c.v.o. ca's · with the winds of growth and development are increasing their pace at national...

C.V.O. CA'S NEWS & VIEWS

FOR MEMBERS / SUBSCRIBERS / VOL. 22 - NO. 6 - DECEMBER 2018

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From President's Desk...

Results of Elections are out and I take this opportunity to congratulate all the elected candidates of Central Council and WIRC.I wish best of luck to Central Council members for their tenure and wish them to form best policies for us professionals and represent all of us before government can help out in forming better policies for the betterment of the society.I congratulate our member CA Priti Savla for getting elected in WIRC and wish her best of luck for her tenure.

With the winds of growth and development are increasing their pace at national level, thus there are various multimillion dollar projects taking place all over the countryMulti Million Dollar Projects are requiring as well as attracting the Foreign Investment Institution's (FII's), High Networth Individual's (HNI's) and Multi-National Companies (MNC's) outside the India to grab the investment opportunities within such projects, also the business houses require huge amount of funds for their operations as well as expansion purposes, which requires the participation of Banks, NBFC's, FII's at National as well as International Level.The remittance of such funds for above mentioned, as well as for other, purposes are regulated by the FEMA Act,1999. Also Reserve Bank of India(RBI) takes active participation in barring the transactions involving foreign currency within the boundaries of the Act.India, as a whole, adopts External Commercial Borrowings as a Primary tool for getting borrowings from the other economies, which helps satisfying their operations and expansions needs and also proves to be a simple medium of borrowings as well as investment opportunities for both the interested parties.RBI also looks into forming rules and regulations related to foreign exchanges, it forms various liberalized remittances schemes for providing ease to inward and outward of foreign exchange, following are the current updates:-

1. RBI eases hedging rules to 70% for external commercial borrowing2. India Inc's foreign borrowings decreases by 34% to $1.99 billion in November3. RBI limits total outstanding ECB's to 6.5% of GDP.

As we had a talk about foreign exchange, now we would also learn about how NRI's can be opportunistic for investment options in their home country.Investing in India would serve a dual purpose for the NRI's :-

1. Better growth prospects for their investments, for example, India's Savings rate are attractive than other economies

2. Emotional gratification of helping your home country to grow and develop further.

Also with the incidence of technology strengthen its roots, such opportunities have become more transparent and easy to perform on.In current issue we have covered article on FEMA and investment opportunities for NRI.

As 2018 is about to close its doors and pushing us further into glorious and prosperous new year ahead, we expect to enhance our knowledge on various topics of foreign exchange and Intra-Border Investment Opportunities for all the citizens as well as non-citizens of India. We expect that the Kite of Knowledge sharing always soar high and achieve the beauty of high skies.I request all members and students to extend whole hearted support and take active participation in all the activities of the association.

Foreign Exchange Management Act, 1999

Investment Opportunities for NRI's in India

Articles in News & Views

Elections of ICAI -Central Council and Western India Regional Council

Dear Professional Colleagues and Readers,

Mumbai, 23 rd December, 2018

CA Sunil V. Dedhia

Thank you all..... Always in Gratitude

We normally use the words 'association' and 'institution' very commonly

in our daily talks. Sometimes, these words are used interchangeably to mean

one and the same. But these words are used in a specific way in sociology.

Hence it is necessary for us to know the meaning and nature of, and the

difference between these two terms.

Association as a Means of Pursuing Ends:

Humans have diverse needs, desires, interests and ends which demand

their satisfaction. They have three ways of fulfilling their ends -

i) They may act independently, each in his own way without bothering

about others. This is unsocial and has its own limitations.

ii) Through conflicts with one another. One may clash with another or

others to snatch things or objects which one wants from others.

iii) Through co-operation and mutual assistance. On the basis of this co-

operative effort each individual will be contributing to the ends of his

fellow-men.

This co-operative pursuit has a reference to association. When a group or

collection of individuals organizes itself expressly for the purpose of pursuing

certain of its interests together on a co-operative pursuit, an association is

said to be born. As Association can be defined as follows -

“An organization deliberately formed for the collective pursuit of some

interest, or a set of interests, which its members share.”

“A group of social beings related to one another by the fact that they

possess or have instituted in common an organisation with a view to securing

a specific end or ends.”

“A group of people organised for the achievement of a particular interest

or interests.”

“A group organised for the pursuit of an interest or group to interests in

common.”

Human beings have several interests. No single association can satisfy

all the interests of an individual. Hence, they establish different

associations to fulfill them such as Political Associations, Religious

Associations, Students' Associations, Labourers' Associations, Business or

Professional Associations, Economic Associations, Cultural Association,

Entertainment or Sports Club, International Associations, etc. It follows

then that a man may belong to more than one association.

An association is not merely a group, but it is something more than

that. It is a group expressly organised around a particular interest. The

qualification “expressly organised”, helps us to distinguish between

associations and other social groups like class, crowd, mob, public, etc.

In modern society, the number of associations is on the increase. Not

FROM THE DESK OF CHAIRMAN

NEWS BULLETINNEWS BULLETINCOMMITEECOMMITEE

President

Chairman

Convenor

Jt. Convenor

Sp. Invitees

Members

CA Sunil Dedhia

CA Dinesh Shah

CA Mehul Gala

CA Parin Gala

CA Rakesh Vora

CA Hitesh PasadCA Paras MaruCA Virav DedhiaCA Viral SatraCA Deepesh ChhedaCA Keval SatraCA Jinit BhedaCA Nisha Gala

CONTENTSCONTENTS

2

CA DINESH SHAH

FORTHCOMING EVENTS

FORTHCOMING EVENTS

FORTHCOMING EVENTSFORTHCOMING EVENTS

ASSOCIATIONASSOCIATION

C.V.O. CA'S NEWS & VIEWSVOL. 22 - NO. 6 - DECEMBER 2018

Forthcoming Events ............................4

External Commercial Borrowing .........5

Investment Opportunities

In India For Nri's ................................11

Liberalised Remittance Scheme (lrs)

Under Fema ......................................21

Judicial Precedents On Fema...........25

Common Contraventions

Under Fema ......................................30

Brief Update On Sebi and

Corporate Law .................................38

Direct Taxes Law updates.................44

GST Updates ....................................45

Fema Updates ..................................43

...CONT’D FROM PG. 1

only their numbers is increasing, but their varieties are also

increasing. In almost all the fields of our social life, we have

associations. The rapid changes that are taking place in different

fields of our social life have necessitated the birth of a large number

of associations.

A professional organization is formed to disseminate information and unite people who share the same

occupation or common interests. It is by and large a non-profit group that helps further awareness and goals

of profession where we are involved

Following are advantages in joining/being active in your Professional Association -

a) Joining an organization may offer us an opportunity to be a leader and make invaluable networking

connections for future career growth.

b) Many organizations have publications devoted to new developments and research in our area of study

to keep us informed of advancements and changes.

c) Membership also offers information on upcoming conferences and conventions which affords us an

opportunity to attend /participate in lectures by the leading edge experts in our field and to

communicate with others with the same interests.

d) Membership fees can be used to allow the organization to continue to conduct research, policy

making, and to hold education conferences to further our education.

At Professional level, we all should be eager with zeal and enthusiasm to be active in Association, since in

today's society it is not always about what you know, but also about who you know. It is never a bad idea to join

a professional organization or association. The key is to find the right one for you and your needs!

3

FROM THE DESK OF CHAIRMAN

STRIKING A BALANCESTRIKING A BALANCE

SE O UH L T I S. O. N Y . J O EU R N

TREAT OTHER THE WAY YOU WANT TO BE TREATED...REMEMBER !!


4

FORTHCOMING EVENTSFORTHCOMING EVENTS

Join us for the fun filled trip to . . . Sanjay Gandhi National Park, BorivaliSanjay Gandhi National Park, Borivali


YIMEC committee of CVOCA has organised Family Treasure Hunt with a cycling twist with your Family and

CVOCA friends with beautiful views of the nature to your company. That's not all…if you are lucky you may get a

ride with deers, monkeys and peacocks too...

Venue:- Sanjay Gandhi National Park, Borivali

Day & date - Sunday, 24 February 2019

Time - Morning 7:00 am to 11:30 am

Team of 4-5 members (A team of 4 shall have only 1 cycle and team of 5 shall have 2 cycles mandatory)

shall be solving clues.

Age limits - 12 years and above

Team Registration - Rs.1600/- Individual Registration - Rs. 350/-

For Further details Chintan Rambhia - 9867383060 Virav Dedhia - 9819296261

5


The present framework of exchange controls in India, consist of basic legislation (Foreign Exchange

Management Act, 1999) and Regulations, Rules, Directions and Circulars issued under the Act.

In August 1994 India accepted Article VIII of the Articles of agreement of the International Monetary Fund

and became fully convertible on the current account. Since India is fully convertible on the current account, all

current account transactions (barring a small list of restricted items) are allowed through the normal banking

channels. In case of capital account transactions, only the transactions which are explicitly enabled under the

guidelines are allowed, remaining require specific approvals under FEMA.

“Capital Account transaction” is defined under section 2(e) of FEMA as 'a transaction which alters the

assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or

liabilities in India of persons resident outside India, and includes transactions referred to in sub-section (3) of

section 6. Thus any transaction as a result of which the assets or liabilities outside India of a person who is

resident in India and assets or liabilities in India of a person who is resident outside India are altered i.e. either

increased or decreased, is a capital account transaction.

To put it in example, if a person resident in India acquires shares of a foreign company, his/her overseas

assets will increase. Similarly, if the same person borrows from a non resident through External Commercial

Borrowings (ECBs) his/her liability is created outside India. Hence, both the transactions lead to creation of

asset or liability outside India of a person resident in India. Both the transactions are capital account

transactions.

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. over and above

the transactions permitted under section 6(3)]. Section 6(3) of FEMA specifies the classes of capital account

transactions which are regulated by RBI. Every transaction listed in this section is regulated by a

corresponding notification/regulation. FEMA Notification No. 1/2000-RB dated 3-5-2000 contains the list of

permissible capital account transactions as well as list of prohibited capital account transactions.

Any borrowing or lending in foreign exchange in whatever form or by whatever name called and any

borrowing and lending in rupees in whatever form or by whatever name called between a person resident in

India and a person resident outside India are permissible Capital Account Transactions.

2. GOVERNING PROVISIONS:

The transactions on account of ECB are governed by clause (d) of sub-section 3 of section 6 of the Foreign

Exchange Management Act, 1999 (FEMA). Various provisions in respect of these two types of borrowings

from overseas are included in the following three Regulations framed under FEMA:

a. Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000;

notified vide Notification No. FEMA 3/2000-RB dated May 3, 2000.

b. FED Master Direction No. 5/2015-16 updated as on November 22, 2018.

These Regulations are amended from time to time to incorporate the changes in the regulatory framework

and published through amendment notifications.

3. EXTERNAL COMMERCIAL BORROWING - FRAMEWORK:

ECBs are basically commercial loans availed by eligible resident entities in form of bank loans, buyers

credit, suppliers credit, securitised instruments, Foreign Currency Convertible Bonds (FCCBs), Financial

Lease and Foreign Currency Exchangeable Bonds (FCEBs). However, ECB framework is not applicable in

respect of the investment in Non-convertible Debentures (NCDs) in India made by Registered Foreign Portfolio

Investors (RFPIs).

EXTERNAL COMMERCIAL BORROWINGEXTERNAL COMMERCIAL BORROWING

CA Manoj C. ShahINTRODUCTION

ECBs can be raised in following three tracks:

Track I: Medium Term Fx denominated ECB with minimum average maturity period of 3/5 years. Manufacturing sector companies may raise Fx denominated ECBs with minimum average maturity period of 1 year.

Track II : Foreign currency denominated ECB with minimum average maturity period of 10 years

Track III : Indian Rupee (INR) denominated ECB with minimum average maturity of 3/5 years. Manufacturing sector companies may raise INR denominated ECBs with minimum average maturity period of 1 year.

AVAILABLE ROUTES FOR RAISING ECB:

FCEBs can be issued only under approval route. All other forms of ECB can be raised under both

automatic and approval route. Further, Rupee Bonds/Masala Bonds and ECBs beyond limits and other

stipulated parameters will come under approval route.

PARAMETERS FOR RAISING ECB:

Various parameters for raising ECB are mentioned below:

Minimum Average Maturity Period: The minimum average maturities for the three tracks are set out as

under:

Automatic Route Approval Route

1. Does not require any approval from RBI or Government of India.2. Obtain Loan Registration Number (LRN) from RBI by filing Form 83

1. Obtain prior approval by making application to RBI through AD Bank.2. Cases considered keeping in view macroeconomic situation and merits of case.

3. Filing of ECB2 return every month with RBI.4. Includes entities under investigation under FEMA on without prejudice basis.

3. ECB proposals received above certain threshold placed before Empowered Committee.4. Post approval obtain LRN and do monthly filings.

6

Track I (ECB in FCY) Track II (ECB in FCY over 10 years average maturity)

Track III (ECB in INR)

•Up to USD 50 million / or its equivalent for companies in manufacturing sector –1 year

•Up to USD 50 million / or its equivalent –3 years •Beyond USD 50 million / orits equivalent –5 years •NBFC IFC / NBFC -AFC, Holding Company, CIC, HFCs and Ports –3 years •FCCB / FCEB –5 years (no put / call option in MAM)

•10 years irrespective of the amount

Same as under Track I


7

Eligible Borrowers: The list of entities eligible to raise ECB under three tracks is set as under:

•All Entities in Track II•NBFCs – regulatory purview of RBI•NBFC – Micro Finance

Institutions and NPO -Companies, Societies, trusts and co-operatives& NGOs -engaged in micro finance activity (satisfactory three diligence certificate) •Companies in miscellaneous services:R&D, Training (other than educational institute), supporting infrastructure, Logistics services, Maintenance, Repair and Overhaul, Freight and Forwarding.•Developers of SEZs / National Manufacturing and Investment Zones

the Entities in Track I eal Estate Investment Trusts

) EITs and Infrastructure Investment Trusts (INVITs )

regulated under SEBI

•Companies in: manufacturing, software development sectors, shipping and airlines

•Small Industrial Development Bank of India (SIDBI) •Units in SEZ •EXIM Bank (only approval route) •Companies in-Infrastructure Sector (Harmonized list plus Exploration, Mining and Refinery sectors), NBFC–IFCs and NBFC–AFCs, Holding Companies and CIC of Infrastructure SPVs, Housing Finance Companies, Port Trusts under Major Ports / Indian Ports Act.

Track I (Fx Normal) Track II (Fx Long Term) Track III (INR Normal)

•All Entities in Track II•NBFCs – regulatory purview of RBI•NBFC – Micro Finance

Institutions and NPO -Companies, Societies, trusts and co-operatives& NGOs -engaged in micro finance activity (satisfactory three diligence certificate) •Companies in miscellaneous services:R&D, Training (other than educational institute), supporting infrastructure, Logistics services, Maintenance, Repair and Overhaul, Freight and Forwarding.•Developers of SEZs / National Manufacturing and Investment Zones

the Entities in Track I eal Estate Investment Trusts

) EITs and Infrastructure Investment Trusts (INVITs )

regulated under SEBI

•Companies in: manufacturing, software development sectors, shipping and airlines

•Small Industrial Development Bank of India (SIDBI) •Units in SEZ •EXIM Bank (only approval route) •Companies in-Infrastructure Sector (Harmonized list plus Exploration, Mining and Refinery sectors), NBFC–IFCs and NBFC–AFCs, Holding Companies and CIC of Infrastructure SPVs, Housing Finance Companies, Port Trusts under Major Ports / Indian Ports Act.


Recognised Lenders/Investors: The list of recognized lenders / investors for the three

tracks will be as follows:


International Banks and International Capital MarketsMultilateral financial institutions/regional financial institutions and government owned financial institutionsExport Credit AgenciesSuppliers of EquipmentForeign Equity Holders*Overseas Long Term Investors:-Prudentially Regulated Financial Entities, Pension Funds, Insurance Companies, Sovereign Wealth Funds, Financial Institutions located in International Financial Services Centers in India

Overseas branches /

subsidiaries of Indian banks

subject to prudential norms of

RBI DBR.

All Entities in Track I but excluding overseas branches/subsidiaries of Indian banks

All Entities in Track I but excluding overseas branches/subsidiaries of Indian banks

In case of NBFCs-MFI, other

eligible MFI, NPO and NGO-

ECB can be availed from

overseas organizations and

individuals (subject to 2

year banking relationship

with overseas banks, due

diligence certificate, etc.)


*Foreign equity holder means

(a)Direct foreign equity holder of minimum 25% equity holding by the lender in the borrowing company

(b)Indirect equity holder with minimum 51%

(c)Group company with common overseas parent

All-in-Cost (AIC):

The term 'All-in-Cost' includes rate of interest, other fees, expenses, charges, guarantee fees whether paid in

foreign currency or Indian Rupees (INR) but will not include commitment fees, pre-payment fees / charges,

withholding tax payable in INR. In the case of fixed rate loans, the swap cost plus spread should be equivalent of

the floating rate plus the applicable spread.

Penal interest, if any, for default or breach of covenants should not be more than 2 per cent over and above the

contracted rate of interest.

The all-in-cost requirements for the three tracks will be as under:

ECBs Ceiling -Spread over the benchmark i.e. over 6 month LIBOR or applicable benchmark for respective currency

Track I •450 basis points per annum

Track II •450 basis points per annum

Track III •The maximum spread will be 450 basis points per annum over the prevailing yield of the Government of India Securities of corresponding maturity

End-use prescriptions: The end-use prescriptions for ECB raised under the three tracks are as under:

For All Tracks

The negative list for all Tracks would include the following:

a. Investment in real estate or purchase of land except when used for affordable housing as

defined in Harmonised Master List of Infrastructure Sub-sectors notified by Government of

India, construction and development of SEZ and industrial parks/integrated townships.

b. Investment in capital market.

c. Equity Investment

Additionally for Tracks I and III, the following negative end uses will also apply except when raised

from Direct and Indirect equity holders or from a Group company, and provided the loan is for a

minimum average maturity of five years:

d. Working capital purposes.

e. General corporate purposes.

f. Repayment of Rupee loans.

For Track I and Track III

8

For all Tracks

Finally, for all Tracks, the following negative end use will also apply:

g. On-lending to entities for the above activities from (a) to (f).


9

Individual Limits of ECB

year under the automatic route. Eligible entities can raise ECB up to following maximum limit under the

automatic route for all three Tracks:

: The individual limits refer to the amount of ECB which can be raised in a financial

Companies in infrastructure and manufacturing sectors,

NBFC-IFCs, NBFC-AFCs, Holding Companies and CIC USD 750 Mn or its equivalent

Companies in Software development sector USD 200 Mn or its equivalent

Entities engaged in micro finance activities USD 100 Mn or its equivalent

Other entities USD 500 Mn or its equivalent

Sector Maximum Amount per FY

ECB proposals beyond aforesaid limits will come under the approval route. For computation of individual

limits under Track III, exchange rate prevailing on the date of agreement should be taken into account.

In case the ECB is raised from direct equity holder, aforesaid individual ECB limits will also subject to ECB

liability: Equity Ratio requirement. The ECB liability of the borrower (including all outstanding ECBs and

the proposed one) towards the foreign equity holder should not be more than seven times of the equity

contributed by the latter. This ratio will not be applicable if total of all ECBs raised by an entity is up to USD 5

million or equivalent.

Equity includes-paid up capital, free reserves (incl. Share premium received in FC) as per latest audited

balance sheet. RBI FAQs-CCDs and CCPS included in Equity.

Currency of Borrowing:

ECB can be raised in any freely convertible foreign currency as well as in Indian Rupees. Change of currency of

ECB from one convertible foreign currency to any other convertible foreign currency as well as to INR is freely

permitted. Change of currency from INR to any foreign currency is, however, not permitted. Change of

currency of ECB into INR can be at the exchange rate prevailing on the date of the agreement between the

parties concerned for such change or at an exchange rate which is less than the rate prevailing on the date of

agreement if consented to by the ECB lender.

REPORTING REQUIREMENTS:

Borrowings under ECB Framework are subject to reporting requirements in respect of the following:

a. Form 83 – Borrower of ECB is required to submit duly CA Certified Form 83 which also contains terms

and conditions of ECB in duplicate to AD Bank. AD Bank in turn will forward one copy to the Director, Balance

of Payments Statistics Division, Department of Statistics and Information Management (DSIM), Reserve Bank

of India

b. Loan Registration Number (LRN): Any draw-down in respect of an ECB as well as payment of any fees /

charges for raising an ECB should happen only after obtaining the LRN from RBI. LRN is received after

submission of Form 83. Copies of loan agreement for raising ECB are not required to be submitted to the

Reserve Bank.

c. Changes in terms and conditions of ECB: Revised Form 83 should be submitted to DSIM with

respect to permitted changes in ECB parameters in any case not later than 7 days from the changes

effected. While submitting revised Form 83 the changes should be specifically mentioned in the

communication.

d. Reporting of actual transactions: The borrowers are required to report actual ECB transactions

through ECB 2 Return through the AD Category I bank on monthly basis so as to reach DSIM within seven

working days from the close of month to which it relates. Changes, if any, in ECB parameters should also

be incorporated in ECB 2 Return.

e. Reporting on account of conversion of ECB into equity: In case of partial or full conversion of ECB

into equity, the reporting to the RBI will be as under:

i. For partial conversion, the converted portion is to be reported to the concerned Regional Office of the


10

Foreign Exchange Department of RBI in Form FC-GPR prescribed for reporting of FDI flows, while monthly

reporting to DSIM in ECB 2 Return will be with suitable remarks "ECB partially converted to equity".

ii. For full conversion, the entire portion is to be reported in Form FC-GPR, while reporting to DSIM in

ECB 2 Return should be done with remarks “ECB fully converted to equity”. Subsequent filing of ECB 2

Return is not required.

iii. For conversion of ECB into equity in phases, reporting through ECB 2 Return will also be in phases.

POWERS DELEGATED TO AD BANKS:

Following powers have been delegated to AD Banks with respect to ECBs:

Change / Modification in Drawdown / Repayment Schedule

Change in Currency of Borrowing

Change in AD Bank (subject to no objection certificate from earlier AD Bank)

Change in name of borrower Company

Transfer of ECB (on re-organization at the borrower level –merger/demerger/ acquisition as per law)

Change in Recognized Lender

Change in name of Lender

Prepayment of ECB (provided MAM is maintained)

Cancellation of LRN (only if no draw-down)

Change in end-use of ECB (only for Automatic Route)

Reduction in amount of ECB

Change in all-in-cost

Refinancing of existing ECB ( provided the fresh ECB is raised at a lower all -in-cost and residual maturity is not reduced) ( partial refinance is also permitted) (Overseas branches / subsidiaries of Indian banks are permitted to refinance ECB of only AAA rate corporates as well as Navratna / Maharatna PSUs)

Extension of matured but unpaid ECB (subject to the consent of lender, without involvement of additional cost and fulfilment of reporting requirements)

While permitting changes, AD Bank should ensure –

- Revised average maturity / all-in-cost are in conformity with applicable guidelines.

- RBI DBR Prudential guidelines complied fo r credit facilities from Indian Banks or their

Overseas Branches / Subs

- ECB continues to be in compliance with applicable guidelines

- Changes to be communicated in Form 83 in 7 days of the changes being effected


11


ABBREVIATIONS

Particulars Full Form

“DIPP” Department of Industrial Policy & Promotion

“FCNR(B)” Foreign Currency Non-Resident (Bank)

“FDs” Fixed Deposits

“FEMA” Foreign Exchange Management Act

“FY” Financial Year

“NRE” Non-Resident External

“NRNR” Non-Resident Non-Repatriable

“NRO” Non-Resident Ordinary

“NRSR” Non-Resident Special Rupee

“NSC” National Saving Certificates

“PAN” Permanent Account Number

“PPF” Public Provident Fund

“PSU” Public Sector Undertaking

“RBI” Reserve Bank of India

“SBI” State Bank of India

“SEBI” Securities and Exchange Board of India

INVESTMENT OPPORTUNITIESINVESTMENT OPPORTUNITIES

IN INDIA FOR NRI'SIN INDIA FOR NRI'SCA Jini Jain

INTRODUCTION

India, with its fast developing

economy and huge potential for

growth, is a great nation that provides

h o s t o f o p p o r t u n i t i e s f o r

investment.India has been ranked at th77 place in the “Ease of Doing

Business 2019 Survey” among 190

countries surveyed. The climb is 23

places up from the last year's

survey.Thanks to the Indian

government's liberalized policy

regime and robust business

environment that have ensured that

foreign capital keeps flowing into the

country. Further, as NRIs have close

ties with India, they have been offered

a preferential status to encourage

inflow of funds from them in Indian

economy. This Article covers various

avenues for investment to NRIs in

India under different modes. The

broad regulatory framework

impacting various investments can

be comprehended illustratively from

the following regulations:

Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 read with the Consolidated FDI Policy of DIPP

Notification No. FEMA 20(R)/ 2017-RB (Herein referred as Notification No.20(R))

Foreign Exchange Management (Deposi t ) Regulations, 2016

Notification No. FEMA 5(R)/2016-RB

Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018

Notification No. FEMA 21(R)/2018-RB

(Herein referred as Notification No.21(R))

Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000

Notification No.FEMA 3 /2000-RB

Foreign Exchange Management (Borrowing and Lending in Rupees) Regulations, 2000

Notification No. FEMA 4/2000-RB

12


Investment Opportunities In India

Strategic Investment

FDI

LLPs

Firm / Proprietary

concern

Non-Strategic Investment

Portfolio Investment

Other Securities

Investment Vehicles

Other Avenues

FDs

Lending Loans

Immovable Property

IMPORTANT DEFINITIONS

1) Capital instruments: Equity shares including partly paid shares, debentures, preference shares and

warrants issued by an Indian company. 'Debentures' and 'Preference Shares' mean fully, compulsorily &

mandatorilyconvertible debentures and preference shares respectively.

2) Non-Resident Indians (NRIs): An individual resident outside India who is citizen of India.

3) Overseas Citizen of India (OCI): An individual resident outside India who is registered as an Overseas

Citizen of India Cardholder under Section 7(A) of the Citizenship Act, 1955

4) Persons of Indian Origin (PIO)(As defined under Notification 5R):A person resident outside India who

Before discussing the various investment options, it is essential to note that the term 'NRI' is defined

specifically in the respective notifications. Alongwith this term, two terms that are commonly referred are 'PIO'

and 'OCI'. Under Notification Nos. 20(R) and 21(R), PIOs are not considered to be a specific category. They are

subsumed under 'OCI'. Therefore, erstwhile PIO cardholders will now be required to obtain OCI card to be

eligible to invest under the above notifications. However, it is pertinent to note that PIOs continue to be a

recognized status under Notification Nos. 4 and 5(R).

Broad coverage of opportunities in India for NRIs:

13


is a citizen of any country other than Bangladesh or Pakistan or such other country as may be specified

by the Central Government, satisfying the following conditions:

a) Who was a citizen of India by virtue of the Constitution of India / Citizenship Act, 1955

or

b) Who belonged to a territory that became part of India after the 15th day of August, 1947or

c) Who is a child or a grandchild or a great grandchild of a citizen of India or of a person referred to

in clause (a) or (b)

or

d) Who is a spouse of foreign origin of a citizen of India or spouse of foreign origin of a person

referred to in clause (a) or (b) or (c)

Explanation: The expression 'Person of Indian Origin' includes an 'Overseas Citizen of India'

cardholder within the meaning of Section 7(A) of the Citizenship Act, 1955.

5) Repatriable Investment:An investment, the sale or maturity proceeds of which are, net of taxes,

eligible to be repatriated out of India.

6) Non-Repatriable Investment:An investment, the sale or maturity proceeds of which are not

eligible to be repatriated out of India.

1. Foreign Direct Investment (FDI)

a) FDI is governed by Schedule 1 of Notification No. 20(R).Under this Schedule, an NRI/OCI is

permitted to invest in capital instruments of an Indian entity as defined above subject to entry

routes (automatic and/or approval) and sectoral caps for foreign investment, pricing guidelines

and reporting requirements.

b) Regulation 16 to FEMA Notification No. 20R prescribes the entry routes, sectoral caps and

conditionalities against specific sectors/activities permitted.

c) Regulation11 of the said Notification prescribes pricing guidelines which have to be fulfilled at the

time of every issue/transfer of capital instruments. The pricing methodology laid down is as under:

i. Incase of a listed company, price should not be less than the price worked out in

accordance with SEBI guidelines.

ii. In case of an unlisted company, price should not be less than the valuation of capital

instruments done as per any internationally accepted pricing methodology for valuation on an

arm's length basis duly certified by a Chartered Accountant or a SEBI registered Merchant Banker

or a practicing Cost Accountant.

d) Reporting Compliance: Single Master Form (SMF) has been made effective from 01.09.2018

which subsumes Form FC-GPR (including reporting of receipt of share application money that was

reported in Advance Reporting Form) for issue of capital instruments and Form FC-TRS for

transfer of capital instruments. All new filings after 01.09.2018 have to be made in SMF only

within the timelines prescribed. The compliances can be summarized as follows:

Particulars Periodicity Compliance

Reporting on issue/transfer of capital

instruments

One-Time Single Master Form

Reporting of foreign investment in

thIndian entity by 15 July for the

previous financial year

Annual Annual Return on Fore ign

Liabilities and Assets

14


1.a) Investment in LLPs under repatriation basis is covered under Schedule 6 of Notification no. 20(R).

Foreign investment by NRIs/OCIs(other than a citizen of Pakistan or Bangladesh) is permissible under

automatic route in LLPs operating in those sectors where 100% FDI is allowed and there are no FDI

linked performance conditions.It means that there should not be any sector specific conditions for LLPs

receiving foreign investment as stipulated in Regulation 16 of the said Notification.

b) Such investment in an LLP is also subject to compliance of the conditions of Limited Liability Partnership

Act, 2008.

c) : The investment should not be less than the fair price

worked out as per any internationally accepted or adopted market practice method of valuation and a

valuation certificate to that effect shall be issued by the Chartered Accountant or by a practicing Cost

Accountant or by an approved valuer from the panel maintained by the Central Government.

d) Pricing guideline at the time of disinvestment:In case of transfer of capital contribution/ profit share :

Investment in Limited Liability Partnerships (LLPs)

Pricing guideline at the time of investment

Particulars Pricing Guideline

From a person resident in India to a person

resident outside India

Consideration should of

capital contribution/ profit share of an LLP.

not be less than the fair price

From a person resident outside India to a

person resident in India

Consideration should of the

capital contribution/ profit share of an LLP.

not be more than the fair price


Reporting on issue/transfer of capital/profit share One-Time Single Master Form

Reporting of foreign investment in LLP by 15 July

for the previous financial year

th Annual Annual Return on Foreign


2.a) Investment in LLPs under repatriation basis is covered under Schedule 6 of Notification no. 20(R).

Foreign investment by NRIs/OCIs(other than a citizen of Pakistan or Bangladesh) is permissible under

automatic route in LLPs operating in those sectors where 100% FDI is allowed and there are no FDI

linked performance conditions.It means that there should not be any sector specific conditions for LLPs

receiving foreign investment as stipulated in Regulation 16 of the said Notification.

b) Such investment in an LLP is also subject to compliance of the conditions of Limited Liability Partnership

Act, 2008.

c) : The investment should not be less than the fair price

worked out as per any internationally accepted or adopted market practice method of valuation and a

valuation certificate to that effect shall be issued by the Chartered Accountant or by a practicing Cost

Accountant or by an approved valuer from the panel maintained by the Central Government.

d) Pricing guideline at the time of disinvestment:In case of transfer of capital contribution/ profit share :

Investment in Limited Liability Partnerships (LLPs)

Pricing guideline at the time of investment

15


a) A company having foreign investment, engaged in a sector where foreign investment up to

100% is permitted under the automatic route and there are no FDI linked performance conditions, can be

converted into an LLP under the automatic route. Similarly, an LLP which satisfies the above conditions

can also be converted into a company under automatic route.

b) Reporting Compliance:SMF has also subsumed the following:

a) Form LLP-I - For investment of capital contribution and profit share

b) Form LLP-II - For disinvestment/transfer of capital contribution and profit share.

Accordingly, after 01.09.2018, such reporting foreign investment in LLP should be made in SMF within

the timelines prescribed.The compliances canbe summarized as follows:

Conversion:


Reporting on issue/transfer of capital/profit share One-Time Single Master Form

Reporting of foreign investment in LLP by 15 July

for the previous financial year

th Annual Annual Return on Foreign


3.a) Under Schedule 4, an NRI/OCI, including company, a trust and a partnership firm incorporated

outside India and owned and controlled by NRIs/OCIs, may purchase/contribute on non-repatriation basis without any limit:i) Any capital instrument issued by an Indian company, whether listed or not.ii) Units issued by an investment vehicle, either on the stock exchange or outside it.iii) Capital of a Limited Liability Partnership.iv) Convertible notes issued by a startup company in accordance with FEMA regulations.

b)residents. This is a major advantage as such investments are not subject to any compliance, conditions or valuation norms as applicable to other foreign investments.

c) However, they are prohibited from making investment in units of Nidhi company, company engaged in agricultural/plantation activities, real estate business, construction of farm house or dealing in TDRs.

d) The amount invested in the capital instruments or units or capital and the capital appreciation thereon shall not be allowed to be repatriated abroad except under One Million Dollar Scheme per financial year.

e) It is to be noted that investment in a firm or proprietary concern in India was earlier governed under a separate notification which has now been included in Notification No.20(R). Thus, an NRI/OCI can invest in a firm or proprietary concern in India provided it is not engaged in agricultural/plantation activity or print media or real estate business. The investment will be a non-repatriable investment governed by Schedule 4 of Notification No. 20(R).

4. Portfolio Investment on Repatriation Basisa) Schedule 3 of Notification No. 20(R) permits portfolio investment in India by NRIs/OCIs i.e they can

invest in capital instruments of Indian companies listed on a recognized stock exchange. Such investments will be considered as repatriable investments.

b) Investment should be routed through only one branch of Authorised Dealer. The NRE Account should be designated as NRE (PIS) and should be exclusively used for such transactions only.

Investment on Non-repatriation basis

Such investment is deemed to be domestic investment at par with investment made by

16


c) Maximum investment limit:

Particulars Investment Limit in Company

Any individual NRI/OCI Not more than 5%*

All NRIs/OCIs put together Not more than 10%*

*

preference shares or share warrants issued by the Indian company. However, the aggregate ceiling of 10% may

be raised to 24% if a special resolution to that effect is passed by the Indian company.

5.a) Under Schedule 5, an NRI/OCI can purchase the following instruments without any limit based on

option of repatriability:

Based ontotal paid-up equity capital on a fully diluted basis or paid-up value of each series of debentures or

Investment in Securities other than Capital Instruments

Repatriable Investment Non- Repatriable Investment

Government dated securities / treasury bills Government dated securities / treasury bills

Units of domestic mutual funds Units of domestic mutual funds

Bonds issued by a PSUs in India Units of Money Market Mutual Funds

National Pension Scheme National Plan/Savings Certificates

Bonds/ Units issued by Infrastructure Debt Funds Authorised Chit funds

Perpetual debt instruments and debt capital

instruments issued by banks in India

Shares in Public Sector Enterprises being

disinvested by the Central Government, provided the

purchase is in accordance with the terms and

conditions stipulated in the notice inviting bids

*

preference shares or share warrants issued by the Indian company. However, the aggregate ceiling of 10% may

be raised to 24% if a special resolution to that effect is passed by the Indian company.

Based ontotal paid-up equity capital on a fully diluted basis or paid-up value of each series of debentures or

6. Investment in Units of an Investment Vehicle

a) Schedule 8 permits NRIs/OCIs (other than citizens of Pakistan or Bangladesh)to invest in the units of

SEBI registered Investment Vehicles.

b) Investment Vehicle is an entity registered and regulated under relevant regulations framed by SEBI or

any other authority designated for the purpose and shall include:

(i) Real Estate Investment Trusts (REITs) governed by the SEBI(REITs) Regulations, 2014

(ii) Infrastructure Investment Trusts (InvIts) governed by the SEBI (InvIts) Regulations, 2014 and

(iii) Alternative Investment Funds (AIFs) governed by the SEBI (AIFs) Regulations, 2012

c) The downstream investment by the Investment Vehicle into an Indian investee entity is treated as

17


Sr. Particulars Schedule Repatriability Limits Mode of Payment Remittance of Sale Proceeds

(Net of taxes)

1 FDI Schedule 1 Repatriable As specified against the sector

a) Inward Remittanceb) Debit NRE/ FCNR(B) A/c

a) Remit abroadb) Credit NRE/ FCNR(B) A/c

2 Portfolio Investment Schedule 3

Repatriable

Individual NRI/ OCI: 5%

All the NRIs/OCIs: 10%*

a)

Inward Remittance

b)

Debit to NRE(PIS) A/c

a)

Remit abroad

b)

Credit to NRE(PIS) A/c

3 Investment on Non -repatriation basis

Schedule 4

Non-Repatriable

Without limit

a)

Inward Remittance

b)

Debit to NRO/ NRE/ FCNR(B) A/c

Credit to NRO A/c

4 Investment in securities other than capital instruments

Schedule 5

Repatriable

Without limit

a)

Inward Remittance

b)

Debit to NRE/ FCNR(B) A/c

a)

Remit abroadb)

Credit to NRE/ FCNR(B)/NRO A/c

Schedule 5

Non-Repatriable

Without limit

a)

Inward Remittance

b)

Debit to NRO/ NRE/ FCNR(B) A/c

Credit to NRO A/c

5 Investment in LLPs Schedule 6

Repatriable

Sectors where 100% FDI is allowed and there are no FDI linked performance conditions.

a)

Inward Remittance

b)

Debit to NRE/ FCNR(B) A/c

a)

Remit abroadb)

Credit to NRE/ FCNR(B) A/c

6 Investment in units of an Investment Vehicle

Schedule 8 Repatriable Depends on the mode of investment in units

a) Inward Remittanceb) Debit to NRE/ FCNR(B) A/c

a) Remit abroadb) Credit to NRE/ FCNR(B) A/c

The investment under various schedules of FEMA Notification No. 20R alongwith the mode of payment and remittance of the sale/maturity proceeds can be summarized as follows:

*

or preference shares or share warrants issued by the Indian company and limit of 10% may be raised to

24% if a special resolution to that effect is passed by the listed Indian company

Based ontotal paid-up equity capital on a fully diluted basis or paid-up value of each series of debentures

domestic investment if the Sponsor, Manager and Investment Manager of the Investment Vehicle are

owned and controlled by resident Indian Citizens.

Having gone through the various investment modes, let us understand briefly the transfer provisions

with respect to the above Notification:

Modes of Transfer by NRIs/OCIs under Notification No. 20(R)

Transfer by NRI/OCI holding capital instruments of Indian company or units on repatriation basis:

(i) NRI/PIO can transfer by way of sale/gift to a Person resident in India or sell on a recognised stock

exchange in India in the manner prescribed by SEBI. The transfer by way of sale shall be in compliance

with pricing guidelines, documentation and reporting requirements as specified by RBI.

(ii) NRI/PIO can transfer by way of sale/gift to a Person resident outside India. However, prior Government

approval shall be required in case the company is engaged in a sector which requires Government

approval.

Transfer by NRI/OCI holding capital instruments of Indian company or units on non-repatriation basis:

(i) NRI/PIO can transfer by way of sale/gift to a Person resident in India or sell on a recognised stock

exchange in India in the manner prescribed by SEBI. Conditions mentioned in (i) above will not apply.

(ii) NRI/PIO can transfer to a Person resident outside India by way of sale, subject to entry routes, sectoral

caps/ investment limits, pricing guidelines, other attendant conditions as applicable and reporting

requirements as specified by RBI. However, these restrictions shall not apply if the transfer is to an

NRI/OCI who shall holditas non-repatriableinvestment.

(iii) NRI/PIO can gift to an NRI/OCI who shall also hold it as non-repatriable investment.

18


Apart from the above, various other investment opportunities available to NRIs are as follows:

7. Investment in Fixed Deposits as covered under Notification No. 5(R)

Investment in fixed deposits with bank is another viable option for NRIs/PIOs. They can invest in bank fixed

deposits through NRE, NRO or FCNR (B) Account. A comparative chart between the three types is as follows:

Description NRE Account FCNR(B) Account NRO Account

Period for fixed deposits From 1 to 3 years.

However, banks are

allowed to accept

NRE deposits above 3

years from their

Asset-Liability view

Not less than 1 year

and not more than 5

years

As applicable to

resident accounts

Denomination Indian Rupee Any permitted

currency

Indian Rupee

Repatriable Yes Yes No, except for balance

under One Million

Dollar per FY. Current

income is freely

repatriable.

Taxability of Interest on

Deposits as per Indian

tax law

Exempt* Taxable*

*

Note:The interest rates shall depend on the guidelines issued by the Department of Banking Regulations.

1.A. Lending of Loans by NRIs in Foreign exchange covered under Notification No. 3

A resident individual can borrow loan from an NRI who is a close relative outside India upto a sum of USD 250000 or its equivalent subject to the following conditions:

(i) the minimum maturity period of the loan is 1 year(ii) the loan is free of interest; and(iii) the loan is from remittance in free foreign exchange throughnormal banking channels or by debit to

NRE/FCNR account of the NRI.

B. Lending of Loans by NRIs/PIOsin INR covered under Notification No. 4a) To Resident Individuals and Entities in India other than Companies

NRI/PIOs can lend loans in INR to a person resident in India, other than a company in India,i.e. to resident individuals, LLPs, firms etc subject to the following terms and conditions:

(i) Borrowing shall be only on a non-repatriation basis(ii) The amount of loan should be received either by inward remittance from outside India or by debit to

NRE/NRO/FCNR(B)/NRNR/NRSR account of the lender in India;(iii) Period of loan shall not exceed 3 years(iv) Maximum Rate of interest = Bank Rate prevailing on the date of availment of loan plus 2%. (At present,

Taxability as per laws of the resident country should also be examined.

Lending of Loans by NRIs

19


the bank rate is 6.75%)(v) Payment of interest and repayment of principal should be made only to the NRO A/c of the NRI/PIO.

b)A company incorporated in India may borrow in INR, on repatriation or non-repatriation basis, from NRIs subject to the following terms and conditions:

(i) Borrowing company does not and shall not:1. Carry on agricultural/plantation/real estate business; or2. Trade in transferable development rights; or3. Act as Nidhi or Chit fund company.

(ii) Borrowing is only by issuance of non-convertible debentures (NCDs) made by public offer.(iii) The rate of interest is not more than the prime lending rate of SBI as on the date on which the resolution

approving the issue is passed in the borrowing company's General Body Meeting plus 3%;(iv) Period of loan shall not be less than 3 years(v) If the lending is on repatriation basis, the lending should be from inward remittance from outside India

or by debit to NRE/FCNR (B) account of the investor maintained in India.(vi) If the lending is on non-repatriation basis, the lending should be from by inward remittance from

outside India or by debit to NRE/NRO/FCNR(B)/NRNR/NRSR account of the investor maintained in India.Payment of interest and repayment of principal shall be made only to the NRO account of the lender.

END USE RESTRICTIONS FOR BOTH (a) & (b) ABOVE:Ø The proceeds shall be utilised only for own business of the borrower. Ø The restriction on real estate does not include development of townships, construction of

residential/commercial premises, roads or bridges.Construction of farm houses is also not a permitted end-use.

Ø The proceeds should not be used for investment or for on-lending.Ø RBI may permit these borrowers to use the borrowed amount for on-lending to infrastructure sector or

to keep in fixed deposits with banks in India, pending utilisation for permissible end-uses.

Comment: Lending of rupee loans by NRIs to Indian companies whether in the capacity as a shareholder or a director is not permitted under FEMA even though it is permissible under Indian corporate law.

2. Investment in Immovable Property in India under Notification No. 21(R)a) General permission: NRIs/OCIscan invest in commercial or residential immovable property in India.

However, acquisition of agricultural land, farm house or plantation property is not allowed. b) Mode of Payment:

(i) Inward remittance from outside India or (ii) Funds held in NRO/NRE/FCNR accounts.

c) Other Mode of Acquisition for an NRI/OCI:(i) By way of gift from a person resident in India or from an NRI or from an OCI who is a relative as per section 2(77) of the Companies Act, 2013.(ii) By way of inheritance from a Person resident outside India who had acquired the property in accordance with the provisions under FEMA(iii) By way of inheritance from a Person resident in India.

Comment: As persection 2(77) of the Companies Act, 2013, 'Relative' are members of HUF, husband and wife and relatives prescribed as follows:

1. Father (includes step-father)2. Mother (includes step-mother)3. Son (includes step-son)4. Son's wife5. Daughter6. Daughter's husband

To Companies in India

20


7. Brother (includes step-brother)8. Sister (includes step-sister)d) No person being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran,

Nepal, Bhutan, Hong Kong or Macau or Democratic People's Republic of Korea (DPRK) without prior permission of RBI shall acquire or transfer immovable property in India, other than lease, not exceeding 5 years. This restriction shall not apply to OCIs.

e) Repatriation of Sale Proceeds:On sale of such immovable property, repatriation outside India will be permitted if the amount for acquisition of the immovable property was paid in foreign exchange received through banking channels or out of funds held in FCNR/NRE account. In case of residential property, the repatriation of sale proceeds is restricted to two such properties.

f) Rental Income:Such property can also be let out and the rental income can be credited to the NRO/NRE A/c.

3.a) NRIs are not eligible to open a new PPF account. However, a resident Indian who subsequently

becomes an NRI can continue to hold the existing PPF account till first maturity.

b) According to the Notification issued by the Government on 03.10.2017, PPF and NSCs held by an NRI would be treated as "deemed to be closed with effect from the day he becomes a non-resident" and would earn interest rate of a post office savings account. However, an Office Memorandum dated 23.02.2018 was later issued, keeping the said notification in abeyance till further notice for PPF account held by NRIs. Interestingly, the said memorandum is silent on NSCs.

One may note that NRIs do have a plenty of opportunities to invest in India. However, it is equally important to note certain prerequisites which are required before actually venturing into any investment activity:

a) PANb) OCI Cardc) Designated NRO/NRE for putting through the banking transactionsd) Demat Account for investing in sharese) Tax Residency Certificateand Form 10F for beneficial treatment under Indian tax regimef) Duly executed Power of Attorney specifying clearly the powers delegatedg) Compliance with KYC norms of various authoritiesh) Valid identity and address proof

Apart from the above procedural aspects, one has to bear in mind various regulatory aspects based on the nature of investment such as repatriation or non-repatriation, mode of investment such as capital instruments, debt instruments or properties, terms and conditions applicable to each mode of investment, mode of acquisition such purchase, gift, inheritance as well as transfer of such investments, restrictions of powers under Power of Attorney as well as implications on holding and reporting of the investments upon change of residential status.

Compliance is an important aspect to be looked into as defaults may result into penalties and compounding under FEMA and other laws.

Considering the economic development India is going through, it is very well going to be an investment hub for investors around the globe. NRIs do enjoy a privileged position for investing in India as compared to foreign investors. Having said that, one has to analyse the risk-reward ratioand the viability of that avenue before investing.One may also note that more and more countries are now trying to regulate investments through the Exchange of Information mechanism. These investments are also subject to multiple compliance from the host country as well as from India and therefore, due care of the interplay between various regulations such as FEMA, Income tax, Company law should be taken to make the investments in India hassle-free and compliant.

Restriction:

Continuation of Public Provident Fund Account

PREREQUISITES BEFORE INVESTING

CONCLUSION

21


After the opening up of the economy in 1991 following the balance of payment crisis, the Government

reviewed the Exchange Control regime in the country and in the year 2000, The Foreign Exchange

Management Act (FEMA) was enacted which replaced the earlier law The Foreign Exchange Regulation Act

(FERA) which regulated the foreign exchange transactions by Indian Residents as well as transactions in

Indian Rupees by Non Residents. The new regime is liberal and encouraged foreign investments in India

which helped India to improve its Foreign Exchange Reserves.

2. What is Capital Account Convertibility (CAC)?

The Committee on Capital Account Convertibility (1997, Chairman Dr S S Tarapore) in its report has

given a working definition for the CAC which is as following. “CAC refers to the freedom to convert local

financial assets into foreign financial assets and vice versa at market determined rates of exchange. It is

associated with changes of ownership in foreign/domestic financial assets and liabilities and embodies the

creation and liquidation of claims on, or by, the rest of the world.”

While all current account transactions, barring a few, are permitted freely under FEMA, the capital

account transactions are either restricted or regulated.

3. Definition of Capital Account & Current Account Transaction:

The Foreign Exchange Management Act (FEMA) defines Capital & Current Account Transactions as

under:

3.1. Section 2 (e) of FEMA defines Capital Account transactions as "a transaction which alters the assets

or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities

in India of persons resident outside India, and includes transactions referred to in sub-section (3) of section

6 "

(Note: Section 6(3) states certain specified transactions)

3.2. Section 2 (j) of FEMA defines Current Account transactions as "a transaction other than a capital

account transaction and without prejudice to the generality of the foregoing such transaction includes -

-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 and as net income from investments,

-remittances for living expenses of parents, spouse and children residing abroad, and

-expenses in connection with foreign travel, education and medical care of parents, spouse and

children."

4. Liberalised Remittance Scheme (LRS):

Once the Foreign Exchange Reserves position was comfortable, the Government introduced the

Liberalised Remittance Scheme (LRS), applicable to all resident individuals, including minors, which is

nothing but a partial Capital Account Convertibility for Resident Indians.

All the provisions related to the LRS have been consolidated in the "FED Master Direction No. 7/2015-

16" which deals with Master Direction–Liberalised Remittance Scheme (LRS).

According to this scheme, the resident individual is freely allowed to remit an amount of USD 2,50,000

per financial year (FY) for a permitted capital or current account transaction or a combination of both.

The LRS limit has been revised in stages consistent with prevailing macro and micro economic

conditions. During the period from February 4, 2004 till date, the LRS limit has been revised as under:

- CA Viral Satra

LIBERALISED REMITTANCE SCHEME (LRS) LIBERALISED REMITTANCE SCHEME (LRS)

UNDER FEMAUNDER FEMA

22


Ÿ The Scheme thereby permits certain capital & current account transactions upto the current limit of USD 2,50,000. This limit is the overall limit for all permitted Capital & Current account transactions during a FY.

Ÿ 4.1. Permissible Capital Account Transactions:

Ÿ The following capital account transactions are permissible under the LRS scheme:

Ÿ Opening of foreign currency account abroad with a bank

Ÿ Purchase of property abroad

Ÿ Making investments abroad viz acquisition and holding shares of both listed and unlisted overseas company or debt instruments; acquisition of qualification shares of an overseas company for holding the post of Director; acquisition of shares of a foreign company towards professional services rendered or in lieu of Director's remuneration; investment in units of Mutual Funds, Venture Capital Funds, unrated debt securities, promissory notes

Ÿ Setting up Wholly Owned Subsidiaries and Joint Ventures outside India for bonafide business subject to certain terms & conditions. Detailed provisions are covered in Regulation 20A read with Schedule V of FEMA 120.

Ÿ Extending loans including loans in Indian Rupees to Non-resident Indians (NRIs) who are relatives. (Hence loans can also be given in FC to NRIs who are relatives).

Ÿ 4.2. Permissible Current Account Transactions:

Ÿ Further, the limit of USD 2,50,000/- per FY also includes remittances for current account transactions viz:

Ÿ Private visits: Any individual resident can spent an amount aggregating to USD 2,50,000 towards cost of rail/road/water transportation, cost of Euro Rail, passes/tickets, etc. outside India or overseas hotel/lodging expenses, etc as per this scheme.

Ÿ Gift/donation: Any resident individual may remit upto USD 2,50,000 in one FY as gift to a person residing outside India or as donation to an organization outside India.

Ÿ Going abroad on employment: A person going abroad for employment can draw foreign exchange upto USD 2,50,000 per FY in India.

Ÿ Emigration: A person wanting to emigrate can draw foreign exchange up to the amount prescribed by the Scheme. Remittance of any amount of foreign exchange outside India in excess of this limit may be allowed only towards meeting incidental expenses in the country of immigration and not for earning points or credits to become eligible for immigration by way of overseas investments in government bonds; land; commercial enterprise; etc.

Ÿ Maintenance of close relatives abroad: A resident individual can remit upto USD 2,50,000 per FY towards maintenance of relatives

Ÿ Business trip: For business trips to foreign countries, resident individuals can avail foreign exchange up to USD 2,50,000 in a FY irrespective of the number of visits undertaken during the year. Business trips include international conference, seminar, specialised training, apprentice training, etc

Ÿ Medical treatment abroad: Individual can raise USD 2,50,000 or its equivalent without any restrictions. For amount exceeding the above limit, Authorised Dealers may release foreign exchange under general permission based on the estimate from the doctor in India or hospital/ doctor abroad.

Ÿ Studies abroad: A resident individual can raise funds upto LRS limits without any estimate from the foreign University. However, remittances above USD 2,50,000 is allowed, without prior approval, based on the estimate received from the institution abroad.

Ÿ Further, remittances under the Scheme can be used for purchasing objects of art, subject to the provisions

DateFeb 4,

2004

Dec 20,

2006

M a y 8 ,

2007

Sep 26,

2007

Aug 14,

2013

J u n 3 ,

2014

May 26,

2015

LRS Limit (USD) 25,000 50,000 1,00,000 2,00,000 75,000 1,25,000 2,50,000

23


of other applicable laws such as the extant Foreign Trade Policy of the Government of India.

Ÿ 4.3. Retention & reinvestment of funds & income:

Ÿ An investor who has remitted funds under LRS can retain, reinvest the income earned on the investments. At present, the resident individual is not required to repatriate the funds or income generated out of investments made under the Scheme. However, a resident individual who has made overseas direct investment in the equity shares; compulsorily convertible preference shares of a JV/WOS outside within the LRS limit, shall have to comply with the terms and conditions prescribed by the overseas investment guidelines under Notification No. FEMA 263/RB-2013 dated March 5, 2013.

Ÿ 4.4. Facility to grant loan in rupees to NRI/ PIO close relative under the Scheme:

Ÿ Resident individual is permitted to lend to a Non-resident Indian (NRI)/ Person of Indian Origin (PIO) close relative [where 'relative' means & includes those defined in Section 2(77) of the Companies Act, 2013] by way of crossed cheque/ electronic transfer subject to the following conditions:

Ÿ i. the loan is free of interest and the minimum maturity of the loan is one year;

Ÿ ii. the loan amount should be within the overall limit under the Liberalised Remittance Scheme of USD 2,50,000 per financial year available for a resident individual. It would be the responsibility of the resident individual to ensure that the amount of loan granted by him is within the LRS limit and all the remittances made by the resident individual during a given financial year including the loan together have not exceeded the limit prescribed under LRS;

Ÿ iii. the loan shall be utilized for meeting the borrower's personal requirements or for his own business purposes in India.

Ÿ iv.the loan shall not be utilized, either singly or in association with other person for any of the activities in which investment by persons resident outside India is prohibited, namely:

Ÿ a) The business of chit fund, or

Ÿ b)Nidhi Company, or

Ÿ c) Agricultural or plantation activities or in real estate business, or construction of farm houses or

Ÿ (Note: real estate business shall not include development of townships, construction of residential/ commercial premises, roads or bridges)

Ÿ d)Trading in Transferable Development Rights (TDRs).

Ÿ v. the loan amount should be credited to the NRO a/c of the NRI / PIO. Credit of such loan amount may be treated as an eligible credit to NRO a/c;

Ÿ vi. the loan amount shall not be remitted outside India; and

Ÿ vii. repayment of loan shall be made by way of inward remittances through normal banking channels or by debit to the Non-resident Ordinary (NRO) / Non-resident External (NRE) / Foreign Currency Non-resident (FCNR) account of the borrower or out of the sale proceeds of the shares or securities or immovable property against which such loan was granted.

Ÿ 4.5. Rupee gift to a NRI/PIO relative:

Ÿ A resident individual can make a rupee gift to a NRI/PIO who is a relative of the resident individual by way of crossed cheque /electronic transfer. Here, Relative means & includes all those defined under section 2(77) of the Companies Act, 2013.

Ÿ The amount should be credited to the Non-Resident (Ordinary) Rupee Account (NRO) a/c of the NRI / PIO and credit of such gift amount may be treated as an eligible credit to NRO a/c.

Ÿ The gift amount would be within the overall limit of USD 250,000 per FY as permitted under the LRS for a resident individual. It would be the responsibility of the resident donor to ensure that the gift amount is within the LRS limit.

Ÿ Further, the remitter should also consider other tax implications with regards to the gift to relatives.

Ÿ Say for example; in India, 'relative' defined under Income Tax Act, 1961 differs from the definition of relative under Companies Act, 2013. Thus, while remitting amount to a relative, care should be taken that the same is included in the purview of Income Tax definition.

Ÿ 1.Reporting Requirements:

Ÿ The resident individual seeking to make remittance should furnish Form A2 for purchase of foreign exchange under LRS. In case of remitter being a minor, the Form A2 must be countersigned by the minor's

24


natural guardian. PAN is mandatory for making remittances under LRS. The individuals will have to mention the purpose code in the Form A2. The amount remitted should be used for the purpose specified in the said form. In case, the amount is not utilized for the specified purpose it will lead to contravention under FEMA. Further, the individual will have to designate a branch of an AD through which all the remittances under the Scheme will be made.

Ÿ AD Banks are required to submit information on remittances under LRS to RBI every month under Online Return Filing System (ORFS). (AP Dir Circular 50 dated 11-02-2016). AD Banks have been given List of 11 Purpose Codes for reporting transactions under LRS. While reporting, respective purpose code for particular transactions must be mentioned instead of reporting transactions collective under a single code.

Ÿ The following are the Purpose Codes for AD Banks:

Sr. No. Items under LRS Purpose Codes

1. Opening of Foreign Currency Account abroad S0023

2. Purchase of Immovable Property S0005

3. Investment in equity, debt, JV, WOS S0001, S0002, S0003, S0004,

S0021, S0022

4. Gift S1302

5. Donations S1303

6. Travel (business, pilgrimage, medical treatment, education,

employment)

S0301, S0303, S0304, S0305,

S0306

7. Maintenance of Close Relatives S1301

8. Medical Treatment S1108

9. Studies Abroad S1107

10. Emigration S1307

11. 'Others' such as loan to NRI close relative and health

insurance

S0011, S0603

1.

Thus, the LRS scheme permits resident individuals an opportunity to diversify their investment portfolio and

look at global investment options albeit within the limit of USD 2,50,000 per FY.

Conclusion:

25


When we deal with interpretation of regulations say debentures(“OPCDs”).FEMA or SEBI, we are always confronted with the 6 The Plaintiff is India's largest Trusteeship challenge whether we need to apply literal Company and provides a widespectrum of interpretation, or we need to apply the rule Trusteeship Services. ofpurposive construction keeping in mind the object 7 The Plaintiff has been appointed as and purpose of the regulations and the economic theDebenture Trustee under-policy of the nation.Followingare some judicial a. the Debenture Subscription and precedents where the Courts while dealing with DebentureTrust Deed executed by commercial disputes have considered and dealt with Amazia Developers Private Limited FEMA provisions and have interpreted them by (Amazia), Vinca,Brainpoint Infotech honouring the contract entered between the parties, Private Limited (Brainpoint), the considering the strategic relations amongst the Defendant and thePlaintiff; and countries and encouraging FDI inflows. b. the Debenture Subscription and

Debenture Trust Deedexecuted by Supeme Court Judgement in the case of IDBI

Rubix Trading Private Limited Trusteeship Services Ltd. vs Hubtown (Rubix), Vinca, the Defendantand the

Plaintiff as amended by OPCD Ltd.(AIR2016SC 5321)

Amendment Agreement dated Background of the case: th8 September,2010;

1 The present appeal arises out of summons (hereinafter collectively referred to as the

for a judgment in a SummarySuit filed on the “Debenture Trust Deeds”) in relation to

original side of the Bombay High Court, by Vinca'sinvestment in OPCDs issued by

the Appellant - Plaintiff, a debenture trustee, Amazia and Rubix.

to enforce rights that arise out of a 8 Pursuant to and inaccordance with the terms

corporateguarantee executed by the of the Debenture Trust Deeds, Vinca

Respondent - Defendant.hassubscribed to certain OPCDs which carry

2 In 2009 and 2010 , Neder l andse a viable running coupon and aback ended

F i n a n c i e r i n g s - M a a t s c h a p p i j coupon to ensure an internal rate of return of

voorOntwikkelingslanden N.V. (“FMO”) 14.75% perannum.

invested in certain equity shares 9 The Plaintiff states that the proceeds

andcompulsorily convertible debentures obtained by Amazia and Rubixfrom the issue

(“CCDs”) of Vinca Developer PrivateLimited of the OPCD's to Vinca were to be applied

(“Vinca”). towards inter aliaprojects which are

3 As a result of the said investment, FMO compliant with Indian foreign direct

currently holds (i)10% of the equity of Vinca investment law asapplicable to townships,

through Class A shares and is entitled to 10% housing, built-up infrastructure and

ofthe voting rights and economic interest in constructiondevelopment projects.

Vinca by virtue thereof; and (ii) 3CCDs in 10 In order to secure the said OPCDs, and to

Vinca. ensure the due and punctualpayment by

4 Further, as on date, the Defendant owns 49% Amazia and Rubix of all dues to Vinca under

of the equityof Vinca through Class A shares the DebentureGuarantee Deeds, the

and is entitled to 49% of the voting rightsand Defendant has, inter alia vide the

economic interest in Vinca by virtue thereof. CorporateGuarantee Deed, dated 9th

The remaining 41% ClassA equity shares in D e c e m b e r , 2 0 0 9 , i s s u e d a n

Vinca are owned by the individual promoters unconditional,absolute and irrevocable

of theDefendant. corporate guarantee in favour of the Plaintiff,

5 The said monies invested by FMO into Vinca interalia for the benefit of Vinca (Guarantee).

were then used byVinca tosubscribe to 11 Defaults were committed by Amazia and

certain optionally partially convertible Rubix and hence, the Plaintiff was

- Adv. Sagar Maru

JUDICIAL PRECEDENTS ON FEMAJUDICIAL PRECEDENTS ON FEMA

26


constrained to issue notices to both, under effect seeking the assistance of this Court to Clause 33.1 of the Debenture Trust Deeds. enable/enforce recovery by FMO of its FDI However, no response was forthcoming from amount and interest thereon(through Amazia and/or Rubix. Consequently, the Vinca), contrary to the provisions of the Plaintiff in exercise of its right of early FEMA Regulations and FDI policy redemption issued redemption notices embodied therein. As has been held by the calling upon both to fully redeem all the Hon'ble Supreme Court in the case of OPCDs at par value and to credit principal Immami Appa Rao v. G. Ramalingamurthi redemption amount along with interest (supra), the Plaintiff who wants orders in accrued. his favour, is actually seeking the active

However, despite repeated reminders, Amazia assistance of the Court to achieve what the and Rubix failed and neglected to pay the amount due law prohibits/declares illegal and that is and payable in terms of the Debenture Trust Deeds. clearly and patently inconsistent with Consequently, Plaintiff was constrained to issue a public interest. Moreover, as has been held Demand Certificate for the enforcement of the by the Supreme Court in the above case, in Guarantee. No reply has been received to the said such a case there can be no question of Demand Certificate, and hence, the Plaintiff prayed estoppel and the paramount consideration for an order and decree the Defendant to pay a certain of public interest requires that the plea be sum under the Summary Suit for invocation of the allowed to be raised and tried.Corporate Guarantee. e. Even if it is assumed that the Some propositions from the Bombay High Court corporate veil is not to be lifted or Vinca, Ruling of the Single Judge granting unconditional Amazia and Rubix are to be treated as one leave to the Defendant to defend the summary suit: Company, as has been mentioned

a. The present claim has been made and hereinabove, Vinca interposed as the the present proceeding has been holding Company of Amazia and Rubix initiated/filed by the Plaintiff at the instance only for the purpose of structuring FMO's of FMO/FMO nominees on Vinca's Board of FDI investment into Amazia and Rubix, D i r e c t o r s , i n o r d e r t o s e c u r e through Vinca as the nominal recipient. repayment/return of the FDI amount The transaction documents, specifically invested along with a fixed rate of return provided that the FDI amount to be thereon i.e. for seeking the active received by Vinca from FMO against a s s i s t a n c e o f t h i s C o u r t t o issuance of CCDs and equity shares by implement/effectuate/enforce a transaction Vinca, was not to be retained by Vinca or prohibited by the FDI policy and the FEMA used by Vinca in its own projects. The Regulations. transaction documents in fact expressly

b. The transaction documents establish stipulated that the FDI amount received by that it was always agreed and understood Vinca from FMO, was to be immediately that Vinca was only the nominal recipient passed on by Vinca to Amazia and Rubix, of the FDI amount received from FMO and against issuance by them of OPCDs. was also only nominally the recipient of the Accordingly the transaction documents FDI amount and interest thereon at itself established that Vinca had been 14.5per cent per annum to be received interposed only to provide a facade of back from Amazia and Rubix. On receipt c o m p l i a n c e w i t h t h e F E M A back by Vinca of the FDI amount and 14.5 Regulations/FDI policy and was only a per cent interest thereon, FMO can and will nominal recipient of the FDI and that Vinca by conversion of the three CCDs become was immediately required to route the the 99% shareholder of Vinca. entire amount received from FMO to

c. Under the FDI pol icy /FEMA Amazia and Rubix, against issuance Regulations, FMO can thereafter sell the bythem of OPCDs.shares of Vinca at the fair value, which will f. The Bombay High Court granted necessarily include the value/benefit of the unconditional leave to the defendant to FDI amount and interest at 14.5 per cent defend the aforesaid summary suit.thereon.

d. Through the present petition, the Following are some of the arguments made on behalf Plaintiff (who is admittedly acting at the of the Plaintiff before the SC:instance of FMO/FMO's nominees) is in 1. There is no breach whatsoever of the

27


Regulations in as much as the suit, based Regulations.upon a Corporate Guarantee to enforce its e. At the stage that FMO wishes to repatriate such terms, is filed by an Indian company, namely, funds, RBI permission would be necessary. If RBI the debenture trustee IDBI Trusteeship Pvt. permission is not granted, then again there would be Ltd.,against another Indian company namely no infraction of FEMA Regulations.”Hubtown Ltd, the beneficiary being a subsidiary of Hubtown namely Vinca, which Some Remarks in respect of the above Verdict:-is also an Indian company. There is therefore 1. The Supreme Court has not expressly ruled no question of any funds going out of the that the transaction structure adopted by the country in violation of any FEMA Regulation, Parties was illegal and in contravention of the the ultimate repose of the funds being for the FEMA Regulations and FDI Regulations and benefit of Vinca which is an Indian company. has also not lifted the corporate veil in the facts

2. Amount paid by FMO, a Dutch company have of the present case.been swallowed by the development project 2. Payment under the said Guarantee to the that has been set up by Amazia and Rubix. debenture trustee, an Indian company, for and There is no question of any infraction of the on behalf of Vinca, another Indian company is FEMA Regulations for the reason that these not considered as the infraction of the FEMA funds went to purchase equity shares of Regulations. The aforesaid view also seems to Vinca in the form of fully convertible be in line with the provisions of the Companies debentures, such debentures having to be Act, 2013 whereby under Rule 18(d) of the converted into shares after a certain period, Companies Share Capital and Debentures and that, therefore, there was no question of Rules, 2014 the security for the debentures by any illegality in the said transaction. way of a charge or mortgage shall be created in

3. It was also submitted that it is only in 2011 favour of the debenture trustee on any specific that defaults were made in payment, as a movable property or immoveable property of result of which the Corporate Guarantee was the company. Accordingly, a similar view may invoked. The said Corporate Guarantee is be taken in the context of creation of pledge of unconditional and not a word has been stated shares or creation of charge by way of mortgage against its invocation, namely, that it has not or escrow accounts. Further, it has been held been alleged to have been invoked wrongly. that, at the stage that FMO wishes to repatriate Accordingly, there is no defense whatsoever such funds, RBI permission would be to the suit, and the defense being entirely necessary. If RBI permission is not granted, frivolous and vexatious, leave to defend ought then again there would be no infraction of to have been refused altogether. FEMA Regulations.

3. The judgement may also relevant in the Extract of the Supreme Court Ruling: context of creation of private trust for “19. Coming to the facts of the present case: succession planning whereby the Indian assets a. It is clear that a sum of Rs 418 crores has been are settled by Indian settl or for the benefits of paid by FMO, the Dutch company, to Vinca for non-residents.purchase of shares as well as compulsorily 4. The above judgement was in the context of the convertible debentures. This transaction by itself is Summary Suit. It would be interesting to not alleged to be violative of the FEMA Regulations. evaluate the consequences if instead of the b. The suit is filed only on invocation of the Corporate summary suit, the provisions of SARFAESI or Guarantee which on its terms is unconditional. It Insolvency and Bankruptcy Code of 2016 may be added that it is not the Defendant's case that would have been applied.the said Corporate Guarantee is wrongly invoked.c. Payment under the said Guarantee is to the Delhi High Court Verdict in the case of NTT debenture trustee, an Indian company, for and on Docomo Inc. vs. Tata Sons Limited – behalf of Vinca, another Indian company, so that (2017)3CompLJ526(Del)primafacie again there is no infraction of the FEMA Background of the case:Regulations. 1. This matter arose out of petition for the d. Since FMO becomes a 99% holder of Vinca after recognition and enforcement of the award the requisite time period has elapsed, FMO may at passed by Arbitral Tribunal (“AT”) in that stage utilise the funds received pursuant to the London, United Kingdom in LCIA Case No. overall structure agreements in India. If this is so, 152896 under the London Court of again prima facie there isno breach of FEMA Arbitration(“LCIA”) Rules in favour of NTT

28


Docomo and against Tata. disputes.2. A Shareholder Agreement ('SHA') was

entered into on 25th March 2009 between Delhi High Court Ruling:Docomo, Tata and Tata Teleservices Ltd. a. The High Court held that there is no ('TTSL'). One of the provisions of the SHA provision in law which permits RBI to provided that if TTSL failed to satisfy certain intervene in a petition seeking enforcement of key performance indicators stipulated in the an arbitral Award to which RBI is not a party. SHA, Tata would be obligated to find a buyer Its prayer for permission to intervene was or buyers for Docomo's shares in TTSL at the rejected.Sale Price i.e., the higher of (a) the fair value of b. The AT has come to a definite conclusion those shares as of 31st March 2014, or (b) that what has been awarded to Docomo is 50% of the price at which Docomo purchased damages. It has given effect to the alternative its shares. The object of the aforesaid mechanism envisaged by the parties under provision was to guarantee Docomo an exit at the SHA. It is not even RBI's stand that any a minimum of 50% of the subscription price. general or special permission of RBI would

3. Since TTSL did not deliver evidence to be required if what is being paid by Tata to Docomo of its compliance of the aforesaid Docomo is in the nature of damages. The conditions, the Docomo's right to sell Award is very clear on this issue. What was triggered. The disputes arose between the awarded to Docomo were damages and not Parties and the matter was referred to the the price of the shares. The order that the Arbitral Tribunal under LCIA Rules. share scrips must be returned to Tata was

4. The fair value of the shares was lower than only incidental and, in fact, Docomo itself the 50% of the price at which Docomo was not interested in retaining the share purchased its shares, Consequently, if the s c r i p s . I t c o u l d b e s e e n a s a n shares of Docomo were to be purchased by acknowledgment of Docomo volunteering to Tata as per the SHA, it would have return the share scrips as they were of no contravened the FEMA provisions since the particular use to it. acquisition by Tata of the shares held by c. It is not open to RBI to re-characterise the Docomo would have been at price higher than nature of the payment in terms of the Award the fair value of the shares of TTSL and also to which there is no longer any opposition provided assured return to Docomo. from Tata, the only party which could

5. The AT considered the FEMA provisions and possibly oppose its enforcement. passed the award of damages in favor of d. RBI has not placed before the Court any Docomo and against Tata. What was awarded requirement for any permission of RBI to Docomo by AT were damages and not the having to be obtained for Docomo to receive price of the shares. The AT decided that the money as damages in terms of the Award.since the sum awarded to Docomo was in the e. Under the Terms of the SHA, it was intended nature of damages and not the Sale Price of that Docomo should not lose more than 50% the shares, the question of having to seek the of investment. It was in the nature of a special permission of RBI did not arise. downside protection and was not in the Docomo moved to Delhi High Court for nature of an assured return on its enforcement of the aforesaid award of the investment. Arbitral Tribunal. f. SHA was a contractual promise by Tatato find

6. During the proceeding before the Delhi High a buyer for Docomo's shares which could Court RBI intervened contending that the always have been performed using general award was illegal since it violated FEMA permissions of RBI under FEMA Notification provisions and hence against the public No. 20. Its failure to do so was, according to policy of India. RBI did not contend that the the AT, a breach entitling Docomo to SHA was void or illegal. Instead, it drew damages. The SHA, therefore, could not be attention to the fact that the fair value of the said to be void or opposed to any Indian law shares was less than the Sale Price and that including the FEMA, much less the Indian the transfer of the Sale Shares by Docomo to Contract Act. FEMA contains no absolute Tata at the Sale Price was not within the ambit prohibition on contractual obligations.of the general permission. g. As far as the Award itself is concerned, the

7. The Parties had also filed Consent Terms interpretation placed by the AT on the clauses before the High Court for settlement of their of the SHA was consistent with the intention

29


of the contracting parties and not opposed to SHA was also not held to be invalid.any provision of Indian law. There is nothing b. The view of the High Court may be further in the SHA as interpreted by the Award that supplemented by saying that the payment on renders it void or voidable under the ICA or account of the damages may be treated as opposed to either the public policy of India or current account transaction and not capital the fundamental policy of Indian law. The account transaction.AT's interpretation of the various provisions The definitions of current and capital of the FEMA and the regulations thereunder account transaction are as follows for have also not been shown to be improbable or reference: -perverse. "current account transaction" means a

h. The Consent Terms were also held not to be transaction other than a capital account contrary to any provision of Indian law much transaction and without prejudice to the less opposed to public policy or void or generality of the foregoing such transaction voidable under the Indian Contract Act. The includes,issue of an Indian entity honouring its (i) payments due in connection with commitment under a contract with a foreign trade, other current business, foreign entity which was not entered into services, and short-term banking and under any duress or coercion will have a credit facilities in the ordinary course bearing on its goodwill and reputation in of business,the international arena. It will indubitably (ii) payments due as interest on loans have an impact on the foreign direct and as net income from investments,investment inflows and the strategic (iii) remittances for living expenses of relationship between the countries where parents, spouse and children the parties to a contract are located. These residing abroad, andtoo are factors that have to be kept in view (iv) expenses in connection with foreign when examining whether the enforcement travel, education and medical care of of the Award would be consistent with the parents, spouse and children;public policy of India. "capital account transaction" means a

transaction which alters the assets or Some Remarks in respect of the above Verdict: liabilities, including contingent liabilities,

a. In this case the AT and the Delhi High Court outside India of persons resident in India or had considered the FEMA provisions and assets or liabilities in India of persons have held under the facts of the present case resident outside India, and includes that there was downside protection as against transactions referred to in sub-section (3) of the assured return. Further, it had section 6;distinguished between the amount paid towards damages as against the amount paid c. The aforesaid judgement is in favour of the towards the sale of shares. Further, it was enforcement of foreign awards in India and held that, FEMA contains no absolute being in favor of the investors it shall benefit prohibition on contractual obligations and the FDI in India.

30


1. Background provide that 'contravention' is a breach of the

provisions of FEMA and rules / regulations / 1.1 With the liberalization of the economy in the

notification / orders / directions / circulars year 1991, a need was also felt to liberalize the

issued thereunder. In the above backdrop, this legislation regulating foreign exchange to align

article seeks to throw light on some of the the same with economic requisites.

common contraventions under FEMA.According ly, the Fore ign Exchange

Management Act, 1999 (“FEMA” or “the Act”) 2. Common Contraventions under FEMA

was enacted in place of the Foreign Exchange

Regulation Act, 1973 with the objective of External Commercial Borrowings ('ECB')facilitating external trade and payments and

2.1 External Commercial Borrowing (ECB) for promoting the orderly development and

refers to commercial loans raised by eligible maintenance of foreign exchange market in

resident entities from recognized non-resident India. It is widely recognized that while the

entities. The framework for raising ECB is erstwhile Foreign Exchange Regulation Act,

provided under A.P. (DIR Series) Circular 1973 was a rigid legislation, contravention of

No.32 dated 30 November 2015, as amended which amounted to a criminal offence,with the

from time to time, and the Master Direction on enactment of FEMA, the policy focus shifted to

External Commercial Borrowings, Trade facilitation of the use of foreign exchange

Credit, Borrowing and Lending in Foreign instead of regulation thereof. It is in this

Currency by Authorised Dealers and Persons context that violation of the provisions of the

Other than Authorised Dealers ('Master FEMA in force no longer warrant criminal

Direction on ECB').prosecution and are generally considered as

civil offences. 2.2 The ECB framework provides for raising of

ECBs under Track I (Medium term foreign 1.2 The framework of the current foreign

currency denominated ECB), Track II (Long exchange legislation includes FEMA, rules,

term foreign currency denominated ECB) and regulations, notifications, directions, orders,

Track III (Rupee denominated ECB), with FAQs etc. To ensure a holistic construction of

various parameters like minimum average the provisions of FEMA, it is pertinent to take

maturity period, eligible borrowers, into consideration all the above aspects. The

recognized lenders, all-in-cost, end-use RBI and the Authorized Dealer Banks (AD

prescriptions etc. being stipulated for each of Banks) are entrusted with the responsibility of

the three tracks.administering the provisions of FEMA and

accordingly, at times, it is also essential to be 2.3 Some of the common contraventions under

mindful of the interpretations and practical the ECB framework are outlined below:

positions being adopted by the RBI and the AD

Banks in construction of the Act. A study of the (i) All-in-cost ceiling - The Master

cases compounded by RBI may serve useful in Direction on ECB specifies the all-in-cost

gaining insights in this regard. ceiling for ECB under various tracks. In

certain cases, it is observed that interest 1.3 The term 'contravention' has not been defined

payment on ECB is structured in such a in the Act. However, the RBI FAQs on

manner that there is no interest payment Compounding of Contraventions under FEMA

in the initial years and higher interest

- CA Vishal Gada

COMMON CONTRAVENTIONS UNDER FEMACOMMON CONTRAVENTIONS UNDER FEMA

31


payment in subsequent years,which also prior to obtaining Loan Registration

takes into account the interest of earlier Number (LRN), prepayment of ECB

period. In such cases, where the all-in- without satisfying the minimum average

cost for the subsequent years exceeds the maturity period, use of ECB proceeds for

prescribed ceiling as specified in the non-permissible uses such as equity

Master Directions, even where the investment etc.

average all-in-cost during the tenure of Borrowing or Lending in Foreign Exchange the ECB is within the ceiling prescribed, (Other than ECB)t h e s a m e w o u l d c o n s t i t u t e a

contravention of FEMA. This is clarified 2.4 Borrowing in foreign currency by resident vide FAQ No. 32 of the RBI FAQs on ECB. individual from non-resident friends–It is Accordingly, it must be ensured thatthe commonly observed that resident individuals all-in-cost must be within the applicable avail loan in foreign currency from non-ceiling at all times and not merely on an resident friends for personal purposes, average basis. including acquisition of property outside India

etc. Availing of such loan by resident (ii) Deemed ECB -In the context of ECB individuals in foreign currency from persons

framework, one of the most common other than closed relatives is not in compliance contraventions is when payments are with applicable provisions of FEMA. Under made by overseas group entity on behalf FEMA (Borrowing or Lending in Foreign of the Indian entity. It is generally Currency) Regulations, 2004, except in cases observed that, an overseas group entity involving borrowing in foreign currency for bears certain expenses on behalf of the execution of projects outside India or for Indian entity. Such payment may either exports on deferred payment terms or for be recovered later from the Indian entity import payments, a resident individual is or be waived off by the group entity. permitted to borrow in foreign currency only Regulation 3 of FEMA (Borrowing or from close relatives outside India to the extent Lend ing in Fore i gn Exchange ) of USD 250,000. Such loan needs to be of a Regulations, 2000 restricts any person minimum maturity period of 1 year and free of resident in India to borrow or lend in interest. Also, the loan proceedsshould be foreign exchange from or to a person received by inward remittance in free foreign resident in or outside India except as exchange through normal banking channels or specifically provided under FEMA. by debit to NRE / FCNR account of the Payment by an overseas entity in foreign lender.Accordingly, the above points need to be exchange on behalf of an Indian entity is kept into consideration by resident individuals not specifically provided for under the while borrowing in foreign exchange from non-ECB framework and the same is residents.considered by RBI as deemed ECB not in

Borrowing or Lending in INRcompliance with the provisions of FEMA.

Such issue has been dealt with in 2.5 Incurring of expenditure by Indian company

compounding orders in the case of on behalf of foreign group company –Loan by

Markit India Services Pvt. Ltd., Cisco an Indian company / LLP to its joint venture

D e v e l o p m e n t I n d i a P v t . L t d . , (JV) / wholly owned subsidiary (WOS) outside

Adknowledge Asia Pacific (India) Pvt. Ltd. India is permissible under FEMA (Borrowing

and Cisco Systems (India) Pvt. Ltd. or Lending in Rupees) Regulations, 2000

subject to conditions prescribed under FEMA (iii) O ther Con t raven t i ons - O ther (Transfer or Issue of Foreign Security)

common contraventions under the ECB Regulations, 2004 viz. provided the Indian framework include drawdown of ECB company / LLP has equity contribution in the

32


JV. However, at times, it has been observed that the intent of the Scheme. It has been

Indian entities make payment or incurs observed that resident individuals make

expenditure in India in INR on behalf of their remittance under LRS from borrowed

overseas group entity.The RBI may consider funds. Such remittance under LRS out of

such payment on behalf of overseas group borrowed funds is in violation of the

entities to be deemed lending in INR in provisions of FEMA. It must be ensured

contravention with the provisions of that any remittance under LRS is out of

FEMA.Regulation 3 of FEMA (Borrowing and own funds.

Lending in Rupees) Regulations, 2000 restricts (ii) Pooling of limits of family members lending in rupees by a person resident in India

–It is observed that while pooling limits of to a person resident outside India except as family members for remittance under specifically provided under the Act or the LRS for capital account transactions regulations. Incurring of expenditure on behalf such as opening a bank account/ of overseas group entity is not specifically investment/ purchase of property, though permitted as a mode of lending in INR either the family members are co-owners / co-under the FEMA (Borrowing or Lending in partners of the overseas bank account/ Rupees) Regulations, 2000 or under FEMA investment/ property, the co-ownership / (Transfer or Issue of Foreign Security) co-partnership is not in the same Regulations, 2004. Accordingly, such proportion as the utilization of limits for transaction of incurring of expenses by Indian LRS remittance. This may constitute entity on behalf of group concerns may be contravention of LRS provisions and is considered as a contravention under FEMA. further explained by way of an

Liberalised Remittance Scheme ('LRS') illustration. A and B, resident individuals

and family members, contribute USD 2.6 LRS is a facility provided by RBI for all 250,000 each under LRS for acquisition resident individuals including minors to freely of an immovable property outside India. remit upto USD 250,000 annually for any However, A has 75% share in the property current account transactions or specified while B has 25% share in such property, capital account transactions or a combination despite contributing 50% of the funds of both. The scheme was introduced by RBI, required for acquisition of the property. vide circular no. 64 dated February 04, 2004 as RBI may consider such a transaction as a liberalization measure.one involving deemed gift by B to the

2.7 Common contraventions under the LRS are credit of A to the extent of USD 125,000 outlined hereunder: (25% share in the property) not permitted (i) Remittance out of other than own under the provisions of LRS. Accordingly,

funds -The Master Direction on LRS, where LRS limits of family members are under operational instructions to clubbed for making remittance for capital Authorised Persons, stipulates that account transactions, it must be ensured payment for making remittance under that the co-ownership / co-partnership of LRS should be received out of funds the family members is in the same belonging to the person seeking to make proportion as their contribution.the remittances. This provision appears

to have been made to plug situations (iii) Setting up of JV / WOS under LRS -wherein an individual who has already Resident individuals are permitted to exhausted his limit under LRS loans the make remittance under LRS for setting money to another resident individual and up of WOS or JV outside India for makes remittance through such other bonafide business subject to terms and individual, which would be contrary to conditions stipulated in Notification No.

33


FEMA 263/RB-2013 dated March 2013. regulateoverseas direct investments (or

Common contraventions in respect of financial commitment) by Indian companies /

such JV / WOS set up under LRS route LLPs in overseas JV / WOS. A few common

include: contraventions under the ODI Regulations are

§ JV / WOS acquired / set up by a outlined below:

resident individual under LRScan (i) ODI in real estate -It is frequently

only be an operating entity and no observed thatresident individuals set up

step-down subsidiary is allowed to an Indian holding company that further

be acquired or set up by the JV or invests upto 400% of its net worth in

WOS.This aspect is also relevant J V / W O S o v e r s e a s u n d e r O D I

where part of the capital investment Regulations. Such JV / WOSthenacquires

in the JV / WOS has been made by an the immovable property abroad

Indian Party under Overseas Direct contending the same to be for its business

Investment (ODI) route and the purposes. In absence of any bona fide

balance has been made by resident business of the JV / WOS, such

individual under LRS route. In such acquisition of immovable property is

cases, though setting up of step- regarded by the regulator as ODI in real

down subsidiaries by JV / WOS set estatewhich is prohibited under the ODI

up under ODI route may otherwise Regulations and is considered to be in

be permissible, since the balance violation of ODI Regulations. One also

capital investment has been made needs to be mindful of investing in a JV /

under LRS, the JV / WOS in such WOS involved in leasing of immovable

case may not have a step-down property since there is no express

subsidiary. exclusion for leasing activities from the

§ Additionally, it is commonly observed definition of 'real estate' under ODI

that disinvestment rules are not Regulations as in the case of FEMA

followed by the residents. It must be (Transfer or Issue of any Security by a

noted that disinvestment by a Person Resident outside India)

resident individual is allowed only Regulations, 2017.Such transactions

after one year from the date of should be undertaken after obtaining

making first remittance for setting prior approval of RBI.

up or acquiring the JV or WOS (ii) Round tripping -One of the common abroad.

contraventions related to cross border § Also, no write off is allowed in case of f l o w o f i n v e s t m e n t i s t h e disinvestments by the resident

conceptpopularly known as 'Round individuals as per Notification No.

tripping'. Round tripping, as the name FEMA 263/RB-2013 (supra).

suggests, involves investment of money § It is also commonly observed that

from Indiain overseas entities and individuals making overseas

routing of the same back to India in the investments in JV / WOSunder LRS

missfiling of Form APR resulting in form of foreign direct investment. While

contravention of condition under there is no express provision prohibiting

Notification No. FEMA 263/RB- round tripping in the scheme of FEMA,

2013. Regulation 6(2)(ii) of the ODI Regulations

provides that the direct investment by an

Indian Party should be made in an Overseas Direct Investment (ODI)overseas JV / WOS engaged in a bona fide

2.8 FEMA (Transfer or Issue of Foreign Security) business activity, it has been observed Regulations, 2004 (“ODI Regulations”)

34


thatforeign direct investment (FDI) participation of the Indian Party in the JV

through overseas direct investment (ODI) / WOS continues till the loan to JV / WOS

is not considered as a bona fide business subsists.

activity in terms of the provisions of (iv) Divestment – As per ODI regulations, Regulation 6(2)(ii) of the ODI Regulations

an Indian Party may transfer by way of by RBI. Such transactions have been sale any share or security held by it in a compounded by the RBI in the case of JV/WOS outside India provided the Subhkam Ventures (I) Pvt. Ltd., Jasper overseas concern has been in operation Infotech Pvt. Ltd., Lupin Limited and for at least 1 full year. Divestment from Halcyon Finance and Capital Advisors the JV / WOS before completion of 1 year Pvt. Ltd.In such cases, RBI also generally of operation is the most common advises to unwind either the FDI or the contravention relating to divestment. ODI leg of the structure. While it may be Also, while transferring of shares of argued that genuine cases (for e.g. where JV/WOS by way of sale it must be ensured the overseas entity already has a step-that the Indian Party does not have any down Indian entity prior to ODI from outstanding dues by way of dividend, India) should be allowed, the present technical know-how fees, royalty, view of the RBI appears to be that no consultancy, commission or other cases involving round tripping shall be entitlement and/or export proceeds from

permitted. Hence, it would be prudent to the JV/WOS. It also needs to be ensured

undertake transactions involving round that all the APRs due have been filed

tripping only with the prior approval of before disinvestment. It is commonly

RBI.observed that shares in overseas JV /

WOS are sold without complying with the (iii) Loan without equity contribution aforesaid conditions. One such case –Regulation 6(4) of the ODI Regulations which has been compounded by the RBI provides that an Indian Party may extend involving similar contravention is that a loan or a guarantee to or on behalf of the ofSahyadri Hospitals Limited.JV / WOS abroad within the permissible

financial commitment only where the (v) Other Contraventions -Other

Indian Party has made investment by way common contraventions under the ODI

of equity contribution to the equity Regulat ions include rout ing of

capital of the JV. It has been observed that transactionsrelating to investment in JV /

the loan to the JV / WOS by the Indian WOS through a branch other than the

Party continues even after the equity designated branch of AD Bank(Afcons

investment in the JV / WOS has been Infrastructure Limited), delay in receipt

divested by the Indian Party. While the of share certificates, non-reporting of

ODI Regulations only provide about diversification of activities of JV / WOS or

equity participation at the time of setting up of step-down subsidiary by JV /

extension of loan / guarantee, the RBI WOS in terms of requirement under

appears to consider continuation of loan Regulation 13 of the ODI Regulations etc.in the JV / WOS at a later point of time

without equity contribution as a

contravention of the said Regulation. Export-Import RegulationsS u c h c o n t r a v e n t i o n h a s b e e n

compounded in the case of Lodha 2.9 Tri-partite adjustments -In certain cases,

Developers Private Limited.Accordingly, Indian residents may resort to tri-partite

it must be ensured that equity adjustments with respect to receivables and

35


payables from abroad. This could especially be Accordingly, it must be ensured that import

the case where imported goods are re-exported payables are not outstanding for more than 6

or in case of high-seas sales. To illustrate, an months.

Indian resident A has a receivable from B (non-Desgnation of Accounts on Change in resident) and an equivalent payable to C (non-Residential Statusresident). A settles the outstanding receivable

and payable by requesting B to directly make 2.11 FEMA (Deposit) Regulations, 2016 deal with payment to C. Such tri-partite settlement is in the various types of bank accounts that could contravention of FEMA. Under the instructions be maintained in India by persons resident outlined under A.P. (DIR Series) Circular No. outside India as well as foreign accounts that 47 dated November 17, 2011, AD Banks have could be maintained by persons resident in been allowed to set-off export receivables India. All persons resident outside India are against import payables, subject to specified permitted to maintain Non-Resident Ordinary conditions. One of the conditions is that the Rupee (NRO) Account in India for putting “set-off” of export receivables against import through bona fide transactions in rupees. payments should be in respect of the same Similarly, NRIs / PIOs are permitted to overseas buyer and supplier and that set-off maintain Non-Resident (External) Rupee should be carried on through banking (NRE) Account in India. By nature, funds in channels only.Tri-partite adjustments are not NRO account are generally non-repatriable in compliance with the conditions prescribed beyond prescribed threshold of USD 1 million under the said Circular and accordingly, per financial year while NRE account is fully should not be undertaken to avoid any adverse repatriable.implications under FEMA.

2.12 FEMA (Deposit) Regulations, 2016 provide 2.10 Import dues outstanding for more than that when a resident Indian becomes a person

prescribed period –It is observed that on resident outside India, his existing resident account of liquidity issues, resident importers account should be designated as NRO account do not pay the import dues for long, especially and likewise, NRO account may be designated in case of import from overseas group as resident accounts on the return of the concerns. Non-payment of import dues for a account holder to India. period of more than 6 months shall

2.13 Similarly, NRE accounts should be tantamount to a contravention of FEMA.

designated as resident accounts or the funds Paragraph B.5.1. of the Master Direction on

held in these accounts may be transferred to Import of Goods and Services also provides

the Resident Foreign Currency (RFC) account, that remittances against imports should be

at the option of the account holder, completed within 6 months from the date of

immediately upon the return of the account shipment, except in cases where amounts are

holder to India for taking up employment or on withheld towards guarantee of performance

change in the residential status. and except in case of deferred payment

arrangements such as supplier's credit or 2.14 Intimating the bank for change in designation

buyer's credit. Payment beyond a period of six of the bank account is often missed out on

months may be permitted by the AD Bank change in residential status under FEMA.

because of delay due to disputes, financial Though the RBI does not take a strict view in

difficulties etc. in certain cases. However, in respect of this contravention, it is suggested

other cases, payment beyond a period of 6 that migrating / returning individuals should

months would require the prior approval of be mindful of the same.

RBI. While logically delay in payment of import Foreign Investment in Indiadues in fact preserves foreign exchange, such

argument is not accepted as tenable. 2.15 Foreign investment in India is governed by

36


the FEMA (Transfer or Issue of Security by a r equ i r e government approva l .

Person Resident Outside India) Regulations, Accordingly, it must be ensured that the

2017 (“Inbound Regulations”). These Indian entity presents its case before RBI

regulations replaced the erstwhile FEMA and obtains necessary approval in order

(Transfer or Issue of Security by a Person to avoid any adverse implications under

Resident Outside India) Regulations, 2000. FEMA.

Some of the common contraventions under the (ii) Mode of payment for foreign Inbound Regulations are discussed below:

investment –At times, the consideration (i) Foreign investment in SPVs/ core for foreign investment is paid by another investment companies (CICs) – resident on behalf of the foreign investor. Instanceshave been noted where foreign Such a mode of payment for foreign investment is received by an Indian investment is in contravention of the entity proposed to be engaged in Inbound Regulations. The RBI has activities which are under automatic compounded such a contravention in the route, however, the proceeds of foreign case of Mahesh Mohan Oberoi.It must be investment are invested in treasury e n s u r e d t h a t t h e a m o u n t o f instruments etc. for a substantial period consideration for foreign investment is of time till the deployment of such received as inward remittance from proceeds for business operations. This abroad through banking channels or out usually happens where there is unusual of funds held in NRE / FCNR(B) account delay in commencement of operations or etc.as permitted under the Schedule of the operations fail to take-off. In such the Inbound Regulations under which cases, since the surplus proceeds of foreign investment is being made. foreign investment are utilized for Further, it also needs to be ensured that investment activities, it is possible that foreign investment is not made in cash or the Indian entity fulfils the criteria of through third-party intermediaries or classification as NBFC. If the Indian from NRO account of the investor (unless entity is not registered as an NBFC with the investment is on non-repatriable the RBI, receipt of foreign investment by basis) sincethe same would be such Indian entity may constitute a considered as contravention of FEMA. contravention of FEMA. This is because

Paragraph B of Regulation 16 of the (iii) O ther con t raven t i ons–Other Inbound Regulations provides that

common contraventions under the foreign investment in investing Inbound Regulations involve violation of companies not registered as NBFCs with sectoral cap for foreign investment, non-the RBI and in core investment adherence to pricing guidelines, non-companies, both engaged in the activity allotment of shares within 60 days from of investing in the capital of other Indian the date of receipt of consideration, non-entities, will require prior Government filing / delay in filing of Single Master approval. Further, foreign investment in Form and Form FLA etc.financial services is permitted to the

extent of 100% under automatic route 3. Penal consequences of contravention and only where the financial services

available remediesactivities are regulated by financial

sector regulators. In situations referred 3.1 Contraventions under FEMA are adjudicated to above, since the Indian entity would by an Adjudicating Officer, being an officer of not be registered as an NBFC with the the Directorate of Enforcement.Upon a RBI for the interim period, foreign contravention being confirmed, a penalty of up investment in such Indian entity may

37


to thrice the amount involved in the guiding principles for the purpose of

contravention (where such amount is computation of compounding fee. It is

quantifiable) or up to two lakh rupees where generally observed that the RBI takes a lenient

the amount is not quantifiable is leviable. view in compounding proceedings and the

Where the contravention is a continuing one, compounding fee is substantially lower than

further penalty of five thousand rupees for the penalty exposure for the contravention

every day during which the contravention under the Act.

continues is leviable. Confiscation of the 3.3 It may also be noted that delays in reporting

property in respect of which contravention has under the Inbound Regulations for

been committed may also be directed where transactions undertaken on or after 7

deemed fit. Further, prosecution proceedings November 2017 can now be regularized by

may also be initiated in cases involving payment of prescribed late submission fee

acquiring of foreign exchange, foreign security (LSF) without undergoing the compounding

or immovable property outside India of procedure.

aggregate value exceeding one crore rupees.

4. Conclusion3.2 Considering the above consequences, in case

a contravention is realized to have been 4.1 Considering the above consequences, it is in committed by error or otherwise, it is advisable best interest to review the implications under to get the same compoundedin order to avoid the Act in case of any transaction between further penal consequences or prosecution residents and non-residents and any under the Act. Almost all contraventions can be transaction involving foreign exchange. compounded under FEMA unless the

4.2 In case of any ambiguity regarding any compounding re la tes to a ser ious provisions of the Act, the suggested course of contravention suspected of money laundering, action is to obtain guidance from the AD Bank terror financing or affecting the sovereignty regarding the provisions or a prior approval and integrity of the nation etc. Compounding from the RBI to avoid any adverse may be initiated prior to or even after the consequences.initiation of adjudication proceedings under

section 13 of FEMA. The RBI has also issued

38


by CA IP Neha Gada and CA IP Rajen Gada

BRIEF UPDATE ON SEBI BRIEF UPDATE ON SEBI AND CORPORATE LAW AND CORPORATE LAW A. REGULATIONS:

1. Securities and Exchange Board of India

(Issue of Capital and Disclosure

Requirements) Regulations, 2018.[Issued by the Securities and Exchange Board of India vide Notification No. SEBI/LAD-NRO/GN/2018/31 dated September 11, 2018]


(Buy-back of Securities) Regulations,

2018[Issued by the Securities and Exchange Board of India vide Notification No. SEBI/LAD-NRO/GN/2018/32dated

6. Securities and Exchange Board of India September 11, 2018](Appointment of Administrator and 3. Securities and Exchange Board of India Procedure for Refunding to the (Depositories and Participants) Investors) Regulations, 2018Regulations, 2018[Issued by the Securities and Exchange [Issued by the Securities and Exchange Board of India vide Notification No. Board of India vide Notification No. SEBI/LAD-NRO/GN/2018/39 dated SEBI/LAD-NRO/GN/2018/40 dated October 08, 2018]October 03, 2018]

4. Securities Contracts (Regulation) (Stock

Exchanges and Clearing Corporations)

Regulations, 2018[Issued by the Securities and Exchange Board of India vide Notification No. SEBI/LAD-NRO/GN/2018/41 dated October 03, 2018]


(Buy-back of Securities) Regulations,

2018[Issued by the Securities and Exchange Board of India vide Notification No. SEBI/LAD-NRO/GN/2018/33 dated September 11, 2018]

Further, an “Administrator” means a person registered with the Insolvency and Bankruptcy Board of India as an

SEBI has introduced the concept of “fugitive economic offender”. A “fugitive economic offender” shall mean an individual who is declared a fugitive economic offender under section 12 of the Fugitive Economic Offenders Act, 2018 (17 of 2018).

A fugitive economic offender is debarred from making a public announcement of an open offer or make a competing offer for acquiring shares or enter into any transaction, either directly or indirectly, for acquiring any shares or voting rights or control of a target company.

These Regulations are applicable for all or any of the following:(a) appointment of Administrator

pursuant to failure to comply with disgorgement or refund orders passed by the Board;

(b) sale of properties attached by the Recovery Officer of the Board under

SEBI has re-issued the above listed the Act;Regulations thereby consolidating various (c) collection of claim documents and amendments undertaken post the issue of verification of claims of investors for respective original regulations till date. the purpose of effecting refunds;

(d) refund of monies to the investors pursuant to disgorgement or refund orders passed by the Board;

(e) recovery of disgorgement amounts directed by the Board;

(f) any act incidental or connected thereto.

Among other important amendments,

39


Insolvency Resolution Professional and FP;who has been engaged by the Recovery (d) Exempted documents to be provided Officer (an Officer appointed by SEBI) for during investigations/ enquiry;the purposes of these regulations.

(e) Data security;

(f) Period for maintenance of records; 7. Securities and Exchange Board of India

and(Issue and Listing of Debt Securities)

(g) Timelines for compliance.(Amendment) Regulations, 2018[Issued by the Securities and Exchange

2. Eligibility conditions for Foreign Portfolio Board of India vide Notification No.

Investors (FPIs)SEBI/LAD-NRO/GN/2018/42 dated [Issued by the Securities and Exchange October 09, 2018]Board of India vide Circular No. 8. Securities and Exchange Board of India CIR/IMD/FPIC/CIR/P/2018/132 dated (Issue and Listing of Securitised Debt September 21, 2018]Instruments and Security Receipts)

(Second Amendment) Regulations, 2018[Issued by the Securities and Exchange Board of India vide Notification No. SEBI/LAD-NRO/GN/2018/43 dated October 09, 2018]


(Issue and Listing of Non-Convertible 3. Applicability of Circulars issued for Redeemable Preference Shares)

Commodity Derivatives markets(Amendment) Regulations, 2018

[Issued by the Securities and Exchange [Issued by the Securities and Exchange

Board of India vide Circular No. Board of India vide Notification No.

SEBI/HO/CDMRD/DMP/CIR/P/2018/133 SEBI/LAD-NRO/GN/2018/44 dated dated September 28, 2018]October 09, 2018]

SEBI has done away with the requirement of depositing 1% (one percent) refundable security deposit to be deposited by the Issuer of Securities to the Stock Exchange.

4. Participation of Eligible Foreign Entities B. CIRCULARS(EFEs) in the commodity derivatives

market1. Know Your Client requirements for [Issued by the Securities and Exchange Foreign Portfolio Investors (FPIs)Board of India vide Circular No. [Issued by the Securities and Exchange SEBI/HO/CDMRD/DMP/CIR/P/2018/134 Board of India vide Circular No. dated October 09, 2018]CIR/IMD/FPIC/CIR/P/2018/131 dated

September 21, 2018]

(a) Identification and verification of

Beneficial Owners –For Category II & III

FPIs;

(b) Periodic KYC review;

(c) KYC documentation for Category III

This circular deals with the manner and extent of participation of Non-Resident Indians / Overseas Citizens of India / Resident Indians in either the FPI or controlling the investment manager of FPI.

Effective from October 1, 2018 no separate circulars with respect to Commodity Derivatives Exchanges will be issued by SEBI.

Foreign entities having actual exposure to Indian commodity markets will now be

SEBI has issued revised KYC norms that permitted to participate in the commodity

the Foreign Portfolio Investors will now derivative segment of recognized stock

have to comply with. The Circular issued exchanges for hedging their exposure.

deals with:

The Circular further lays down the Regulatory framework for Eligible Foreign Entities (EFEs) in Commodity Derivatives Segment.

40


5. Uniformity in the procedure for obtaining

samples of goods at the Exchange

accredited warehouses

[Issued by the Securities and Exchange

Board of India vide Circular No.

SEBI/HO/CDMRD/DMP/CIR/P/2018/136

dated October 16, 2018]

8. Standardised norms for transfer of

securities in physical mode


Board o f Ind ia v ide C i r cu la r

No.SEBI/HO/MIRSD/DOS3/CIR/P/2018/1

39 dated November 06, 2018]

6. Total Expense Ratio (TER) and

Performance Disclosure for Mutual

Funds



SEBI/HO/IMD/DF2/CIR/P/2018/137

dated October 22, 2018]

(b) Mismatch of name in PAN card vis-à-

vis name on share certificate/transfer

deed; and

(c) Major mismatch / Non-availability of

transferor'ssignature.

For further details, please refer SEBI website at

.

7. Streamlining the Process of Public Issue

of Equity Shares and convertibles



SEBI/HO/CFD/DIL2/CIR/P/2018/138

dated November 01, 2018]

addition to ASBA route.This payment method will be implemented in a phased manner starting from January 01, 2019.

The Circular further elaborates details of Channels for making application, Timelines, Process of becoming a Sponsor Bank, Process of UPI 2.0 Certification by Self Certified Syndicate Banks (SCSBs),

SEBI has directed that Exchange Validation by Depositories, Number of accredited warehouses should follow applications per bank account, Obligations common procedures for obtaining sample of the Issuer and Other requirements.of goods. They have also been directed to collect 4 (four) different samples and retains them so as to be used use case of any disputes that may arise subsequently.

This Circular is effective from November 14, 2018.

This circular elaborates the procedure to be adopted for transfer of physical securities. Thedocumentation/procedure for transfer of physical securitiesis modified as under:

(a) Non - availability of PAN of the

transferor for transfer deeds executed

prior to December 01, 2015;The Circular elaborates on the following aspects to be followed by Mutual funds, Asset Management Companies, Trustees, Registrar and Share Transfer Agents and Association of Mutual funds of India:

(a) Transparency in TER;

(b) Additional TER of 30 bps for

penetration in B-30 cities;

(c) Disclosure of expenses;

(d) Disclosure of scheme performance;

and

(e) Applicability.

SEBI has decided to include Unified Payment Interface developed by National Payments Corporation of India (NPCI), a Reserve Bank of India initiative, as an additional payment mechanism in

www.sebi.gov.in

41

3. Commencement Notification –

A. Sections 37

[Issued by Ministry of Corporate Affairs

1. Amendment to Schedule –V of the CA vide Notification no. S.O. 4907 (E)

2013 dated September 19, 2018]


vide Notification no. S.O. 4822(E) dated Section 37 of Companies Act, 2013

September 12, 2018] relating to 'Action by Affected Persons'

shall come into force from September 19,

The following acts have been added to the 2018.

list of other statutes whereby a person

cannot be appointed as a managing 4. Constitution of National Financial

director, whole-time director or a manager Reporting Authority ('NFRA')

if he / she have been sentenced to [Issued by Ministry of Corporate Affairs

imprisonment for any period, or to a fine vide Notification no. S.O. 5099 (E)

exceeding one thousand rupees, for the dated October 1, 2018]

conviction of an offence:

(a) Insolvency and Bankruptcy Code, NFRA has been constituted by Central

2016 (31 of 2016), Government with effect from October 1,

(b) Goods and Services Tax Act, 2017 2018.

(12 of 2017); and

(c) Fugitive Economic Offenders Act, 5. Regarding amendments in Schedule

2018 (17 of 2018) III to the Companies Act, 2013-reg.


Further, the provisions relating to vide Notification no. S.O. ___ (E) dated

Remuneration have also been amended. September 12, 2018]

2. Commencement Notification – MCA has amended the disclosure

Sections 66 to 70 (both inclusive) requirements in Division I and II of

[Issued by Ministry of Corporate Affairs Schedule III with effect from October 11,

vide Notification no. S.O. 4823 (E) 2018. Further, it has introduced Division

dated September 12, 2018] III for disclosures to be made in

preparation of Financial Statements by

The following section of Companies Act, Non-Banking Finance Companies.

2013 shall come into force from 6. Companies (Amendment) Ordinance ,

September 12, 2018: 2018

(a) Sec 66 - Reduction of Share Capital. [Issued by Ministry of Corporate Affairs

(b) Sec 67 – Restrictions on Purchase by vide Ordinance No. 9 of 2018 dated

Company or Giving of Loans by it for November 02, 2018]

Purchase of its Shares

(c) Sec 68 – Power of the Company to The Amendment Ordinance has been

Purchase its Own Securities promulgated by the President of India

(d) Sec 69 – Transfer of Certain Sums to since the Parliament was not in session

Capital Redemption Reserve Account and the President was satisfied that there

(e) Sec 70 – Prohibition for Buy-Back in existed circumstances which rendered it

Certain Circumstances necessary to take immediate action. As

such, various sections have been

NOTIFICATIONS

CORPORATE LAWCORPORATE LAW


42

Ind-AS related Rules.

B.

5. Companies (Registered Valuers and

1. Companies ( CSR) Amendment Rules, Valuation) Third Amendment Rules,

2018 2018

[Issued by Ministry of Corporate Affairs [Issued by Ministry of Corporate Affairs

vide notification no. G.S.R. 895 (E) vide notification no. G.S.R. 925(E)

dated September 19, 2018] dated September 25, 2018]

The Central Government has amended the The last date for accepting the valuation

definition section by enlarging the scope of assignments without registering as a

applicability of the CSR provisions. valuation professional has been extended

Further, it shall now be applicable to from September 30, 2018 to January 31,

private limited as well as unlisted public 2018.

companies satisfying the provisions of

section 135 of Companies Act, 2013.

2. Companies (Registration office and 1. Relaxation of additional fees and

Fees) 5th Amendment Rules,2018 extension of last date of in filling of

[Issued by Ministry of Corporate Affairs forms MGT-7(Annual Return) and AOC-

vide notification no. G.S.R. 905 (E) 4 Financial Statement Under the

dated September 20, 2018] companies Act,2013-State of Kerala-

reg.

The Rules with regard to payment of [Issued by Ministry of Corporate Affairs

penalty for delay in filing of DIR-3-KYC vide General Circular 09/2018 dated

have been relaxed such that fee of rupees October 10, 2018]

five hundred shall be payable from

21.09.2018 to 05.10.2018and fee of

rupees five thousand shall be payable on

or after 06.10.2018.

3. Companies (Appointment and

Qual i f icat ion of Directors)6th

Amendment Rule,2018


vide notification no. G.S.R. 904(E) 2. The additional fee waiver vide

dated September 20, 2018] circular No.10 dated 29th October 2018

has been implemented w.e.f 31st

The due date for filing of Form DIR-3 KYC October midnight. Stakeholders may

was extended from September 15, 2018 to please take note.

October 5, 2018. [Issued by Ministry of Corporate Affairs

vide General Circular 10/2018 dated

4. Companies (Indian Accounting October 29, 2018]

Standards) Second Amendment

Rules,2018


vide notification no. G.S.R. 903(E)

dated September 20, 2018]

The Central Government has amended the

RULES

C.

MCA has extended the time limit for filing

MGT-7(Annual Return) and AOC-4

Financial Statement without payment of

additional fees till December 31, 2018 for

the companies having their registered

office in the State of Kerala.

MCA has extended the time limit for filing

MGT-7(Annual Return) and AOC-4

Financial Statement without payment of

additional fees till December 31, 2018.

CIRCULARS


FEMAFEMAUPDATESUPDATES

(Matter on FEMA has been contributed by:

CA VIRAL SATRACA MANOJ SHAH

43

ECB Policy – Review of Hedging Provision (NBFC-AFCs), Holding Companies and Core Investment Companies (CICs). 12Also, Housing Finance Companies, regulated by the National

A.P. (DIR Series) Circular No. 15 dated November Housing Bank, Port Trusts constituted under the 26, 2018 Major Port Trusts Act, 1963 or Indian Ports Act,

1908, for a maturity period of 3 to 5 years.

It has been decided to reduce the mandatory hedge It is also clarified that ECBs falling within the coverage from 100 per cent to 70 per cent for ECBs aforesaid scope but raised prior to the date of this raised under Track I of the ECB framework by circular will be required to mandatorily roll-over eligible borrowers given at para 2.4.2(vi) viz. in their existing hedge(s) only to the extent of 70 per cent infrastructure sector, Non-Banking Financial of outstanding ECB exposure.Companies -Infrastructure Finance Companies

(NBFC-IFCs), NBFCs-Asset Finance Companies


Sr. No. Subject Matter Contraventions Compounded

1. F o r e i g n D i r e c t Investment – FEMA Notification No. 20

Øbusiness of wholesale trading in India and providing maintenance services in relation to eye care products. The company had 100% FDI. It carried out financial leasing of Opthalmic Surgical Equipment (through wholesale trading), from March 2006 to October 2015.

Ø A company having foreign investment and engaged in financial leasing was required to meet the minimum capitalization norms, which the applicant company failed to do, thus contravening Regulation 5(1) read with Annexure B of Schedule I of Notification No. FEMA 20/2000RB.

The applicant company was engaged in

Gist of some Compounding Orders passed by Reserve Bank of India

DIRECTDIRECTTAXES LAW UPDATETAXES LAW UPDATE

- Law Update

CA HARESH P. KENIA

44


· INCOME-TAX (TWELFTH AMENDMENT) · SECTION 194A OF THE INCOME-TAX ACT,

RULES, 2018 - AMENDMENT IN RULE 114, 1961, READ WITH RULE 31A OF THE

FORMS 49A & 49AA INCOME-TAX RULES, 1962 - DEDUCTION

NOTIFICATION NO. GSR 1128(E) OF TAX AT SOURCE - INTEREST OTHER

[NO.82/2018 (F.NO.370142/40/2016-TPL THAN INTEREST ON SECURITIES - TDS IN

(PART-I)], DT 19-11-2018 CASE OF SENIOR CITIZENS Budget 2018 amended Sec 139A of the I-T Act NOTIFICATION NO. 06/2018

making it mandatory for non-individuals who [F.NO.PR.DGIT(S)/CPC(TDS)/NOTIFICATION

did not have PAN but conducted transactions of /2018-19], DT 6-12-2018

Rs 2.5 lakh or more in a single FY to apply for It has been brought to the notice of CBDT that in

PAN. Non-individual entities who have do not case of Senior Cit izens, some TDS

have PAN but conduct a transaction of Rs 2.5 deductors/Banks are making TDS deductions

lakh or more in a single financial year will now even when the amount of income does not

mandatorily have to get a PAN before May 31 of exceed fifty thousand rupees. The same is not in

the following financial year. This is as per the accordance with the law as the Income-tax Act

above notification. An amendment has been provides that no tax deduction at source under

made in Rule 114 of the income tax rules. The section 194A shall be made in the case of Senior

amendment will come into effect from Citizens where the amount of such income or,

December 5, 2018. the aggregate of the amounts of such income

· SECTION 90 OF THE INCOME-TAX ACT, credited or paid during the financial year does

1961 - DOUBLE TAXATION AGREEMENT - not exceed fifty thousand rupees. (Please refer

AMENDMENT IN DOUBLE TAXATION to the third proviso to sub-section 3 of section

AVOIDANCE AGREEMENT BETWEEN INDIA 194A). Under sub-rule (5) of Rule 31A of the

& CHINA Income-tax Rules, 1962, the Director General of PIB PRESS RELEASE, DATED 26-11-2018 Income-tax (Systems) is authorized to specify The Government of the Republic of India and the procedures, formats and standards for the the Government of the People's Republic of purposes of furnishing and verification of the China have amended the Double Taxation statements or claim for refund in Form 26B and Avoidance Agreement (DTAA) for the avoidance shall be responsible for the day-to-day of double taxation and for the prevention of administration in relation to furnishing and fiscal evasion with respect to taxes on income, verification of the statements or claim for refund by signing a Protocol on 26-11-2018. in Form 26B in the manner so specified. In Besides other changes, the Protocol updates the exercise of the powers delegated by the Central existing provisions for exchange of information Board of Direct Taxes (Board) under sub-rule to the latest international standards. Further, (5) of Rule 31A of the Income-tax Rules, 1962, the Protocol incorporates changes required to the Principal Director General of Income-tax implement treaty related minimum standards (Systems) hereby clarifies that no tax deduction under the Action reports of Base Erosion & at source under section 194A shall be made in Profit shifting (BEPS) Project, in which India the case of Senior Citizens where the amount of had participated on an equal footing. Besides such income or, the aggregate of the amounts of minimum standards, the Protocol brings in such income credited or paid during the changes as per BEPS Action reports as agreed financial year does not exceed fifty thousand upon by the two sides. rupees.

45

GST UPDATEGST UPDATE

CA Nitin D. Kenia and CA Bharat K. Gosar

Compiled by:

GST UPDATE: · Notification No 66/2018 -Central Tax dated thCOMPILED BY: CA Nitin D. Kenia and 29 November, 2018.

CA Bharat K. Gosar · The due date of furnishing the return by a

registered person required to deduct tax at NOTIFICATIONS - CENTRAL TAX: source u/s 51 of CGST Act in FORM GSTR-7

for the months of October, 2018 to December, · Notification No 62/2018 -Central Tax dated

2018 is extended to 31/01/2019.th29 November, 2018.

· Notification No 63/2018 -Central Tax dated CIRCULARS - CGST:th

th29 November, 2018. · Circular No. 73/47/2018-GST-dated 5 The due date of furnishing return in FORM November, 2018.GSTR-3B & GSTR-1 for registered persons The Circular explains the scope of principal whose principal place of business is in and agent relationship under Schedule I of Srikakulam district in the State of Andhra CGST Act, 2017 in the context of del-credere Pradesh for the month of September, 2018 agent.and October,2018 is extended to 30/11/2018

thand for registered persons whose principal · Circular No. 74/48/2018-GST-dated 5 place of business is in Cuddalore, November, 2018.Thiruvarur, Puddukottai, Dindigul, The Circular clarifies that TCS at the notified

Nagapatinam, Theni, Thanjavur, Sivagangai, rate, in terms of section 52 of the CGST Act,

T i r u c h i r a p p a l l i , K a r u r a n d shall be collected by Tea Board respectively

Ramanathapuram in the State of Tamil Nadu from the sellers (i.e. tea producers) on the net

for the month of October, 2018 is extended to value of supply of goods i.e. tea; and from the

20/12/2018. auctioneers on the net value of supply of

services (i.e. brokerage).· Notification No 64/2018 -Central Tax dated

th29 November, 2018. Orders-:th· Notification No 65/2018 -Central Tax dated · Order No. 1/2018 - Central Tax dated 11

th29 November, 2018. December, 2018.The due date of furnishing return in FORM

The Order declared that the annual return (in GSTR-1 & GSTR-4 for registered persons

FORMs GSTR-9, GSTR-9A and GSTR-9C) whose principal place of business is in stfor the period from the 1 July, 2017 to the Srikakulam district in the State of Andhra

st31 March, 2018 shall be furnished on before Pradesh for the quarter of July to September, stthe 31 March, 2019.2018 is extended to 30/11/2018.


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