fema fdi policy and producedures by ca. murali krishna, hyd

FDI – Policy and Procedures

CA Murali Krishna [email protected]

Date: 18th January 2016

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Definition of Resident in India (2 (v)) (1/2)

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a person residing in India for more than 182 days during the course of the preceding financial year

A person who has gone out of India or who stays outside India, in either case-(a) for or on taking up employment outside India, or(b) for carrying on outside India a business or vocation outside India, or(c) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period;

A person who has come to or stays in India, in either case, otherwise than-(a) for or on taking up employment in India, or(b) for carrying on in India a business or vocation in India, or(c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;

India

But does not include

Definition of Resident in India (2 (v)) (2/2)

(ii) any person or body corporate registered or incorporated in India,(iii) an office, branch or agency in India owned or controlled by a person resident

outside India,(iv) an office, branch or agency outside India owned or controlled by a person

resident in India.


Definition of Non Resident Indian/ PIO a person resident outside India who is citizen of India; Person of Indian Origin (PIO) means a citizen of any country (other than

Bangladesh or Pakistan) who had:(a) at any time held Indian passport or (b) he or either of his parents or any of his grandparents was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 or (c) the person is a spouse of an Indian citizen or a person referred to in (a) or (b). Note: Clause (c) above is excluded for the purpose of acquisition of immovable property


Types of FDI (1/2)


Types of FDI (2/2)


Entities permitted to invest in India


*other than defence, space and atomic energy and sectors/ activities prohibited for foreign investment

Types of Instruments


Allotment of shares –Flow (1/2)


Allotment of shares –Flow (2/2)


Foreign Investment – Prohibited Sectors (1/2) Atomic Energy Lottery Business including Government / private lottery, online lotteries etc. Gambling and Betting including casinos etc. Business of chit fund Nidhi Company Trading in Transferable Development Rights (TDRs) Agriculture (excluding Floriculture, Horticulture, Development of seeds, Animal

Husbandry, Pisciculture and cultivation of vegetables, mushrooms etc. under controlled conditions and services related to agro and allied sectors) and Plantations (Other than Tea Plantations, coffee, rubber, cardamom , palm oil tree and olive oil tree plantations)


Foreign Investment – Prohibited Sectors (2/2) Real estate business, or construction of farm houses. Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of

tobacco or of tobacco substitutes. Activities / sectors not opened to private sector investment including Atomic

Energy and Railway Transport (other than Mass Rapid Transport Systems). foreign investment in any form, foreign technology collaboration in any form

including licensing for franchise, trademark, brand name, management contract is also completely prohibited for Lottery Business and Gambling and Betting activities.

Foreign investment in Trusts other than investment by SEBI registered FVCIs in domestic VCF


Investment in Firms/ Proprietory Concern/ AOP/BOI

NRI / PIO can invest on non-repatriation basis under automatic route without any limit.

NRI / PIO can invest on repatriation basis with prior approval of RBI. RBI will decide the application in consultation with the GOI

Amount is invested by inward remittance or out of NRE/FCNR(B)/NRO account maintained with AD/ Authorized banks.

The entity should not engage any prohibited activity


Transfer of Shares / CCPS/ CCD


Transfer of shares –Flow (1/2)


Transfer of shares –Flow (2/2)


Transfer by R to NR as Gift under RBI approval route

The proposed transferee (donee) is eligible to hold such capital instrumentsThe gift does not exceed 5 % of the PUCof the Indian company/each series of

debentures/each mutual fund scheme.The applicable sectoral cap limit in the Indian company is not breachedThe transferor (donor) and the proposed transferee (donee) are close relatives as

defined in Section 2 (77) of the Companies Act, 2013The value of capital instruments to be transferred together with any capital

instruments already transferred by the transferor, as gift, to any person residing outside India does not exceed the rupee equivalent of USD 50,000 during the calendar year.

Such other conditions as stipulated by Reserve Bank in public interest from time to time


Conversion of ECB/Lumpsum Fee/Royalty into Equity

The activity of the company is covered under the Automatic Route for FDI or the company has obtained Government approval for foreign equity in the company

The foreign equity after conversion of ECB into equity is within the sectoral cap, if any

Pricing of shares shall be as prescribedCompliance with the requirements prescribed under any other statute and

regulation in forceThe conversion facility is available for ECBs availed under the Automatic or

Government Route and is applicable to ECBs, due for payment or not, as well as secured/unsecured loans availed from non-resident collaborators.


Issue of securities – other cases (1/2) Issue of shares/preference shares against lump sum technical know-how fee, royalty, under

automatic route or SIA/FIPB route, subject to pricing guidelines and compliance with applicable tax laws

Issue of Shares on Rights basiscompany listed on a recognized stock exchange in India, at a price as determined by the

company in compliance with SEBI (ICDR) Regulations, 2009company not listed on a recognized stock exchange in India, at a price which is not less

than the price at which the offer on right basis is made to resident shareholders.rights share to such erstwhile OCBs will have to take specific prior permission from RBI.

As such, entitlement of rights share is not automatically available to erstwhile OCBs.Existing non-resident shareholders are allowed to apply for issue of additional shares/

CCPS / CCD over and above their rights share entitlements subject to the sectoral caps.


Issue of securities – other cases (2/2)Units in Special Economic Zones (SEZs) are permitted to issue equity shares to

non-residents against import of capital goods/ machinery/ equipments (excluding second hand equipments) subject to the valuation done by a Committee consisting of Development Commissioner and the appropriate Customs officials.

Share Swap: Approval of the Foreign Investment Promotion Board (FIPB) is a prerequisite for investment by swap of shares, for sectors under Govt approval route. For Sectors under automatic route, no approval of FIPB is required.


Pledge of Shares (1/2)

Person eligiblepromoter of a company registered in India (borrowing company) raised ECB ,

Whose shares are eligible for pledgepledge the shares of the borrowing company or that of its associate resident

companies Eligible Purpose

securing the ECB raised by the borrowing company, Compliance required

NOC from AD Bank


Pledge of Shares (2/2) Conditions to be reviewed by AD for issue of NOC

ECB is in line with the extant FEMA regulations the loan agreement has been signed by both the lender and the borrower,there exists a security clause in the Loan Agreement requiring the borrower to create

charge on financial securities, andthe borrower has obtained LRN from the RBI

Additional conditions to be fulfilled by the companythe period of such pledge shall be co-terminus with the maturity of the underlying ECB;in case of invocation of pledge, transfer shall be in accordance with the extant FDI Policy

and directions issued by the RBI;the Statutory Auditor has certified that the borrowing company will utilize / has utilized

the proceeds of the ECB for the permitted end –use/s only


Investment in Limited Liability Partnership Firm

• Non Resident Investor can invest on repatriation basis under automatic route where 100% FDI is permitted and there are no FDI linked performance related conditions.

• Amount is invested by inward remittance or out of NRE/FCNR(B)/NRO account maintained with AD/ Authorized banks.

• LLP is now eligible to make downstream investments• Only by way of cash consideration• LLPs not be permitted to avail ECBs• The entity should not engage any prohibited activity• Conversion of a company with FDI, into an LLP, with the prior approval of

FIPB/Government


Changes in FEMA through Finance Act, 2015

Definitions of “authorised officer” and “competent authority” would be inserted in Section 2 of FEMA, 1999

CG makes all rules for Capital Account Transactions except the debt instruments 37A is proposed to be inserted to give powers to the Authorised Officers

(officers in ED not below the rank of Assistant Director) – GSR 702 (E), dt. 16/09/2015

Can confiscate the equivalent value of assets located in India of the Person contravening the provisions of FEMA

No seizure of assets, if the amount involved is below Rs. 1 Crore - GSR 701 (E), dt. 16/09/2015


Compounding of offenses

The compounding application can be submitted to the RBI for the cases other than the Cases of contravention having a money-laundering, national and security concern involving serious infringements of the regulatory framework including cases where application for compounding has not been filed within the stipulated period in the memorandum issued by the Reserve Bank may be referred to Directorate of Enforcement for further investigation and necessary action under Section 37 of the Act or to the Anti Money Laundering Authority instituted under Prevention of Money Laundering Act, 2002 or to any other agencies as deemed fit.

Contraventions related to any transaction without proper approval or permission from the concerned Government or any Statutory Authority as the case may be under the relevant laws/regulations as envisaged under FEMA, would not be compounded unless the required approval is obtained from the concerned authorities.


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CA Murali Krishna G M.Com., F.C.A, F.C.S.

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fema fdi policy and producedures by ca. murali krishna, hyd

Economy & Finance