employee Stock Option Scheme • An Indian company can issue shares to its employees or employees of its joint venture or wholly owned subsidiary abroad • Citizens of Bangladesh can invest with the prior approval of the FIPB • Shares can be issued directly or through a trust subject to the following conditions that • the scheme has been drawn in terms of the relevant regulations issued by the SEBI • the face value of shares to be allotted does not exceed 5% of the paid-up capital of the issuing company

43. SubsidiaryConversion of ECB/Lump sum Fee • General permission granted for conversion of ECB into shares / convertible debentures provided: • Activity is covered under the Automatic Route or Government approval has been obtained • FDI is within sectoral caps • Pricing guidelines are followed • Compliance under any other statute and regulation in force Conversion is available for ECBs due for payment or not, as well as secured / unsecured loans availed from non-resident collaborators • General permission granted for issue of shares/ preference shares against lump sum technical know-how fee, royalty, etc • Pricing guidelines of RBI/SEBI should be followed • Compliance with applicable tax laws

44. SubsidiaryImport of capital goods by SEZs into Equity/Import payables • Issue of equity shares by units of SEZs to non-residents against import of capital goods is permitted subject to valuation by committee consisting of Development Commissioner and the appropriate Customs officials • Issue of equity shares against import of capital goods/ machinery/ equipment allowed under approval route • Import be in accordance with the EXIM policy and the FEMA regulations • Independent valuation, preferably by an independent valuer from the country of import • Application to indicate beneficial ownership and identity of importer company as well as overseas entity • Applications be made within 180 days from the date of shipment of good

45. SubsidiaryPre-incorporation/Share Swap • Issue of equity shares against pre-operative / pre-incorporation expenses (including payment of rent etc.) allowed under approval route subject to following: • Submission of FIRC for remittance of funds by the overseas promoters for the expenditure incurred • Verification and certification of expenses done by statutory auditor • Payments being made directly by the foreign investor to the company • Applications for capitalisation be made within the period of 180 days from the date of incorporation of the company • Issue of shares to a non-resident against shares swap can be done by obtaining the approval of FIPB

46. SubsidiaryPricing guidelines (1) • Fresh issue of shares, issue against payment of lumpsum technical know how fee/ royalty, conversion of ECB into Equity, capitalization of pre-incorporation expenses/ import payables (with prior approval of government) • For listed company, price as per SEBI guidelines • For unlisted company, price not less than FMV of shares determined by a SEBI registered Merchant Banker or a CA as per the Discounted Cash Flow (DCF) Method • Preferential Allotment • Issue price shall not be less than the price as applicable to the transfer of shares from resident to non-resident • Right Shares • If listed, price as determined by the company • If unlisted, price not less than the price at which the offer on right basis is made to a resident shareholder

47. SubsidiaryPricing guidelines (2) • Acquisition / transfer of existing shares (private arrangement) i.e. from resident to a non-resident (i.e. incorporated non-resident entity other than erstwhile OCB, foreign national, NRI, FII) • For listed companies, negotiated price which shall not be less than the price certified by SEBI registered Merchant Banker or CA • For unlisted companies, negotiated price which shall not be less than the FMV to be determined by the SEBI registered Merchant Banker or CA as per the DCF Method • Issue price of convertible capital instruments to be determined upfront • the price at the time of conversion should not be lower than the fair value at the time of issuance of such instruments

48. SubsidiaryReporting Requirements

49. Comparative Analysis

50. Comparative Analysis(1) Liaison Office • Can only undertake liaising / representing / promoting / communicating activities • Local expenses have to be met through inward remittances Branch Office • Can undertake activities – export / import of goods, professional / consultancy services, research work, technical / financial collaborations, buying / selling agent, IT services / development of software, technical support, foreign airline & shipping company • Cannot undertake retail trading activities, manufacturing / processing activities. • Can acquire property but not for leasing / renting Subsidiary/JV • Can carry out any activity specified in the memorandum of articles (subject to FDI guidelines) • Funding may be through equity, other forms of permitted capital infusion or internal accruals