april 27, 2008 foreign exchange management act, 1999 - harshal kamdar
TRANSCRIPT
April 27, 2008
Foreign Exchange Management Act, 1999Foreign Exchange Management Act, 1999
- Harshal Kamdar
April 27, 2008
• FEMA – Basics
• Steps to do a FEMA Research
• Recent Updates– Relevant Circular / Notification / Amendment– Issues– Practical aspects & experiences
• Questions?
Contents
April 27, 2008
• FEMA, 1999 – The ACT (wef…?)• Rules – Current Account Rules, Compounding Rules• Regulations – Notifications under FEMA• AP DIR(?) Series Circulars – issued by the RBI• Master Circulars – July every year!• Memorandum of Instructions, Exchange Control Manual• Prescribed Forms
------------------------------------------------------------------------------------• Allied Acts – to name a few…
------------------------------------------------------------------------------------• FDI Policy ie the NIP 1991• FDI Policy - Amended by PRESS NOTES issued by DIPP (SIA)• SIA Manual• Press RELEASES by the PIB – Not effective
Basics
April 27, 2008
• FERA, 1973
• Foreign Contribution Regulation Act, 1976
• Prevention of Money Laundering Act, 2002
• Foreign Trade (D & R) Act, 1992
• Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974
• Exim Policy
Allied Acts
April 27, 2008
Applicability of FEMA depends on:
• residential status of the person; and
• nature of the transaction (ie, capital account or current account)
Applicability
April 27, 2008
• Capital account transactions alter assets or liabilities (including contingent liabilities) “outside India of persons resident in India”, or those “in India of persons resident outside India” and include certain specified transactions [Section 2(e)]
• Current account transactions are those that are not capital account transactions, and specifically include:– payments due in connection with foreign trade, other current business,
services, and short-term banking and credit facilities in the ordinary course of business;
– payments due as interest on loans, net income from investments;– remittances for living expenses of parents/ spouse/ children residing
abroad, expenses in connection with foreign travel, education/ medical care of parents/ spouse/ children
[Section 2(j)]
Applicability
April 27, 2008
Cardinal Rule -- Drawal of foreign exchange for:
– capital account transactions is not permitted, except under specific or general permission of the Reserve Bank of India (‘RBI’) / Government of India
– current account transactions is freely permitted, unless the transaction is restricted by the RBI
April 27, 2008
• Step 1
• Step 2
• Stick to basics – read, research and conquer!!!
• Practical aspects!
Steps to do a FEMA research
April 27, 2008
Residential statusResidential status
• A “person resident in India” means:– an individual who satisfies certain conditions (discussed in the next
slide) – a person or body corporate registered or incorporated in India– an office, branch or agency in India owned or controlled by a
person resident outside India – an office, branch or agency outside India owned or controlled by a
person resident in India[Section 2(v)]
• A “person resident outside India” means a person who is not resident in India
[Section 2(w)]
• A “person resident in India” means:– an individual who satisfies certain conditions (discussed in the next
slide) – a person or body corporate registered or incorporated in India– an office, branch or agency in India owned or controlled by a
person resident outside India – an office, branch or agency outside India owned or controlled by a
person resident in India[Section 2(v)]
• A “person resident outside India” means a person who is not resident in India
[Section 2(w)]
April 27, 2008
A “person resident in India” means a person residing in India for more than 182 days during the preceding financial year but does not include:
Residential status of an individual
(a) a person who has gone out of India or who stays outside India, in either case:
– for or on taking up employment outside India, or
– for carrying on outside India a business or vocation outside India, or
– for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period;
(b) a person who has come to or stays in India, in either case, otherwise than:
– for or on taking up employment in India, or
– for carrying on in India a business or vocation in India, or
– for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period.
A “person resident outside India” means a person who is not resident in India.
April 27, 2008
Avenues
• Foreign Direct Investment
• Foreign Institutional Investors
• NRIs, repatriation, non-repatriation basis
• Foreign Venture Capital Funds
• Investment in Partnerships, etc in India
Foreign investments in Indian Companies
April 27, 2008
Avenues
• Equity Shares
• Preference shares, convertible and redeemable
• Convertible debentures (optionally convertible???)
• All sectors, except prohibited, restricted sectors
Foreign Direct Investment
April 27, 2008
Amendments
• Change announced on April 30, 2007 vide DEA’s Press Release
• No respite to investors who had remitted funds to India
• RBI issued a circular on June 8, 2007 w.e.f May 1, 2007
• Only convertibles allowed under FDI
• Non-convertibles, optionally convertibles, partially convertibles to conform with ECB Guidelines
• Finally relief to investors who had remitted funds before April 30, 2007
Preference shares – June 8, 2007
April 27, 2008
Amendments
• No change announced on April 30, 2007 vide DEA’s Press Release
• RBI issued a circular on June 8, 2007 w.e.f that date for CDs
• Respite to investors – who had remitted funds to India – existing investments in non-convertible, optionally convertible instruments
• Only convertibles allowed under FDI henceforth
• Non-convertibles, optionally convertibles, partially convertibles to conform with ECB Guidelines?
Convertible Debentures – June 8, 2007
April 27, 2008
Structures, to tell a few…
• Put option!!!
• Arrow – Instrument, dotted line – Cash flow
Structures vis-à-vis intention of amendment
India
Outside India
I Co 1 I Co 2
F Co
1
2
3
After X period, I Co 1 has cash
April 27, 2008
Structures…
• Buyback (not redemption) of preference shares
• Issue of CCPS by I Co to F Co
• Buyback by I Co
• Allowed under October 4, 2004 Circular as clarified
Structures vis-à-vis intention of amendment
April 27, 2008
Issues, Practical aspects – Put option, buyback
• Technically – may be fine as long as transfer allowed under October 4, 2004 Circular / clarification dated August 30, 2005
• Practically defends the intention of amendments
Structures vis-à-vis intention of amendment
April 27, 2008
Earlier position
• Advance against equity allowed under FEMA
• Reporting requirement
• Remittance under general permission – Circular 45 of 2002– Subject to Authorised Dealer’s satisfaction!
Circular dated December 14, 2007
• 180 day ceiling limit provided, going forwards – otherwise…
• For advances received earlier > 180 days as on November 29, 2007 – RBI approval required
• Principle of promissory by estoppel
• Notification dated November 13, 2007 w.e.f November 29, 2007
FDI – Refund of advance subscription money
April 27, 2008
Practical aspects – approval
• Approval granted by the respective Regional Office
• Board resolution along with a specific action plan required
• Rationale for not issuing shares till date
FDI – Refund of advance subscription money
April 27, 2008
Amendments
• Replaced the erstwhile USD 100,000 scheme (May 8, 2007) which replaced the erstwhile USD 50,000 scheme (December 20, 2006)
• Changed the remittance period from calendar year to financial year
• Limits for Gifts and Donations subsumed within USD 200,000
• Unlimited avenue to invest in a listed company overseas removed
What continues…
• Applicable to resident individuals
• Allowed for capital and / or current account transactions
• Restrictions – Schedule I / II, – Bhutan, Nepal, Mauritius or Pakistan– Countries identified by FATF / Terrorist countries separately notified by RBI
The USD 200,000 scheme – September 26, 2007