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INBOUND INVESTMENT-

FEMA PROVISIONS23rd October 2008

CA Manoj Shah

Shah & Modi

Phone :+ 91 22 2512 6399

E-Mail :[email protected]

Visakhapatnam Branch

of SIRC


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If you learn only methods you will be tied to

your methods, but if you learn principles you can

device your own methods.


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CA Manoj Shah - Shah & Modi 3

FEMA Overview

STRUCTURE OF THE FEMA (ACT)

FEMA has in all 49 sections of which 9

(section 1 to 9) are substantive and the restare procedural/administrative.

Section 46 of the Act grants power to Central Governmentto makes rules and section 47 of the Act grants power to

RBI to make regulations to implements its provisions andthe rules made there under.

Thus RBI is entrusted with the administration andimplementation of FEMA


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Difference in implementation of

Income Tax Act & FEMA

Under Income Tax, issue is of taxability of income which

is determined for the full year, therefore generally

amendments are annual.

Whereas FEMA regulations are there for undertaking

transaction itself, therefore clarity at the time of

undertaking transaction is a must and therefore

amendments keep pace with changes taking place ineconomy.


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Current & Capital A/c Transactions

Capital A/c transactions means a transaction

which alters assets or liabilities including

contingent liabilities outside Indian of person

resident in India and vice-versa. Its a economicdefinition rather than accounting or legal

definition

Current A/c transaction - transaction other than a

current a/c transaction


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Current & Capital Account

Transaction

Difference between concept of Capital Assets and

Capital A/c transaction

e.g. Import of machinery on payment of cash.

From FEMA perspective it is current a/ctransaction ( to be looked from Balance of

payment position of Country)


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Current & Capital A/c transactions

General Policy is

Current A/c transactions are freely permitted unlessprohibited whereas Capital A/c transactions are prohibitedunless generally permitted.

Current A/c transactions are regulated by CentralGovernment whereas Capital A/c transactions areregulated by RBI

Sec. 6(3) of FEMA, prescribes the class of capital a/ctransactions which are regulated.


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Sec. 6(4) & 6(5)

Sec. 6(4) A Person Resident in India, may hold, own,

transfer or invest in foreign currency, foreign security or

any immovable property situated outside India- If such

property was acquired, held or owned by such persons

when he was resident outside India or inherited from a

person who was resident outside India

Sec. 6(5)- Similar provisions for Persons Resident Outside

India and assets held in India


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Inbound Investments

FEMA Provisions


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If u want 1 year of prosperity grow grains,

If u want 10 year of prosperity grow trees

&

If u want 100 years of prosperity grow people


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Destination India

A decade and a half ago the prospect of India

becoming a major player in the global economy

seemed a distant dream, only a theoretical

possibility. During the last 14 years there hasbeen a sea change not only in the worlds

perception about Indias future, but in our own

perception about ourselves. The world has

acknowledged thearrival ofIndia

. We no longerdiscuss the future of India: we say the future is

India.


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Background of Inbound Investment

FDI policy is formulated by Government of

India.

FEMA regulations prescribe the mode of

investments i.e. manner of receipt of funds,issue of shares/convertible debentures and

preference shares and reporting of the

investments to RBI.


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Inbound InvestmentCheck Points

Investor

(Other than citizen & entity of Pakistan)

Proposed Activity in India

NRI

Non-Resident

Prohibited Activities

Approval Route

Automatic Route

Mode of Remittance

Procedural Compliance at thetime of Investment

Annual Compliance

NRE

Inward Remittance


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Non Corporate Entity

(Notification 24)

To Non Resident

(Regulation 10A)

By Non Resident

(Regulation 9 & 10B)

Transfer of

existing Shares

Corporate Entity

(Notification 20)

J/V, WOS

Establishment of Branch /

Liaison office/Project Office

(Notification 22)

Inbound Investments

A. Fresh Investment. Schedules

1. FDI Scheme.

i. Private / Direct Investment.

ii. ADR / GDR Issue.

2. Investment by FIIs under PIS.

3. Investment by NRIs under PIS.

4. Purchase & Sale of shares by NRIs on Non

Repatriable basis.

5. Purchase & Sale of Securities other than

Shares or CDs by Non Resident.

6. Investment in Venture Capital undertaking

by Regd. Foreign VC.

B. Right Shares. (Regulation 6)

C. Effect of Shares on Merger / Demerger.

(Regulation7)

D. ESOP. (Regulation 8)

Overview of

InboundInvestments


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Foreign Direct Investment

(Schedule I - Notification 20)

Automatic

Route

Approval Route:

Annexure A activities.

Annexure B activities

beyond sectoral cap.

Activities Prohibited:

Retail Trading.

Automatic Energy.

Lottery Business.

Gambling & Betting.

Housing & Real

Estate Business.


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Provisions of Notification No.20

Important Definitions:

Capital - equity, Preference shares, Convertible Preference,Convertible debentures

Entity incorporated outside India - entity incorporated orregistered under the relevant statutes

Govt. Approval - from SIA - DIPP or FIPB

Investment on repatriation basis- sale proceeds net of taxeseligible for repatriation out of India


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Notification No.20..

Regulation 4- An Indian entity shall not issue any security toany person resident outside India or record in its books anytransfer of security from or to such person

Regulation 5 prescribes the various schemes under inboundinvestment for NR and NRIs

Reg 6 & 7 Acquisition of Right Shares & under merger/de-merger

Reg 8-Issue of shares under ESOP

Reg 9 & 10- provisions relating to transfer of shares by/toNon Resident

Reg 11- Repatriation of sale proceeds


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Basic Framework

Schedule 1 : FDI Scheme

Schedule 2 : FII Scheme

Schedule 3 : Portfolio Investment Scheme for NRI

(Repatriable) Schedule 4 : Investment Scheme for NRI (Non-repatriable)

Schedule 5 : Investment Scheme for securities other thanshare / convertible debentures

Schedule 6 : Investment Scheme for Foreign VentureCapital Investment


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Foreign Direct Investment

Available Financial Instruments

Equity Shares, Compulsorily Convertible PreferenceShares and compulsorily Convertible Debentures.

Not Available to Investors who are

Citizens of Pakistan OR Entities of Pakistan

Available with approval of FIPB (AP (DIR) No.22dt.19/12/2007)

To Citizens & Entities of Bangladesh


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FDI Scheme

FDI Scheme can be categorized in following 3 segments:

Sectors/activities where FDI is prohibited

Sectors/activities which require Approval from Govt.-

Approval Route Sectors/activities which require procedural compliance and

intimation to RBI without any approval- Automatic Route

of RBI


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FDI Prohibited in following activities or

items

Retail Trading (except single branded product retailing)

Atomic Energy

Lottery Business

Gambling and Betting

Housing and Real Estate business, (other than construction ofintegrated township)

Agriculture (excluding Floriculture, Horticulture,Development of seeds, Animal Husbandry, Pisiculture andCultivation of vegetables, mushrooms etc. under controlled

conditions and services related to agro and allied sectors) andPlantations (Other than Tea plantations)


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FDI Prohibitioncontinued..

Other activities prohibited are-Business of chit

fund and Nidhi company, trading in TDRs,

Construction of farm houses (in terms of

Notification No.1- Permissible Capital AccountTransactions)


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Automatic Route for FDI

Available in following cases:

Company which is not engaged in items included in Annexure

A to Schedule I of Not.20 (Annex. A lists out activities which

are prohibited and automatic route is not available)

Shares are issued up to the limits specified in Annexure B(prescribes Sectoral cap) to Schedule I (provided activitydoesnt require industrial license under Industries

(Development & Regulation Act) or under the locational policyunder Industrial Policy of 1991


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Automatic Route for FDI (Continue..)

Shares are not issued by the Indian company with a view

to acquire existing shares of any Indian Company

Shares can be issued to provider of technology, or againstroyalty payment or against ECB, subject to sectoral

guidelines


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Approval Route for FDI

Activities/Sectors requiring prior approval of

Government:

Proposals in which foreign collaborator has an existing

financial or technical collaboration in the same field (PressNote 1 of 2005)

Proposals falling outside sectoral policy/cap

Activities listed in part A of Annexure A

Investment in SSI unit manufacturing items reserved for

small scale sector


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Provisions for Certain Specific

Sectors_________________________


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FDI in SSI units

SSI unit cant have more than 24% from any industrialundertaking either foreign or domestic

More than 24% FDI requires Government approval ifitems are reserved for small scale sector, it will also require

industrial license. An SSI unit, not manufacturing items reserved for Small

sector, can have more than 24% equity by giving up SSIstatus and can go under Automatic route.

An EOU can have more than 24% equity participationfrom Non Resident


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Trading Sector

Investment can be made under Automatic route for

Up to 100% in Wholesale/ cash & carry trading (PN 7/2008)

Up to 100% in Trading for exports (PN/4 of 2006)

Under approval from FIPB, investment is permitted

Up to 51% for Retail trade of Single brand products (PN/3-06)

Any addition to the product/product categories to be sold underSingle Brand would require a fresh approval of the Government.

Up to 100% for Items sourced from small scale sector

Up to 100% for Test marketing of such product for whichcompany has approval for manufacture


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Construction Sector

100% FDI permitted under Automatic route in

Construction Development projects including housing,commercial premises, resorts educational institutions, recreationalfacilities, city and regional level infrastructure, townships

Note: FDI is not allowed in Real Estate Business.


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Construction Sector.. Continued..

Minimum area to be developed under each project:

Development of serviced housing plots, a minimum land areaof 10 hectares

Construction-development projects, a minimum built-uparea of 50,000 sq.mts

Combination project, any one of the above two conditions

Capitalization and lock-in requirements:

Minimum capitalization of UDS 10 million for wholly ownedsubsidiaries and USD 5 million for joint ventures with Indianpartners

The funds would have to be brought in within six months of

commencement of business of the company Original investment cannot be repatriated before a period of

three years from completion of minimum capitalization

Investor may be permitted to exit earlier with prior approvalof the Government through FIPB


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Construction Sector .. Continued..

50% of the project to be developed within 5 years

Investors not allowed to sell undeveloped plots*

The project to conform to norms and standards as laid downin applicable regulations

Obtain all necessary approvals

State Government/Municipal/Local Body concerned, whichapproves the building/development plans, to monitorcompliance of above conditions

undeveloped plots would mean where roads, water supply,street lighting, drainage, sewerage, and other conveniences, as

applicable under prescribed regulations, have not been madeavailable. Investor needs to provide this infrastructure andobtain completion certificate from concerned local body/serviceagency before he would be allowed to dispose off servicedhousing plots.


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Construction Sector.. Continued..

Exclusion from the applicability of Press Note

2 of 2005:

Hotel & Tourism (Press Note 4 of 2001)

Hospitals (Press Note 2 of 2000) Special Economic Zones (Special Economic

Zones Act, 2005)

Industrial Parks (PN 3/ 2008)


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Construction sector for NRIs

100% investment permitted under Automatic Route in

following:

Development of serviced plots and construction of built-upresidential premises

Investment in real estate covering construction of residentialand commercial premises including business centers andoffices

Development of townships

City and regional level urban infrastructure facilities,

including both roads and bridges Investment in manufacture of building materials

Investment in participatory ventures in (a) to (e) above

Investment in housing finance institutions which is alsoopened to FDI as an NBFC.


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NBFC Sector- 100% under Automatic

Route in 18 activities

Minimum Capitalization Norms

Fund based NBFC Non-Fundbased NBFC

FDI up to 51% - US$ 0.5 million to be broughtupfront.

FDI above 51% to 75% - US$ 5 million to bebrought upfront.

FDI above 75% to 100% - US$ 50 million, of

which US$ 7.5 million upfront and balance in24 months.

Minimum US$0.5 million


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FDI Scheme- General Provisions

Issue Price

Listed Company- As per SEBI guidelines

Unlisted Company-CCI Valuation

Dividend balancing requirement abolished

Rate of dividend on Preference shares

Cannot exceed 300 basis points over the PLR of SBI

Mode of payment for inbound investment

Inward remittance through banking channels

Debit to NRE/FCNR A/c

Capitalization of lumpsum fee, royalty and ECBs (other thanimport dues deemed as ECB or Trade Credit)


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Acquisition of Right Shares

NR may acquire equity/preference or CDs offered on rightbasis subject to following conditions:

Sectoral cap to be maintained

Existing shares were acquired in accordance with theregulations

Price is not lower than the price which is offered toresident shareholders

Same conditions to apply regarding repatriability as are

applicable to original shares


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Acquisition of shares after merger/de-

merger

In case the percentage of shareholding likely to increase onaccount of merger/de-merger, Govt., approval & RBIapproval needed

New company should not carry on agricultural, plantation

or real estate business or trading in TDRs.

To file a report in 30 days with RBI


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Issue of shares under ESOP

Indian company can issue shares to employees of its J/V

or WOS abroad

The scheme should be approved by SEBI

Face value of the shares to be allotted under scheme to thenon resident employees not to exceed 5% of the paid up

capital


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PIS by NRIs

Limit of 5% by single NRI, 10% by all NRIs (this can be

increased to 24%) to be maintained

Payment to come from NRE/FCNR or NRO (in case of non

repatriable investment) Delivery based purchase and sale permitted

Shares purchased under PIS cannot be transferred under

private arrangements to person resident in India or outside

India without prior approval of RBI OCBs are not permitted after 29/11/2001 to invest in PIS


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Investment in Shares/CDs on non

repatriation basis by NRIs

Scheme applies to investment other than PI

NRIs may acquire without any limit, shares under public issue,private placement or right issue

Central Govt., approval needed if investor has previous JV ortechnical collaboration or trade mark agreement in the same orallied field

Not permitted- investment in companies engaged in chitfund/nidhi, agricultural/plantation or real estate business or

construction of farm house or dealing in TDRs


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Investment in securities other than shares

or CDs by Non Resident

Scheme available to FIIs & NRIs

Investment on repatriation basis in

- dated Govt., securities/treasury bills,

NCD and Units of Domestic MF

Other conditions on FII for composition of investment andregistration with SEBI

NRIs can also invest in shares of Public Sector enterprise indisinvestment process

Investment on Non Repatriation basis by NRIs inunits ofmoney market funds in India or National Plan/SavingCertificates.


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Procedure under Automatic Route

Intimation to Authorized Dealer

within 30 days from receipt of funds in Annexure IIto Form FC-GPR

Intimation to be filed along with KYC Report(Annexure III to Form FC-GPR gives KYC Report)

To file report in form FC-GPR (Part A of Annexure I)within 30 days from the date of issue of shares

Annual Return in FC-GPR (Part B of Annexure I) by31st July


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Procedure under Approval Route

Applications for NRI investment, EOU andRetail Trading (Single Brand) should besubmitted to SIA in DIPP

Applications for FDI other than above shouldbe submitted to FIPB unit, DEA, MoF

Application in Form FC-IL


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Time Limit for issue of shares/CDs

Notification No.170 dt. Nov 29, 2007,( AP (DIR)

Series Circular No. 20 dated 14th Dec 07)

Shares & CDs to be issued within 180 days from the

date of receipt of inward remittance or date of debit to

NRE/FCNR A/c.

In case Share Application is outstanding beyond a

period of 180 days

.. application to be made with sufficient reasons for

refunding share application

If 180 days have elapsed on Nov 28, 2007- approval

of RBI needed either for issue or for refund


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Transfer of Shares- without RBI

approval/ or any procedure

Transferor Transferee Mode of Transfer

PROI- other

than NRI &

OCB

PROI

(including

NRI)

Sale or gift (prior approval

of Govt., by transferee, in

case transferee hasprevious J/V or technical

collaboration in same field)

NRI/OCBs NRI Sale or gift (conditions

same as above)

Note: above conditions not

to apply to IT sector &

certain international

financial institutions/bank.

Transfers without any permission/procedural


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Transfers without any permission/procedural

compliance

Transferor Transferee Mode of Transfer for

shares/C.Deb., of Indian

Company

PROI Person Res.

in India

Gift

PROI Sell on Recognized Stock

Exchange

PROI IndianCompany

Under buy back/ capitalreduction scheme (other than

financial serv sector)


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Transfer of security with prior

permission

Transferor Transferee Mode

Person Resident

in India

NRI

Person Resident

Outside India(Not being

erstwhile OCBs)

Non Resident

Gift

Sale


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Transfer of Shares/CDs by way of

Sales

From Resident to Non Resident Applicable to industries of Annexure B to FDI

schedule, except Banking, NBFC & Insurance andFinancial Services sector.

Transfer doesnt fall under SEBI takeover regulations

(RBI approval for Fin services & SEBI takeover)

Sectoral caps are maintained (if not then first Govt.,approval & then RBI approval)

From Non Resident to Resident

Applicable to other than those covered under Reg.9 Both the above categories of transfer are Subject to

P, D & R (pricing guidelines, Documentation &Reporting Requirements)


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Pricing, documentation & reporting for

transfer by way of sale

Transfer between resident & non resident

Parties involved

Seller (non resident/ resident)

Buyer (non resident/ resident)

Duly authorized agents of seller/ buyer

AD Branch

Indian Company

i i id li


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Pricing Guidelines

For transfer from Res to NR (non OCBs)

Price shall not be less than

Ruling market price for listed shares

CA certified fair valuation as per CCIguidelines for unlisted shares

P i i G id li


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Pricing Guidelines

For transfer from NR (including OCBs) toResident- In case of listed shares

At prevailing price & sale effected throughmerchant banker or registered stock broker

In other cases- avg. (avg of daily high andlow) quotations of one week preceding thedate of appln with 5% variation

Price could be higher up to a ceiling of 25%as arrived above, if shares are sold to Indianpromoters for passing management control

P i i G id li (NR TO R) C d


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Pricing Guidelines (NR TO R). Contd..

For thinly traded shares

1- consideration per seller per company is up to INR

20.0 lacs- mutually agreed price between seller &

buyer, based on current valuation methodology and

valuation certificate from statutory auditors

2- for consideration exceeding INR 20 lacs-at sellers

option (a) higher of the price based on EPS multiple

or NAV linked to book value multiple OR (b)

prevailing market price in small lots so that entireshareholding is sold in not less than 5 trading days

P i i G id li (NR TO R) C d


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Pricing Guidelines (NR TO R). Contd..

In case of unlisted shares

At a price lower of two valuations- one by

Statutory Auditors and other by CA or Cat-I

merchant banker registered with SEBI

D i


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Documentation

Form FC-TRS in quadruplicate

For sale by person resident in India

Consent letter from both seller & buyer or their agent(PoA in case signing by agent)

Share holding pattern after investment by NonResident

CA cert for valuation/ brokers note

Undertaking from the buyer that he is eligible to

acquire shares and FDI limit complied with Undertaking from FII/sub account that individual

ceiling prescribed by SEBI not breached


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Documentation

For sale by person resident outside India

Consent letter from both seller & buyer or their agent

(PoA in case signing by agent)

Copies of RBI approval for NRI/OCBs to determine

investment on repatriation/non repatriation basis

Fair valuation certificate from CA

No objection/Tax clearance certificate from income

tax authority/ Chartered Accountant

Undertaking from buyer for adherence to pricing

guidelines.


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Reporting by AD

R return for actual inflow/ outflow of forex

Two copies of FC-TRS to FED

Recording of transfer in Indian company

On submission of A.D. certified copy of FC-TRS

Note- Shares purchased under PIS cannot be

transferred by way of sale under privatearrangement

Investment in Firm or Proprietary


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Investment in Firm or Proprietary

Concern

Permitted to NRIs/PIOs

PIOs who are not citizen of Bangladesh, Pakistan or Sri

Lanka

Firm should not undertake- Print Media, Agricultural/Plantation & dealing in land and immovable property

Capital invested cant be repatriated

Income can however be repatriated

Establishment of Branch or Liaison


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Establishment of Branch or Liaison

office in India (Notification No 22)

Permitted activities for a branch in India of a person residentoutside India:

Export/Import of goods.

Rendering professional or consultancy services.

Carrying out research work, in which the parent companyis engaged.

Promotional technical of financial collaborations betweenIndian companies and parent or overseas group company.

Representing the parent company in India and acting asbuying/selling agent in India.

Rendering services in IT and development of software inIndia.

Establishment Branch or Liaison office


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Establishment Branch or Liaison office

in India (Notification No 22) Continue.

Permitted activities for a Liaison office in India of a personresident outside India:

Rendering technical support to the product supplied byparent/group companies.

Foreign airline/shipping company.

For Liaison Office

Representing in India the parent company/group company.

Promoting export import from/to India.

Promoting technical/financial collaborations between

parent/ group companies and companies in India. Acting as a communication channel between the parent

company and Indian company.

A li ti t RBI f i b h


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Application to RBI for opening branch or

liaison office

A person resident outside India desiring to

establish a branch or liaison office in India shall

apply to RBI, in form FNC 1.


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Remittance of profit or surplus

A person resident outside India shall produce followingdocuments to the authorised dealer through whom theremittance is effected

For remittance of profit of a branch:

Certified copy of the audited balance sheet and profit andloss account for the relevant year

A CAs Certificate certifying:

The manner of arriving at the remittable profit

That the entire remittable profit has been earned byundertaking the permitted activities, and

That the profit does not include any profit onrevaluation of the asset of the branch



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Continue

For remittance of surplus on completion of project

Certified copy of the final audited project account

A CAs certificate showing the manner of arriving at

the remittable surplus Income tax assessment order or either documentary

evidence showing payment of income tax and other

applicable taxes, or a CAs certificate stating that

sufficient funds have been set aside for meeting allIndian tax liabilities

Auditors certificate stating that no statutory liabilities

in respect of the project are outstanding


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FIRST DESERVEAND THEN

DESIRE

THANK YOU

inbound inv oct 08

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