LRS & ODI Provisions under FEMA

CA. Divakar Vijayasarathy

DVS Advisors LLPIndia-Singapore-London-Dubai-Malaysia-Africa

www.dvsca.com

.

Credits and AcknowledgmentsMeenakshi Jayaraman& Bharathi Priya R D

Legends used in PresentationAD Authorised DealerCCPS Compulsorily Convertible Preference Shares

FC Financial CommitmentFCCB Foreign Currency Convertible BondsFE Foreign ExchangeFEMA Foreign Exchange Management Act

FLA Foreign Liabilities and AssetsFY Financial YearIP Indian PartyJV Joint VentureNRI Non Resident IndianNRO Non-Resident (Ordinary) Rupee AccountPIO Person of Indian OriginRI Resident IndividualTDRs Transferable Development RightsUSD United States DollarsWOS Wholly Owned Subsidiary

Presentation Schema

Meaning of few important terms

Overview of LRS & ODI LRS & LRS limit

Permitted Capital and

Current Account Transactions

Relative

Granting LoanProhibited

transactions -LRS

LRS Procedure

ODI governing provisions &

Applicability to Residents

Regulatory Approach

Financial Commitment -

Meaning

Prohibited activities under

ODI

ODI transactions under Automatic &

Approval Route

Method of Funding & Procedure under

ODIStatistics

Meaning of few important terms• A transaction which alters assets or liabilities, including contingent

liability outside India of person resident in India or assets orliabilities in India of persons resident outside India

Capital account transaction – Sec 2 (e) of FEMA

• A transaction other than capital account transactionCurrent account transaction – Sec 2 (j) of FEMA

• Means a person authorised to act as such under the Act andincludes a person carrying on business as a factorAuthorised Dealer

• Means a Company, a body created under an Act of parliament,Registered partnership firms / LLP, entity notified by RBI

• Making investment in a JV / WOSIndian Party

Overview of LRS & ODI

ParticularsLRS ODI

Liberalised Remittance Scheme Overseas Direct Investment

Applicability Resident Individuals Resident Individuals, Corporates, Partnership firms, HUF, Trusts, etc.

Purpose Liberalization measure to facilitate residentindividuals to remit funds abroad

To invest in JV / WOS for business purpose

Transactions Deals with permitted current accounttransactions* or capital account transactions**or combination of both

Deals only with capital accounttransactions**

*all current account transactions are PERMITTED unless otherwise PROHIBITED *C**all capital account transactions are PROHIBITED unless otherwise PERMITTED

Liberalised Remittance Scheme (LRS)

Resident Individuals (including minor) can remit upto USD 2,50,000 perFY

Remittances can be made in any freely convertible foreign currency

For any permitted current or capital account transaction orcombination of both

Routed only through one branch of an AD

LRS not available to corporates, firms, trusts, HUF, etc

LRS Limit – Revision in stages

• USD 25,000

Feb 4, 2004

• USD 50,000

Dec 20, 2006

• USD 1,00,000

May 8, 2007

• USD 2,00,000

Sep 26, 2007

• USD 75,000

Aug 14, 2013

• USD 1,25,000

Jun 3, 2014• USD

2,50,000

May 26, 2015

LRS limit revised in stages consistent with prevailing macro and micro economic conditions

Permitted Capital Account Transactions Under LRS

Opening of Foreign Currency Account abroad with a bank

Purchase of property abroad

Making investments abroad: acquisition and holding shares of both listed and unlisted overseascompany or debt instruments. Investment in units of mutual funds, venture capital funds,unrated debt securities, promissory notes

Setting up JV / WOS outside India subject to conditions

Extending loans including loans in Indian Rupees to NRIs who are relatives as defined in Companies Act, 2013

Relatives – Sec 2(77) of Companies Act, 2013

Relative

Members of HUF

Related person Rule 4

Father Mother Son & Daughter

Spouse of Son &

DaughterBrother Sister

Spouse

Includes Step-Father, Step-Mother, Step-Son, Step-Brother & Step-Sister

Permitted Current Account Transactions –Up to LRS limit

• Except Nepal & Bhutan• FE up to USD 2,50,000 (“LRS limit”) from an AD• All tour related expenses shall be subsumed under LRS limit

Private visits to abroad

• Gift to person residing outside India / Donation to orgn. outside India• Resident individual can make rupee gift to NRI / PIO relative by credit to

NRO account up to LRS limit per FYGift / Donation

• FE upto the amount prescribed by the country of emigration or LRS limitfrom AD category I bank & AD category II

• Remittance above the LRS limit may be allowed only towards meetingincidental expenses in the country of emigration

Emigration

• FE up to LRS limit per FY from any ADGoing abroad on employment

Permitted Current Account Transactions –Up to LRS limit

• Resident Individuals can remit up to LRS limit per FYMaintenance of close relatives abroad

• FE up to LRS limit per FY irrespective of the number of visits• Exception– If an employee is deputed and the expenses are borne by

entity, they fall outside the scope of LRS

Business trip (attending international conference, seminar,

specialized training, apprentice training)

• FE up to LRS limit per FY from AD (Additional LRS limit allowed to attendant accompanying a patient for medical treatment / check-up)

• Amount in excess, will be released by AD based on the estimate from a doctor / hospital, under general permission

Medical treatment abroad

• FE up to LRS limit will be given by AD category I banks & AD category II• Amount in excess, will be released by AD without prior permission from

RBI based on the estimate received from the institution abroadFacilities available to students for

pursuing their studies abroad

Granting Loan

Loan repayment by inward remittances through normal banking channels or by debit to NRO/NRE/FCNR A/c.of the borrower or out of sale proceeds of shares / immovable property against which loan is granted

The loan should be credited to NRO account of NRI / PIO and loan amount shall not be remitted outside India

Loan cannot be utilised for investment in business of chit funds, Nidhi company, agricultural or plantationactivities, real estate, construction of farm houses & trading in TDRs

Loan can be utilised for borrower’s personal requirements or his own business purposes in India

The remitter should ensure that the loan granted including all other permissible transactions does not exceedLRS limit per FY

The loan is free of interest & the minimum maturity of the loan is 1 year

Residents can lend money to NRI / PIO close relative in ₹ by way of crossed cheque / electronic transfersubject to the following conditions

Prohibited transactions - LRS

Remittance out of lottery winnings, income from racing/riding or from any other hobby

Remittance for purchase of lottery tickets, banned/proscribed magazines, football pools, sweep stakes, etc

Payment related to “Call Back Services” of telephone

Remittance of dividend by any company to which the requirement of dividend balancing is available

Remittance of interest income on funds held in Non-Resident Special Rupee (Account) Scheme

Capital account remittances, directly or indirectly, to countries identified by the Financial Action Task Force(FATF) as “non- cooperative countries and territories”, from time to timePayment of Commission on exports under Rupee State Credit Route, except commission upto 10% of invoicevalue of exports of tea and tobacco

Payment of commission on exports made towards equity investment in JV / WOS abroad of Indian Companies

LRS Procedure

Individual must designate a branch of an AD for remittances

Mandatory to Furnish PAN to make

remittances under LRS

Resident individual seeking to make remittance shall

furnish Form A2 – An application for

remittance abroad

In case of remitter being a minor, Form

A2 must be countersigned by minor’s guardian

ODI – GOVERNING PROVISION

ODI means Investment in overseas entities by way of:

Contribution to capital / Subscription to MOA

Purchase of existing shares

By market purchase / private placement / Stock exchange

ODI – Direct Investment outside India is governed by Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004, as amended from time to time

However, ODI does not include portfolio investment

ODI – General permission to Resident in India

Person resident in India can purchase / acquire securities

Out of the funds held in ResidentForeign Currency account (RFC)

As bonus shares on existingholding of foreign currencyshares

Resident and not ordinary resident– out of their foreign currencyresources outside India

General permission is available to sell the shares so purchased / acquired

ODI by Resident Individuals

Limit of ODI should be within the overall limit prescribed by RBI under the provisions of LRS i.e. USD 2,50,000

May make ODI

In Equity shares of a JV / WOS outside India In CCPS in JV / WOS outside India

Effective August 2013, resident Individual (single / in association with another resident individual / with an IP)

Regulatory Approach

ODI

Automatic Route

No prior approval fromRBI is required

FC <400% of its net worth(as per last audited balancesheet)

FC < USD 1 Billion

Approval Route

Prior approval fromRBI is required

Direct investment / Financial Commitment outside India

Total FC of IP in JV / WOS shall comprise

of:

100% of equity and / or CCPS

100% of the amount of other preference shares

100% of the amount of loan

100% of the amount of guarantee (including 100% of the amount of bank guarantee); 50% of

the amount of performance guarantee

IP can give loan or guarantee to only JV / WOS in which it has Equity participation

Prohibited activities under ODI

Real estate – Buying and selling of real estates or trading in TDRs

Banking Business

Dealing in financial products linked to INR (eg.rupee exchange rates, stock indices linked toIndian market, etc.)

Indian parties cannot invest in the following activities without the PRIOR approval from RBI

ODI transactions under Automatic Route

Investment in JV / WOS abroad by IP through Special Purpose Vehicle

Issuance of guarantee by IP to first level step down subsidiary of JV / WOS

Direct Investment or FC in unincorporated / incorporated entities overseas in oil sector

Construction & Maintenance of submarine cable system

ODI Transactions that require RBI Approval

ODI in the energy & natural resources sector

ODI by proprietorship concerns and unregistered partnership firms

Investments by Registered Trusts / Societies (satisfying certain eligibility criteria) engaged in the manufacturing/ educational / hospital sector in the same sector in a JV / WOS outside India

Corporate guarantee and all other forms of Guarantee by IP to second and subsequent level of Step DownSubsidiary

Restructuring of the balance sheet of JV/WOS involving write-off of capital or receivables in the books oflisted/ unlisted Indian Company

Capitalization of export proceeds remaining unrealized beyond the prescribed period of realization

Investment in Financial Service Sector (approval from concerned regulatory authority in India & abroad)

Undertaking FC without equity contribution in JV / WOS

Method of funding

Drawal of FE from an AD bank in India

Capitalisation of exports

Swap of shares

Proceeds of External Commercial Borrowings (ECBs) / Foreign Currency Convertible Bonds (FCCBs)

In exchange of American Depository Receipts (ADRs) & Global Depository Receipts (GDRs)

Balances held in Exchange Earners Foreign Currency (EEFC) account

Procedure under ODI

Certification of APRs by Statutory Auditor or Chartered Accountant need not be insisted in the case of ResidentIndividuals and self-certification may be accepted

AD shall check with its nodal office to confirm that all APRs in respect of all the JV / WOS of the applicant have beensubmitted

IP / RI which has made ODI has to submit APR in Form ODI to RBI by 31st December in respect of each JV / WOS outsideIndia set up or acquired by IP / RI and an annual return on FLA

Authorized Dealers Category – I banks may allow additional investment in overseas concern set up by IP only after RBIhas allotted UIN for the investment made/to be made in the JV/WOS

Authorized Dealers Category – I banks to do online reporting of ODI forms for allotment of Unique Identification Number(UIN), reporting of subsequent remittances, filing of Annual Performance Reports (APRs)

IP should approach AD with an application in Form ODI (Master Document on Reporting)

Procedure under ODI

Where the law of the host country does not mandatorily require auditing of the books of accounts of JV / WOS, APRmay be submitted by the Indian party based on the un-audited annual accounts of the JV / WOS

The Statutory Auditors of IP certify thatthe law of the host country does notmandatorily require auditing of thebooks of accounts of JV/WOS and thefigures in APR are as per the un-auditedaccounts of the overseas JV/WOS

That the un-auditedannual accounts of theJV / WOS has beenadopted and ratified bythe Board of the IP

The above exemption from filing the APR basedon unaudited balance sheet will not be availablein respect of JV/WOS in a country/jurisdictionwhich is either under the observation of theFinancial Action Task Force (FATF) or in respect ofwhich enhanced due diligence is recommendedby FATF or any other country/jurisdiction asprescribed by Reserve Bank of India.

Where multiple IPs / RIs have invested in the same overseas JV / WOS, the obligation to submit APR shall lie with the IP/ RI having maximum stake in the JV / WOS.

Post Investment Compliances

On disinvestment repatriate the sale proceeds immediately or not later than 90 days from the date of sale ofthe shares / securities

Report the details of the decisions taken by a JV/WOS regarding diversification of its activities / setting up ofstep down subsidiaries / alteration of shareholding pattern within 30 days of the approval of such decisions andthe same shall form part of APR

Submit to RBI through the designated AD every year, an Annual Performance Report (APR) in respect of each JVor WOS outside India set up or acquired by the Indian party.

Repatriate to India, all dues receivable from the foreign JV / WOS, like dividend, royalty, technical fees etc.within 60 days of its falling due

Receive share certificates or any other documentary evidence of investment in the foreign JV / WOS shall besubmitted to designated AD within 6 months from the date of remittance

LRS Statistics – Outward remittances

1325.84

4642.61

8170.7

11333.58

0

2000

4000

6000

8000

10000

12000

2014-15 2015-16 2016-17 2017-18

In U

S $

mill

ion

Total Outward LRS Remittance

Transaction-wise outward remittances under LRS

200.642021.39

27.48

2937.424022.12

8.471169.72

441.8

89.61414.94

OthersStudies Abroad

Medical treatmentMaintenance of close relatives

TravelsDonations

GiftInvestment in equity & debt

Purchase of Immovable PropertiesDeposit

0 500 1000 1500 2000 2500 3000 3500 4000 4500

FY 17-18 (in US $ Mn.)

Components of LRS Remittances

859.97 318.881398.75

2855.74

24.43

7252.486653.45

69.21

5034.89

1004.932014 – 2018 (in US $ Mn.)

DepositPurchase of Immovable PropertyInvestment in Equity / DebtGiftDonationsTravelsMaintenance of close relativesMedical treatmentStudies abroadOthers

ODI Statistics

4460.74771.8

3902.3 3995.9

1176.3 1223.6 1126 1283.9

0

1000

2000

3000

4000

5000

6000

2015 2016 2017 2018

In ₹

bill

ion

EquityDebt

Top ODI Destinations

924.4

804.5725.8

699.1

423.3

Total ODI - March 2018 (in ₹ billion)

SingaporeNetherlandsMauritiusUSAUAE

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