fema compliances and recent policies on fdi · 1973 to foreign exchange management act, 1999 post...

FEMA COMPLIANCES AND RECENT POLICIES ON FDI

ICSI WIRC - PCS ANNUAL REGIONAL CONFERENCE AT INDORE

8th JULY, 2018

By:CA Manoj Shahe-mail :[email protected]

CHARTERED ACCOUNTANTS

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Transition from Foreign Exchange Regulation Act,1973 to Foreign Exchange Management Act, 1999

Post liberalization (i.e. New Industrial policy of 1991) therewas need to remove shackles of regulatory and legalprovisions.

Need to consolidate and amend the law relating to foreignexchange with the objectives of facilitating external trade andpayments and for promoting the orderly development andmaintenance of foreign exchange market in India.

Need to take various steps to make ‘New Industrial Policy’-workable and meaningful.

Industrial licensing was made pragmatic and objective-oriented.

It was decided to review provisions of Foreign ExchangeRegulation Act, 1973 (FERA).


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Transition from Foreign Exchange Regulation Act,1973 to Foreign Exchange Management Act, 1999

Intention was to bring provisions of FERA in line withemerging trends of liberalization so as to remove obstacles inthe inward flow of foreign exchange and foreign investment.

Accordingly, on June 1, 2000, the Foreign ExchangeManagement Act, 1999 (FEMA) brought in force to replacethe then existing FERA.

It is an act to manage the foreign exchange of India asopposed to FERA which was enacted to regulate/control theforeign exchange.


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Structure of FEMA

Applies to the whole of India and all branches, offices andagencies outside India which are owned or controlled by aperson resident in India.

FEMA has 49 sections of which 9 (section 1 to 9) aresubstantive and the rest are procedural/ administrative

Section 46 of FEMA grants power to Central Governmentto make rules to carry out the provision of FEMA

Section 47 of FEMA grants power to RBI to makeregulations to implement its provisions and the rules madethere under

RBI is entrusted with the administration andimplementation of FEMA


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Structure of FEMA

FEM ACT

NOTIFICATIONS

RULES

MASTER DIRECTIONS

A.P. DIR CIRCULARS

FAQs will not prevail over Act, Notifications etc. in case ofconflict


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Substantive Provisions

Section Description

1 Application and Commencement of FEMA

2 Definitions

3 to 9Provisions relating to Regulations and Management ofForeign Exchange

10 to 12 Provisions relating to Authorized Person

13 to 15 Provisions relating to Contraventions and Penalties

16 to 38Provisions relating to Adjudication, Appeal andDirectorate of Enforcement

39 to 49 Miscellaneous Provisions


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Notifications under FEMA

RBI had initially issued 25 notifications, covering capital accounttransaction prescribed in Sec 6(3) & certain miscellaneousprovisions

15 related to capital account transactions, 1 on Export of goods andservices and 9 for other regulations

As on date, the total number of notifications issued by RBI stand at389.

Since original notifications have undergone many changes, RBI hasstarted revising the notifications and till date has issued 15 revisednotifications [5(R), 6(R), 7(R), 9(R), 10(R), 11(R), 12(R), 13(R), 14(R),15(R), 18(R), 20(R), 21(R), 22(R) and 23(R)] carrying suffix (R) foreasy identification along with the year in which they are published.

https://www.rbi.org.in/Scripts/BS_viewfemanewnotification.aspx

https://www.rbi.org.in/Scripts/BS_viewfemanewnotification.aspx


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Master Directions

RBI has come up with Master Directions covering foreignexchange transactions.

Master Directions consolidate instructions rules andregulations on the related subject.

Master Directions are updated as and when there is change inrules/regulations or change in policy.

Existing set of Master Circulars stand withdrawn with issueof Master Directions.

Till date, 19 Master Directions were issued by RBI.

https://www.rbi.org.in/scripts/FS_Notification.aspx?fn=5&fnn=2764

https://www.rbi.org.in/scripts/FS_Notification.aspx?fn=5&fnn=2764


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A.P. (Dir Series) Circulars Authorised Persons Directions issued by RBI u/s. 10(4) and

11(1) of FEMA to Authorized Persons (AP)

These directions are called – A.P. (Dir Series) Circulars

APs are Authorized Dealers, Money Changers and bankswho are authorized to deal in Foreign Exchange

These Circulars are operational instructions to AP by RBI

Legal validity of these Circulars have been upheld in the caseof Prof. Krishnaraj Goswami v. RBI, [2007 (6) Bom. CR 565]

Court upheld the power of RBI to issue such Circulars basedon powers conferred to RBI u/s. 10(4) & 11(1) & negated thecontention that RBI has no jurisdiction to issue such Circulars


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Sr. No.

Transactions Corresponding Notification

Corresponding Section of FEMA

1 Permissible Capital Account Transactions No. 1 Sec 6(2) read with Sec 47 (2)

2 Transfer or issue of any security or foreignsecurity by any branch, office or agency in Indiaof a person resident outside India

No. 2 Sec 6(3)(c) read with Sec 47(2)

3 Any borrowing or lending in foreign exchangein whatever form or by whatever name called

No. 3 Sec 6(3)(d) read with Sec 47(2)

4 Any borrowing or lending in rupees inwhatever form or by whatever name calledbetween a person resident in India and a personresident outside India

No. 4 Sec 6(3)(e) read with Sec 47(2)

5 Deposits between persons resident in India andpersons resident outside India

No. 5(R) dated 01.04.2016

6(3)(f) read with Sec 47(2)

Capital Account Transaction


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Sr. No.


Corresponding Section of FEMA

6 Export, import or holding ofcurrency or currency notes

No. 6(R) dated 29.12.2015 Sec 6(3)(g) read with Sec 47(2)

7 Transfer of immovable propertyoutside India, other than a leasenot exceeding five years, by aperson resident in India

No. 7(R) dated 21.01.2016 Sec 6(3)(h) read with Sec 47(2)

8 Giving of a guarantee or surety inrespect of any debt, obligation orother liability incurred -

(i) by a person resident in Indiaand owed to a person residentoutside India

(ii) by a person resident outsideIndia

No. 8 Sec 6(3)(j) read with Sec 47(2)

9 Insurance No. 12(R) dated 29.12.2015 Sec 47(2)


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Sr. No.


Corresponding Section

10 Remittance of Assets No. 13 (R) dated 01.04.2016

Sec 47

11 Transfer or issue of any ForeignSecurity

No. 120 dated 07.04.2004

Sec 6(3)(a) read with Sec 47

12 Transfer or issue of any security bya person resident outside India

No. 20 (R) dated 07.11.2017

Sec 6(3)(b) read with Sec 47

13 Acquisition or transfer ofimmovable property in India, otherthan a lease not exceeding fiveyears, by a person resident outsideIndia

No. 21 (R) dated 26.03.2018

Sec 6(3)(i) read with Sec 47(2)

14 Establishment in India of Branch orOffice or other place of business

No. 22 (R) dated 31.03.2016

Sec 6(6)


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Crux of FEMA –Current and Capital Account Transaction

Capital Account transaction means a transaction which altersassets or liabilities including contingent liabilities outsideIndia of person resident in India and vice-versa. It’s aneconomic definition rather than an accounting or legaldefinition.

Current Account transaction is transaction other than acapital account transaction.

Current Account transactions are freely permitted unless prohibited - they are regulated by Central Government.

Capital Account transactions are prohibited unless generally permitted - they are regulated by RBI.


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FEMA looks transaction from Balance of payment position of Country

Examples -

Import of machinery on immediate payment basis - Current A/ctransaction

Machinery is purchased on hire - Capital A/c transaction. There isan obligation to make future payment to the non-resident

Consideration for goods & Services – Current A/c transaction

Transaction represents a creation or acquisition of wealth- shares,loans or immovable properties – Capital A/c transaction

Subsidy received from IMF – Current A/c transaction

Setting up Branch overseas by resident Indians – Current A/ctransaction

Section 47 of FEMA grants power to RBI to make regulations andSection 46 grants power to Central Government to prescribe rulesdealing with Current Account Transactions.

Crux of FEMA –Current and Capital Account Transaction

RECENT POLICY CHANGES IN

FOREIGN DIRECT INVESTMENT


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Recent Policies on FDI

Revised Notification

RBI on 7th November 2017 in supersession of Notification No.FEMA 20/2000-RB and Notification No. FEMA 24/2000-RB issuedrevised regulations to regulate investment in India by a Personresident Outside India – Notification No. FEMA 20(R)/2017-RBdated November 07, 2017 viz. Foreign Exchange Management(Transfer or Issue of Security by a Person Resident Outside India)Regulations, 2017.

Master Direction on Foreign Investment in India

RBI for the very first time after issuing revised notification, issuedMaster Direction No.11 - Foreign Investment in India on 4thJanuary 2018.


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Recent Policies on FDI (Contd…)

Recent Amendments to FEMA 20(R) – Notification No.20(R)(1) dated 26th March 2018

Regulation 16.B(5) – Foreign investment in investing companiesnot registered as NBFC with RBI and in Core InvestmentCompanies (CICs), both engaged in activity of investing in capitalof other Indian Companies, will require prior government approval.

Foreign investment in investing companies registered as NBFC withRBI will be under 100% automatic route.

(Previously irrespective of fact whether company is registered asNBFC or not, foreign investment in investing companies was underapproval route).


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There have been changes in sectoral caps of varioussectors/activities Regulation 16.B

Sector/Activity Recent Amendment Previous Guidelines

Para 9.3(a)Air Transport –Scheduled /DomesticScheduled PassengerAirline and Regional

100% allowed.Up to 49% automaticBeyond 49% governmentapproval (For NRIs/OCIsautomatic up to 100%

Only 49% underautomatic route(For NRIs/OCIsautomatic up to 100%)

Para 9.5(d) – NewInsertedForeign Investment (FI)in Air India

FI in Air India includingthat of foreign airlines shallnot exceed 49%.Substantial ownership andeffective control shallcontinue to be with IndianNationals.

Foreign Airlines werenot allowed to investat all in Air India.


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Sector/Activity Recent Amendment Previous Guidelines

Para 10.2(7) New NoteaddedConstructionDevelopment – RealEstate Broking Services

Real Estate Broking Servicesshall be excluded fromdefinition of Real EstateBusiness.100% foreign investmentallowed under automaticroute.

No mention of realestate brokingservices.

Para 15.3Single Brand RetailTrading (SBRT)

100% under automatic route

Few changes have also beenmade in conditions forSBRT

100% allowed49% under automaticand beyond 49%government approval.


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Amendments to Schedule 1 of FEMA 20(R)

Para 1(4) of Schedule 1 – Issue of capital instruments by IndianCompany against –

Swap of capital instruments,

Import of capital goods/machinery/equipment (excludingsecond hand machinery)

Pre-operative/Pre-incorporation expenses (including paymentsof rent)

shall be subject to compliance with conditions prescribed by CentralGovernment and / or RBI and under automatic route providedIndian Company is engaged in an automatic route sector.

Government approval shall be obtained if the Indian investeecompany is engaged in a sector under Government route.


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Additional conditions for issue of shares against import ofcapital goods/machinery/equipment:

Import has to be in accordance with EXIM Policy ofGovernment of India as defined by DGFT/FEMA provisionsrelating to imports.

Application must clearly indicate the beneficial ownershipand identity of Importer Company as well as overseas entity.

Application for conversion of import payables in FDI must bemade within 180 days from date of shipment.


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Additional conditions for issue of shares against pre-operative/pre-incorporation expenses:

FIRC for funds remitted by overseas promoters forexpenditure incurred is to be submitted.

Pre-incorporation/pre-operative expenses are to be verifiedand certified by Statutory Auditor.

Payments should be made by foreign investor directly orthrough bank account opened by foreign investor as providedunder FEMA regulations.

Application for capitalisation complete in all respects shall bemade within 180 days from date of incorporation.


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General Conditions:

All request of conversion should be accompanied by specialresolution of company.

Government’s approval will be subject to RBI pricingguidelines and appropriate tax clearance.

Issue of share against import of capitalgoods/machinery/equipment and pre-operative/pre-incorporation expenses is to be reported to RBI in formFCGPR as per procedure prescribed.


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Other option for pre-incorporation expenses-Remittance to foreign company under current

account rules Remittances up to 5% of investment brought into India or

USD 1,00,000 whichever is higher is permissible underautomatic route for reimbursement of pre-incorporationexpenses by entity in India. Excess will require RBI approval

However, while allowing remittance, AD banks insist onfollowing documents:

Supporting documents for direct vendor payments (FIRCcopy from vendor to justify that he received amount inforeign currency directly)

Statutory Auditors Certificate

Board Resolution for reimbursement

Debit Note from parent company

Form 15CA-CB


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Some important amendment in recent years:

Para 1(5) of Schedule 1 – Equity shares can be issuedagainst any funds payable by an Indian Company to aperson resident outside India, remittance of which ispermitted under FEMA.

Para 2(2) Schedule 1 – Capital Instruments shall be issuedwithin 60 days from the date or receipt of consideration.(Previously under FEMA time period for issue of shares was180 days. Now it has been aligned with Companies Act 2013).

Para 1(2) Schedule 4 – Investment made by NRIs/OCIs incapital instruments of Indian Company on non-repatriationbasis will be deemed to be domestic investment at par withinvestment made by residents.


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Para 1(1) Schedule 6 – Foreign Investment can be made incapital contribution of LLP engaged in sectors / activitieswhere 100% foreign investment is allowed under automaticroute and there are no FDI Linked conditions.

In sectors like Construction Development, Wholesale Cashand Carry Trading etc. 100% FDI is allowed under automaticroute and they also have FDI Linked conditions.

Thus, if a LLP is engaged in any such sector, even though100% foreign investment is under automatic route, butbecause there are FDI Linked conditions, foreign investmentwill not be allowed in such LLPs.

COMPLIANCES UNDER FEMA


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Compliances for remittances under Liberalized Remittance Scheme

Resident Individuals are allowed to make remittances forpermissible capital and current account transactions up toUSD 2,50,000 per financial year under LRS.

Form A2 has to be submitted with AD Bank by individual.

PAN is mandatory for making remittances under LRS.Previously for remittances up to USD 25,000 PAN was noinsisted. However, vide A.P. DIR Circular No. 32 dated June19, 2018, PAN has been made mandatory for all remittancesirrespective of the amount of remittance under LRS.

Form A2 requires individual to mention Payment PurposeCode for remittances. Purpose Codes are given in MasterDirection on LRS.


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Compliances for remittances under Liberalized Remittance Scheme

AD Banks are required to submit information on remittancesunder LRS to RBI every month under Online Return FilingSystem (ORFS).

Additionally AD banks are also required to furnishtransaction wise information on daily (T+1) basis.

AD Banks have been given List of 11 Foreign ExchangeTransactions Electronic Reporting System (FETERS) PurposeCodes for reporting transactions under LRS. While reportingunder FETERS respective purpose code for particulartransactions must be mentioned instead of reportingtransactions collective under a single code.

For e.g. transactions of particular nature must be reported inrespective purpose code and not under S0023 which is for“Opening of Foreign Currency Account”.


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FETERS Purpose Codes for AD Banks

Sr. No. Items under LRS FETERS Purpose Codes

1. Opening of Foreign Currency Accountabroad

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, medicaltreatment, 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 relativeand health insurance

S0011, S0603


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Compliances in case of Liaison Office (LO), Branch Office (BO) and Project Office (PO)

Applications for opening of LO/BO/PO are considered byAD category I bank as per guidelines given by RBI.

Non resident entity has to submit Form FNC along withfollowing documents:

Certificate of Incorporation, MOA and AOA duly attestedby notary in country of registration.

Audited BS of applicant company for three/five years incase of BO/LO respectively.

Banker’s report from applicant’s bank in host country.

Letter of Comfort (if asked for).

For applications requiring prior RBI approval the same mustbe submitted to RBI at New Delhi.


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Compliances in case of Liaison Office (LO), Branch Office (BO) and Project Office (PO)

UIN is allotted and approval is granted by AD.

Validity of LO is three years. Extension of LOs granted by ADbanks must be intimated to RBI, New Delhi.

Annual Activity Certificate (AAC) as at the 31st March end alongwith audited financial statements including receipts and paymentsis to be submitted with AD and copy of same to Director General ofIncome Tax (International taxation), New Delhi, by LO/BO before30 September every year.

Entities from Bangladesh, Sri Lanka, Afghanistan, Iran, China,Hong Kong, Macau or Pakistan which are setting up a BO/LO/POin India should register with the state police authorities and arerequired to submit an annual report within five working days of theBO/LO/PO becoming functional to the Director General of Police(DGP) of the state concerned in which the BO/LO/PO hasestablished its office;


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Compliances in case of Foreign Investment in India –New Reporting Requirements

Reporting in Entity Master Form (EMF) and Single MasterForm (SMF) – A.P. DIR Circular No. 30 dated June 07, 2018:

With objective of integrating extant reporting structures ofvarious foreign investments in India, RBI will issue SingleMaster Form (SMF).

Prior to implementing SMF, RBI has provided interface athttps://firms.rbi.org.in to input data on total foreigninvestment in Entity Master Form (EMF).

This window has been provided between 28th June 2018 to12th July 2018.

Indian entities not complying with this pre-requisite will notbe able to receive foreign investment (including indirectforeign investment) and will be non-compliant with FEMAregulations.

https://firms.rbi.org.in/


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Compliances in case of Foreign Investment in India –New Reporting Requirements

Reporting in Entity Master Form (EMF) and Single MasterForm (SMF) – A.P. DIR Circular No. 30 dated June 07, 2018:

The details instructions on the same have been issued by RBIthrough user manual published on its website.

Data of all foreign investment received by entity since itsincorporation has to be filled.

Considering the User’s Manual, the view seems to be thatcompanies having prior FDI but NIL FDI at present, are alsorequired to update the details of foreign investment andtransfers in EMF


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Compliances in case of Foreign Investment in India – Certain Issues

Issues in case of certain transactions:

Non-convertible, optionally or partially convertible Preferenceshares or Debentures shall be considered as debt and ECBguidelines will apply to the same {[2015] 50 taxmann.com 59(Bom) IDBI Trusteeship Services Ltd. vs. Hubtown – HighCourt of Bombay}

Price / conversion formula for convertible instruments shall notbe determined upfront at the time of issue.

Investment made with assured return by promoter or investeecompany is prohibited.

Extension in conversion period of CCDs/CCPs beyond originaltenure without RBI permission.


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Compliances in case of Foreign Investment in India –

Reporting Forms: ARF

Advance Remittance Form (ARF) –

Indian company receiving amount of consideration for issue ofcapital instruments has to intimate RBI in ARF within 30 days fromdate of receipt of such amounts. KYC of non resident investor andFIRC is to be submitted in ARF.

If remittance receiving AD Bank is different from AD Bankthrough which FCGPR is filed, KYC check should be carried outby the remittance receiving bank and KYC report be submitted bythe investee to the AD bank carrying the transaction along withFCGPR.

At times remittance is not directly received by the bank ofcompany receiving foreign investment. It is first received inintermediary bank of overseas bank and later comes to bankaccount of company receiving investment. In such cases, for issueof FIRC, the bank of company has to obtain NOC fromintermediary bank and then issue FIRC to Indian Company.


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Reporting Forms: FCGPR

Form FC-GPR – Indian Company has to file FCGPR forreporting of allotment of capital instruments with RBI within30 days from the date of allotment. Valuation Report, BoardResolution, CS Certificate, FIRC are to be attached withFCGPR.

Allotment of shares under IPO or QIP under applicable SEBIregulations need not be reported in Form FCGPR.

Filing of ARF and FCGPR is to be done onhttp://www.ebiz.gov.in , up to 31st July, 2018 and from 1st

August 2018 onwards under SMF (Single Master Form)

http://www.ebiz.gov.in/


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Reporting Forms: FCGPR

If Indian Company issues shares to non-resident other thannon-resident from whom the inward remittance is received,following additional documents to be submitted with FCGPR:

KYC reports of both remitter and beneficial owner

NOC from remitter for issuing capital instruments tobeneficial owner mentioning relationship.

Letter from beneficial owner giving reasons for remittermaking remittance on its behalf.

Copy of agreement/Board Resolution of investeecompany for issuing capital instruments to person otherthan from whom remittance has been received.


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Compliances in case of Foreign Investment in India- FLA-

Some issues in respect of LLP

Annual Return on Foreign Liabilities and Assets (FLA) –Indian Company or LLP having foreign investment have tosubmit Annual Return on FLA on or before 15th July every year.

In case of LLP filing FLA, dummy CIN -‘A99999AA9999LLP999999’ is to be filled in the form. Refer A. P.DIR Circular No. 22 dated October 21, 2015

In the column of no shares- one may fill up percentage of profitof Non Resident Partner


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Compliances in case of Foreign Investment in India-

Transfer by way of Sale FCTRS – Form FCTRS is required for reporting of transfer of

capital instruments between:

NR (holding on repatriation basis) and NR (holding on nonrepatriation basis).

NR (holding on repatriation basis) and R.

Sale by NR on stock exchange.

Indian company buying back shares in scheme ofmerger/demerger/amalgamation approved byNCLT/competent authority.

Form FCTRS is to be filed within 60 days from date of transfer orreceipt whichever is earlier with AD Bank.


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FDI in LLP & Downstream Investment

LLP I – LLP receiving consideration for capital contribution andacquisition of profit shares has to intimate RBI through AD Bank inForm LLP I within 30 days from date of receipt. KYC of non-resident investor, FIRC and Valuation Certificate is to be submittedalong with the form.

LLP II – Disinvestment/Transfer of Capital Contribution or profitshare between R to NR and vice-versa is to be reported in Form LLPII within 60 days from date of receipt of funds.

Downstream Investment (DI) – Indian entity making downstreaminvestment in another Indian company or LLP shall notify the sameto DIPP within 30 days of such investment.

Late Submission Fee (LSF) – Person/entity responsible for delaysin submission of any of reports shall be liable for payment of LSF.This shall be applicable for transactions undertaken on or afterNovember 07, 2017. LSF is option for regularising delays withoutgoing for compounding.


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Certain Practical Issues

Practical Issues while filing Forms on e-Biz Portal:

Issues while filing Form FCGPR –

a. The amount of consideration as per UIN Letter andamount of shares allotted should match. If there isdifference in the same, explanation for difference needsto be attached with form.

b. Valuation Report should not be more than threemonths old from the date of allotment.

c. If shares are not allotted for full amount ofconsideration received, RBI is asking for refund of evensmall amounts for which shares have not been allotted.


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Issues while filing Form FCTRS –

a. Pre and Post Shareholding Pattern of company is preferredon letter head of the Company. Further, residential status ofshareholders also should be mentioned along with %holding.

b. At times NR seller (being FII or FVCI) has bank accounts inIndia. So buyer pays consideration to seller’s bank accountin India. Even in such cases AD Banks insist on Form 15CAand 15CB for proof of remittances.

c. The data on Form FC TRS must match with the data of FormFC-GPR filed at the time of allotment of shares. AdditionallyAD Banks also ask for RBI Letter granting registrationNumber allotted while taking FCGPR on record.


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Issues while filing Form FC-TRS –

d. Buyer and Seller consent letter along with declaration ofcompliance of FEMA guidelines must be attached.

e. In case of transfer of equity shares which were allotted onconversion of CCPS, AD Banks ask for board resolution forconversion of CCPS to equity.


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Compliances in case of External Commercial Borrowings

External Commercial Borrowings (ECBs) can be raised under tworoutes – Automatic Route and Approval Route. ECBs so raisedshould conform with parameters such as minimum averagematurity, permitted and non-permitted end uses, maximum all incost ceilings etc.

Form ECB – For applications under approval route Form ECB is tobe filed and submitted with RBI.

Form 83 – Borrower has to submit Form 83 for obtaining LoanRegistration Number (LRN). Any draw down in respect of ECB aswell as payment of any fees/charges for raising ECB should happenonly after obtaining LRN.

ECB 2 Returns – Borrowers have to report actual ECB transactionsthrough ECB 2 returns. ECB 2 returns have to be filed monthly andsame shall reach before 7th of next month.


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Compliances in case of Overseas Direct Investments (ODI)

Reporting of ODI – Indian Party or Individual making ODI inJV/WOS abroad has to file Form ODI Part I within 30 days fromthe date of remittance to RBI through AD Bank.

ODI Part I is to filed for both approval and automatic route. Incase of ODI under approval route, prior approval of RBI has tobe obtained post which Form ODI Part I is to be filed.

Indian Party can make overseas investment up to 400% of its networth. In case of individuals, they can make ODI up to USD2,50,000 under LRS.

Post filing of Form ODI Part I, RBI will allot UniqueIdentification Number. All subsequent remittances to JV/WOSabroad can be made only after receipt of UIN.


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Compliances in case of Overseas Direct Investments (ODI)

Bonafide Business Activity –

As per regulation 6(2)(ii) of FEMA Notification No. 120 IndianParty can make investment in JV/WOS engaged in bonafidebusiness activity.

Overseas entity which is having Indian Investment in it andwishing to make FDI in India will have to satisfy bonafidebusiness activity test and will require prior approval of RBI.

Other Issues – Caution Listing:

Indian Party should not be under RBI’s exporter caution list. IfIP is under exporters caution list, it will not be allowed to makeany remittances for ODI.


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Compliances in case of Overseas Direct Investments (ODI) –

Disinvestment involving write off

Disinvestment involving write off (Reg 16A of FEMA 120)

Indian Party may disinvest (repatriation after disinvestment isless than original amount invested) without prior approval ofRBI in following cases:

In case where JV/WOS is listed on overseas stock exchange.

In case where IP is listed on stock exchange and has networth of not less than Rs. 100 crore

In case where IP is an unlisted company and investment(financial commitment) in overseas JV/WOS does not exceedUSD 10 million.

In case where IP is a listed company with net worth of lessthan Rs. 100 crore but investment in overseas JV/WOS doesnot exceed USD 10 million.


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Disinvestment involving write off

Disinvestment involving write off shall also be subject tofollowing conditions of Reg 16 of FEMA 120:

Sale is effected through stock exchange where shares ofoverseas JV/WOS are listed.

If shares are not listed and disinvested through privatearrangement, the share price is not less than value certifiedby CA /CPA as fair value based on latest audited financials.

IP does not have any outstanding dues (royalty, dividend,consultancy, commission etc.) from JV/WOS.

Overseas concern has been in operation for at least one fullyear.

All APRs together with audited financials have beensubmitted.

IP is not under any investigation.


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Reporting Forms

Application for allotment of UIN and reporting of furtherremittances / transactions – UIN and further remittances and otherforms of financial commitments are reported by Indian Party inForm ODI Part I. The form comprises of following sections –

Section A – Details of IP/RI

Section B – Capital Structure and Other Details of JV/WOS/SDS

Section C – Details of Transactions/Remittance/FinancialCommitment

Section D – Declaration by IP/RI

Section E – Statutory Auditors Certificate

Form ODI should be submitted with Board Resolution for proposedtransaction, diagrammatic representation of organisationalstructure indicating all subsidiaries of IP, incorporation certificateand valuation certificate.


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Reporting Forms

In case of investment by more than one parties, Form ODI is tobe submitted by each party and AD Bank will file online aconsolidated Form ODI with RBI and one UIN will be allotted.

Certificate of Statutory Auditor is not required in case ofIndividuals.

Post Investment Changes have to be reported within 30 days ofsuch change in relevant Section of ODI Part I as under:

Type of Change Section

Change in details of IP/RI viz change in address, name, contact details

Section A

Investigation details of IP/RI Section A

Change in net worth of IP Section A

Change in capital structure of JV/WOS Section B


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Reporting Forms

Type of Change Section

Change in status of JV/WOS from operating entity to SPV or vice-versa

Section B

Change in details of JV/WOS such as change in name, address etc.

Section B

Reporting of set up / incorporation / investment / disinvestment of SDS

Section B

Conversion of loan to equity and vice versa Section C

Rollover/change in amount / validity of guarantee already reported to RBI

Section C


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Annual Performance Report

Annual Performance Report (APR) –

Every year on or before December 31, APR in Form ODI Part IIhas to be filed with RBI through AD Bank.

APR has to be submitted based on audited financial statementsof overseas JV/WOS unless specifically exempted by RBI.

APRs are to be certified by Statutory Auditors of Indian Party.CA certification should not be insisted in case of investment byindividuals.

In case multiple IPs/RIs the obligation to submit APR shall liewith IP/RI having maximum stake. Alternatively IPs/RIsshould mutually agree to assign responsibility to submit APR.

If law of host country does not require mandatory audit of booksof JV/WOS APR may be submitted based on unauditedaccounts.


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FLA and Disinvestment

In such cases statutory auditor of IP has to certify that law ofhost country does not mandate compulsory audit and figures inAPR are based on un-audited accounts of JV/WOS.

The un-audited accounts have to be adopted / ratified by boardof Indian Party.

Annual Return on Foreign Liabilities and Assets (FLA) –

Annual Return has to be submitted by all Indian Companiesreceiving FDI and / or made ODI on or before 15th July everyyear.

Reporting of Disinvestment –

Reporting of disinvestment/closure/winding up/voluntaryliquidation of overseas JV/WOS has to be done in Form ODIPart III within 30 days from the date of disinvestment.


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Compliances in case of Overseas Direct Investment –


Practical Issues while filing Form ODI Part I, II and III:

a. In case of transfer of shares of overseas JV/WOS between tworesidents, prior approval of RBI has to be obtained as noremittance will be effected outside India. Form ODI Part Ialso needs to be filed for reporting of change in shareholder.

b. Section B of Form ODI Part I has two fields in connectionwith financial commitment viz. Estimated Cost/Fair Value ofoverseas acquisition and Financial Commitment wrt to aboveJV/WOS. For ease purposes, estimated maximum amountcan be mentioned in First field of “Estimated Cost of overseasacquisition’ and actual financial commitment can bementioned in second field. In case of reporting of subsequentinvestments, there would be no need to fill full Form ODIagain and only Section B, C, D and E be submitted up to theamount of Estimated Cost of Overseas Investment.


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Compliances in case of Overseas Direct Investment –


Practical Issues while filing Form ODI Part I, II and III:

c. If there are more than one shareholders of overseas entityand all are resident of India, in that case overseas entity willbe treated as WOS and not JV.

d. In case of investment by individuals, even though they areallowed to invest up to USD 2,50,000 under LRS, AD Banksstill insist on Net worth certificate for individuals, eventhough this clause is not applicable

e. In case of capitalisation of other dues viz. Royalty, technicalknow how, consultancy fees etc. Form ODI is required to befiled for reporting the same.

f. Details of FDI by JV/WOS/SDS if any into India is to bereported in APR – Form ODI Party II.


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Compounding Application

Compounding of Contraventions is a voluntary process by whichan applicant can seek compounding of an admitted contraventionof any provision of FEMA. Following is to be submitted:

Application in prescribed format.

Details of irregularities whether relating to FDI, ODI, ECB,LO/BO/PO.

Undertaking that applicant is not under investigation of any agency.

ECS Mandate

Details of Bank Account

DD of Rs. 5,000/-

Copy of PAN

Latest audited Financial Statements

Memorandum and Articles of Association (in case of company)

Cancelled Cheque


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THANK YOU

FIRST DESERVE

AND

THEN DESIRE!!

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fema compliances and recent policies on fdi · 1973 to foreign exchange management act, 1999 post...

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