shah & modishahmodi.com/overview of fema.pdfpreamble to fema intention was to bring provisions...

INTRODUCTION TO FEMA

May, 2011

Shah & ModiCHARTERED ACCOUNTANTS

Preamble to FEMA

Post liberalization (i e New Industrial policy of 1991) therePost liberalization (i.e. New Industrial policy of 1991) therewas need to remove shackles of regulatory and legalprovisionsNeed to consolidate and amend the law relating to foreignNeed 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.g gNeed to take various steps to make ‘New Industrial Policy’-workable and meaningful.Industrial licensing was made pragmatic and objective-Industrial licensing was made pragmatic and objectiveorientedIt was decided to review provisions of Foreign ExchangeRegulation Act 1973 (FERA)

CHARTERED ACCOUNTANTSShah & Modi2

Regulation Act, 1973 (FERA)

Preamble to FEMA

Intention was to bring provisions of FERA so as make it fallg pin line with emerging trends of liberalization so as to removeobstacles in the inward flow of foreign exchange and foreigninvestmentAccordingly, 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.


Structure of FEMA

Applies to the whole of India and all branches, offices andpp ,agencies outside India which are owned or controlled by aperson resident in India.FEMA has 49 sections of which 9 (section 1 to 9) are( )substantive and the rest are procedural/ administrativeSection 46 of FEMA grants power to Central Government tomakes rules to carry out the provision of FEMAy pSection 47 of FEMA grants power to RBI to make regulationsto implement its provisions and the rules made there underRBI is entrusted with the administration and implementationRBI is entrusted with the administration and implementationof FEMA


Substantive Provision

Section 1 – application and commencement of FEMAppSection 2 – Important definitions like Authorized Person,Person, Person Resident in India etc.Section 3 Power to RBI for giving general or specialSection 3 – Power to RBI for giving general or specialpermission for transactions involving foreign exchange orany receipt or payments between resident and non- residentSection 4 – Prohibits a person resident in India to acquire,hold, own, possess or transfer any foreign exchange, foreignsecurity or immovable property situated outside Indiaexcept as provided in the ActSection 5 - Permits any person to sell or buy foreign exchangeto or from an authorized person on account of any current


to or from an authorized person on account of any currentaccount transaction

Substantive Provision – contd…

Section 6 – Selling or drawing foreign exchange to or from ang g g gauthorized dealer for capital account transactionsSection 7 – Exporter of goods and services shall furnishdeclaration to RBI or to any other authoritydeclaration to RBI or to any other authoritySection 8 – Realization and repatriation of foreign exchangeSection 9 – Exemption from realization and repatriation offoreign exchange in certain cases


Some of the important definitions

Authorised Person Capital Account TransactionCurrent Account TransactionE tExportForeign ExchangePerson Person Resident in India Person resident outside India

dRepatriate to IndiaSecurityTransfer


Transfer

Implementation -IT A t i i FEMAIT Act vis–a–vis FEMA

Under Income Tax, issue is of taxability of income which, yis determined for the full year, therefore generallyamendments are annual

Whereas FEMA regulations are for undertakingtransaction (generally between Resident & NonResident) itself & therefore clarity at the time ofResident) itself & therefore clarity at the time ofundertaking transaction is a must

Therefore amendments keep pace with changes takingp p g gplace in economy


Current and Capital Account Transaction

Capital Account transaction means a transaction which altersCapital Account transaction means a transaction which altersassets or liabilities including contingent liabilities outsideIndia of person resident in India and vice-versa. It’s aeconomic definition rather than accounting or legaleconomic definition rather than accounting or legaldefinition.Current Account transaction is transaction other than a

it l t t ticapital account transaction.Current Account transactions are freely permitted unlessprohibited,- they are regulated by Central Government.Capital Account transactions are prohibited unless generallypermitted- they are regulated by RBI.


Current and Capital Account Transaction

FEMA looks transaction from Balance of paymentp yposition of CountryExamples -

I f h f h C A/Import of machinery on payment of cash - Current A/ctransactionMachinery is purchased on hire - Capital A/c transaction. Therei bli d k f h idis an obligated to make future payment to the non-residentConsideration for goods & Services – Current A/c transactionTransaction represents a creation or acquisition of wealthshares, loans or immovable properties – Capital A/c transaction


Capital Account Transaction

RBI has been empowered under section 6(2) of FEMA toRBI has been empowered under section 6(2) of FEMA tospecify, in consultation with the Central Government,any class or classes of Capital account transactionswhich are permissible [i.e. the transactions which arenot included under section 6(3)].Section 6(3) of FEMA specifies the class of capitalSection 6(3) of FEMA specifies the class of capitalaccount transactions which are regulated by RBI.Every transaction listed in this section is regulated by acorresponding notification


Capital Account Transaction – contd…

Sr. No.

Transactions specified under section 6(3) Corresponding NotificationNo.

1 Transfer or issue of any foreign security bya person resident in India

Notification No. 120 dated July 7, 2004 – ForeignExchange Management (Transfer or Issue of AnyForeign Security) Regulations, 2004

2 Transfer or issue of any security by a Notification No. 20 dated May 3, 2000 - Foreigny y yperson resident outside India

y gExchange Management (Transfer or Issue of Securityby a Person Resident Outside India) Regulations, 2000

3 Transfer or issue of any security or foreignsecurity by any branch, office or agency in

Notification No. 2 dated May 3, 2000 - ForeignExchange Management (Issue of Security in India by asecurity by any branch, office or agency in

India of a person resident outside IndiaExchange Management (Issue of Security in India by abranch, office or agency of a person resident outsideIndia) Regulations, 2000

4 Any borrowing or lending in rupees inwhatever form or by whatever name

ll d

Notification No. 3 dated May 3, 2000 - ForeignExchange Management (Borrowing or Lending inF i E h ) R l ti 2000called Foreign Exchange) Regulations, 2000

5 Any borrowing or lending in rupees inwhatever form or by whatever namecalled between a person resident in India

d d d d

Notification No. 4 dated May 3, 2000 - ForeignExchange Management (Borrowing and Lending inRupees) Regulations, 2000


and a person resident outside India

Capital Account Transaction – contd…

Sr. No.

Transactions specified under section 6(3) Corresponding NotificationNo.

6 Deposits between persons resident inIndia and persons resident outside India

Notification No. 5 dated May 3, 2000 - Foreign ExchangeManagement (Deposit) Regulations, 2000

7 Export, import or holding of currency orcurrency notes

Notification No. 6 dated May 3, 2000 - Foreign ExchangeManagement (Export and Import of Currency)y g ( p p y)Regulations, 2000

8 Transfer of immovable property outsideIndia, other than a lease not exceedingfive years, by a person resident in India

Notification No. 7 dated May 3, 2000 - Foreign ExchangeManagement (Acquisition and Transfer of ImmovableProperty outside India) Regulations, 2000

9 Acquisition or transfer of immovableproperty in India, other than a lease notexceeding five years, by a person residentoutside India

Notification No. 21 dated May 3, 2000 - ForeignExchange Management (Acquisition and transfer ofImmovable Property in India) Regulations, 2000

10 Gi i f t t i t N tifi ti N 8 d t d M 3 2000 F i E h10 Giving of a guarantee or surety in respectof any debt, obligation or other liabilityincurred -(i) by a person resident in India andowed to a person resident outside India

Notification No. 8 dated May 3, 2000 - Foreign ExchangeManagement (Guarantees) Regulations, 2000


owed to a person resident outside India(ii) by a person resident outside India

Other important sections of FEMA

Section 6(4) – a person resident in India may hold, own,transfer or invest in foreign currency, foreign security or anyimmovable property situated outside India if such currency,security or property was acquired, held or owned by suchperson when he was resident outside India or inherited froma person who was resident outside IndiaSection 6(5) – a person resident outside India may hold, own,( ) p y , ,transfer or invest in Indian currency, security or anyimmovable property situated in India if such currency,security or property was acquired, held or owned by suchsecurity or property was acquired, held or owned by suchperson when he was resident in India or inherited from aperson who was resident in India


Notification under FEMA

RBI had initially issued 25 notifications, covering capitalt t ti ib d i S 6(3) & t iaccount transaction prescribed in Sec 6(3) & certain

miscellaneous provisions15 related to capital account transactions, 1 on Export ofgoods and services and 9 for other regulationsThe same term may be defined differently in differentnotificationsFor eg. Person of Indian Origin (PIO) is defined differently in 3notifications namely:

FEMA 13/2000-RB pertaining to remittance of assetsFEMA 21/2000-RB pertaining to the acquisition and transfer ofimmovable property in IndiaFEMA 24/2000-RB pertaining to investment in a firm or proprietaryconcern in India


concern in India

Definition of PIO

Under FEMA 13/2000 (Remittance of Assets):-/ ( )'Person of Indian Origin' means a citizen of any country other thanBangladesh or Pakistan if

) H t ti h ld I di ta) He at anytime held Indian passport; orb) He or either of his parents or any of his grand-parents was a

citizen of India by virtue of the Constitution of India or theCitizenship Act, 1955 (57 of 1955); or

c) The person is a spouse of an Indian citizen or a person referredto in sub-clause (a) or (b);( ) ( );


Definition of PIO

Under FEMA 21/2000 (Acquisition and transfer of( qimmovable property in India):-'Person of Indian Origin' means an individual (not being a citizenof Pakistan or Bangladesh or Sri Lanka or Afghanistan or China org gIran or Nepal or Bhutan), whoa) At any time, held India passport; orb) who or either of whose father or mother or whose grandfatherb) who or either of whose father or mother or whose grandfather

or grandmother was a citizen of India by virtue of theConstitution of India or the Citizenship Act, 1955 (57 of 1955)."(Recently included vide Notification No.200 dated October 5,( y ,2009)


Definition of PIO

Under FEMA 24/2000 (Investment in Firm or proprietary( p p yconcern in India):-'Person of Indian Origin' means a citizen of any country other thanBangladesh or Pakistan or Sri Lanka, ifg ,a) He at any time held India 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 citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955); or

c) The person is a spouse of an Indian citizen or a person referred to in sub-clause (a) or (b);to in sub clause (a) or (b);


Notification under FEMA – contd…

Notification FEMA 1/2000-RB dated 3-5-2000:Relates to permissible capital account transactionCapital account transactions of a person may be classifiedunder the following heads, namely-under the following heads, namelyA. Transaction, specified in Schedule I, of a person resident in IndiaB. Transactions, specified in Schedule II, of a person resident

outside IndiaSubject to the provisions of the Act or the rules or theregulations or directions or orders made or issuedthereunder, any person may sell or draw foreign exchange to, y p y g gor from an authorized person for a capital account transactionspecified in the Schedules



Schedule I: Classes of capital account transactions ofppersons resident in Indiaa) Investment by a person resident in India in foreign securitiesb) Foreign currency loans raised in India and abroad by ab) Foreign currency loans raised in India and abroad by a

person resident in Indiac) Transfer of immovable property outside India by a person

resident in Indiaresident in Indiad) Guarantees issued by a person resident in India in favour of a

person resident outside Indiae) Export import and holding of currency/currency notese) Export, import and holding of currency/currency notesf) Loans and overdrafts (borrowings) by a person resident in

India from a person resident outside India



g) Maintenance of foreign currency accounts in India andoutside India by a person resident in India

h) Taking out of insurance policy by a person resident in Indiafrom an insurance company outside India.

i) Loans and overdrafts by a person resident in India to aperson resident outside India.

j) Remittance outside India of capital assets of a person residentj) p pin India.

k) Sale and purchase of foreign exchange derivatives in Indiaand abroad and commodity derivatives abroad by a persony y president in India.



With effect from September 26, 2007, a resident individual mayp ydraw foreign exchange up to USD 2,00,000 per financial year,for a capital account transaction specified in this Schedule I(Proviso to Reg. 4 (a)).( g ( ))

If the drawal of foreign exchange by the resident individualexceeds USD 2,00,000 per financial year, then the limits

ifi d i th ti l l ti hi h l t t th tspecified in the particular regulations which are relevant to thatparticular transaction, shall apply to such drawal. (Proviso toReg. 4(a))

Note: No part of the foreign exchange drawn as per thisproviso shall be remitted to countries notified as non-cooperative countries and territories by Financial Action Task


cooperative countries and territories by Financial Action TaskForce (FATF).


Schedule II: Classes of capital account transactions ofid id I dipersons resident outside India.

a) Investment in India by a person resident outside India, that isto say,i I f it b b d t tit i I di di. Issue of security by a body corporate or an entity in India and

investment therein by a person resident outside India; &ii. Investment by way of contribution by a person resident outside

India to the capital of a firm or a proprietorship concern or anp p p passociation of persons in India.

b) Acquisition and transfer of immovable property in India bya person resident outside India.

c) Guarantee by a person resident outside India in favour of, oron behalf of, a person resident in India.

d) Import and export of currency/currency notes into/from


) p p y yIndia by a person resident outside India.


e) Deposits between a person resident in India and a personid t t id I diresident outside India.

f) Foreign currency accounts in India of a person residentoutside India.

g) Remittance outside India of capital assets in India of a persong) Remittance outside India of capital assets in India of a personresident outside India.


Prohibited Capital Account Transactions

No person resident outside India shall make investmentpin India, in any form, in any Company or partnershipfirm or proprietary concern or any entity, whetherincorporated or not, which is engaged or proposes top g g p pengage-i. In the business of chit fund, orii. As Nidhi Company, orp y,iii. In agricultural or plantation activities, oriv. In real estate business, or construction of farm houses, or

For the purpose of this regulation ‘real estate business’ shall not includep p gdevelopment of townships, construction of residential/commercial premises,roads or bridges

v. In trading in Transferable Development Rights (TDRs)


Current Account Transaction

Current account transaction is a transaction other than aCurrent account transaction is a transaction other than acapital account transactionCurrent account transactions are governed by ForeignExchange Management (Current Account Transaction) RulesExchange Management (Current Account Transaction) Rules,2000 ("Current Account Transactions Rules").Current account transactions are divided into 3 schedules inCurrent Account Transactions Rules:-Schedule I – Prohibited TransactionsSchedule II – Transactions requiring prior approval of Governmentq g p ppof IndiaSchedule III – Transactions requiring prior approval of RBI


Current Account Transaction – contd…

Some examples are:pSchedule I :1. Remittance out of lottery winnings2 Remittance of income from racing/riding etc or any other2. Remittance of income from racing/riding etc., or any other

hobby3. Remittance for purchase of lottery tickets, banned/prescribed

magazines football pools sweepstakes etcmagazines, football pools, sweepstakes etc.Schedule II:1. Cultural tours2. Remittance of container detention charges exceeding the rate

prescribed by Director General of Shipping


Current Account Transaction – contd…

Schedule III:1. Gift remittance exceeding US$ 5,000 per remitter/donor per

annum2 D ti di US$ 10 000 itt / d2. Donation exceeding US$ 10,000 per remitter/ donor per

annum3. Release of exchange for meeting expenses for medical

treatment abroad exceeding the estimate from the doctor inIndia or hospital or hospital/doctor abroad.Note: Drawal of foreign exchange by resident individualsg g ytowards remittance of gift or donations as per this Schedule IIIshall be within the limit specified under the proviso of Reg. 4(i.e. US$ 2,00,000)


(i.e. US$ 2,00,000)

Residential Status under FEMA

Under FEMA residential status is of two types:ypPerson resident in IndiaPerson resident outside India

Under FERA citizenship was considered as decidingUnder FERA citizenship was considered as decidingfactorFEMA lays emphasis on 'residing' which denotespermanency


Definition - Person Resident in India and Person Resident outside IndiaPerson Resident outside India

Section 2(v) of FEMA defines 'person resident in India' as:( ) p(i) A person residing in India for more than one hundredand eighty-two days during the course of the precedingfinancial year but does not include --financial year but does not include

(A) a person who has gone out of India or who stays outsideIndia in either case –

(a) for or on taking up employment outside India, or( ) g p p y ,(b) for carrying on outside India a business or vocationoutside India, or(c) for any other purpose, in such circumstances as would( ) y p pindicate his intention to stay outside India for an uncertainperiod;


Definition - Person Resident in India and Person Resident outside India

(B) a person who has come to or stays in India, in either case,otherwise than

Person Resident outside India

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(c) for any other purpose, in such circumstances as would

indicate his intention to stay in India for an uncertain period;(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( ) g y

controlled by a person resident in India

Section 2(w) defines ‘person resident outside India’ to mean


( ) pa person who is not resident in India


Person to be resident in India, has to reside in India for more


than 182 days during the previous financial yearExclusion to this is - if a person stays outside India foremployment, for vocation or for any other purpose foruncertain period, then even if he has resided in India formore than 182 days he will become a ‘person resident outsideIndia’

b d d dMoreover a person to be treated as person resident in Indiahe has to satisfy not only the condition of period of stay (i.e.182 days) but has to also comply with the conditions of the'purpose' of stay i e for taking up employment carrying on'purpose' of stay i.e. for taking up employment, carrying onbusiness or vocation in India or for any other purpose whichwould indicate his intention to stay in India for an uncertainperiod


period


RBI may ignore the arithmetic condition (i.e. of 182 days) and


treat the person who comes to or stays in India for any of thethree purposes set out in section 2(v)(i)(B) as ‘person residentin India’ even though he may not have resided in India for a

i d f 182 d d i th di fi i lperiod of 182 days or more during the preceding financialyear. However legal tenability of such a view cannot be saidto be free from doubt.RBI h h t d id tRBI has a very narrow approach towards non residentacquiring immovable property in India. It gives a weightedsignificance to the arithmetic condition of staying in India formore than 182 days during the preceding financial yearmore than 182 days during the preceding financial year.(FAQs on Acquisition and Transfer of Immovable Propertyin India by a person resident outside India issued by RBI)


FAQs on acquisition of Immovable Property in IndiaProperty in India

Q.37- What is meant by a person resident in India?A.37 - Under FEMA, a person resident in India is defined as a personresiding in India for more than one hundred and eighty-two days duringthe course of the preceding financial year (April-March) and who hascome to or stays in India either for taking up employment, carrying oncome to or stays in India either for taking up employment, carrying onbusiness or vocation in India or for any other purpose, that wouldindicate his intention to stay in India for an uncertain period. In otherwords, to be treated as `a person resident in India' under FEMA, a personhas not only to satisfy the condition of the period of stay (being morehas not only to satisfy the condition of the period of stay (being morethan 182 days during the course of the preceding financial year) but hasalso to comply with the condition of the purpose / intention of stay

Q.39 - who can determine whether a person is resident in India or not?A.39 - Reserve Bank does not determine the residential status. UnderFEMA, residential status is determined by operation of law. The onus ison an individual to prove his / her residential status if questioned by


on an individual to prove his / her residential status, if questioned byany authority

Deposits By Non-residents

Deposit, a capital account transaction referred to inp psection 6(3)(f) and sub-section (2) of sec. 47 of FEMA,includes deposit of money with a bank, company,proprietary concern, partnership firm, corporate body,p p y p p p ytrust or any other person.Acceptance of deposits by an authorized dealer/bank from persons resident outside India would be as under:from persons resident outside India would be as under:- Non-resident (Ordinary) Account Scheme (NRO Account)- Non-resident (External) Account Scheme (NRE Account)- Foreign Currency (Non-resident) Account Banks Scheme- Foreign Currency (Non-resident) Account Banks Scheme(FCNR(B) Account)


Deposits By Non-residents – contd…

PARTICULARS FCNR(B) ACCOUNT NRE ACCOUNT NRO ACCOUNT

Who can open anaccount?

NRI (Individuals ofBangladesh / Pakistannationality / ownershiprequires prior approvalof RBI)

NRI (Individuals ofBangladesh / Pakistannationality / ownershiprequires prior approvalof RBI)

Person resident outside India[other than a person residentin Nepal and Bhutan](Individuals / entities ofBangladesh / Pakistanof RBI) of RBI) Bangladesh / Pakistannationality / ownership aswell as erstwhile OverseasCorporate Bodies requiresprior approval of RBI)

Repatriable / Non-repatriable

Repatriable Repatriable Non-Repatriable (Except (i)current income and (ii) underUSD 1 million scheme perfinancial year)

Type of account Term deposits only Current, Savings,Recurring or FixedDeposit Accounts

Current, Savings, Recurring orFixed Deposit Accounts

Joint accounts 2 or more NRI of Indian 2 or more NRI of Indian Jointly with residents


nationality or origin nationality or origin



Nomination Permitted Permitted Permitted

Currency inwhich accountdenominated

GBP, USD, JPY, EURO,CAD and AUD

Indian Rupees Indian Rupees

denominated

Operations byPower ofAttorney (POA)

f f

Operation in theaccount in terms of POAis restricted to

hd l f

Operation in theaccount in terms ofPOA is restricted to

hd l f

Operations in the account interms of POA is restricted towithdrawals for permissiblel lin favour of a

resident by thenon-residentaccount holder

withdrawals forpermissible localpayments or remittanceto the account holderhimself through normal

withdrawals forpermissible localpayments orremittance to theaccount holder himself

local payments in rupees,remittance of current incometo the account holder outsideIndia or remittance to theaccount holder himselfse t oug o a

banking channels.accou t o de sethrough normalbanking channels.

accou t o de sethrough normal bankingchannels. Remittance issubject to the ceiling of USD1 million per financial year.




PermissibleCredits

Remittance in permittedforeign currency,proceeds of foreigncurrency / bank notestendered during

Remittance inpermitted foreigncurrency, proceeds offoreign currency /bank notes tendered

Remittance in permittedforeign currency, Deposit byaccount holder duringtemporary visit to India,Transfer from rupee accounttendered during

temporary visit to India,transfer from other NRE/ FCNR account etc.

bank notes tenderedduring temporary visitto India, transfer fromother NRE / FCNRaccount etc.

Transfer from rupee accountof non-resident banks, Duesin India of accountholder

PermissibleDebits

Local disbursements,remittance outsideIndia, transfer to otherNRE / FCNR accountetc.

Local disbursements,remittance outsideIndia, transfer to otherNRE / FCNR accountetc.

Local rupee payments,Remittance outside India ofcurrent income in India (netof taxes)

etc. etc.



PARTICULARS FCNR(B) ACCOUNT NRE ACCOUNT NRO ACCOUNTLoan – to the Rupee Loan - Rupee Loan - Rupee Loan -Loan to theaccountholders

Rupee Loan• India - Upto Rs. 10

million• Outside India –

Permitted provided no


million• Outside India – Permitted

provided no funds are

Rupee Loan• India - Permitted• Outside India – Not

permittedPermitted provided nofunds are remitted backto India and are usedabroad only

provided no funds areremitted back to Indiaand are used abroad only

Foreign Currency Loan inIndia -Upto Rs. 10 million

Foreign Currency Loan inIndia -Not permitted

Foreign Currency Loanin India -Not permitted




L h P P PLoan – to theaccountholders(contd.)

Purpose –In India• For personal purpose or

business purpose except

Purpose –In India• For personal purpose or

business purpose except for

Purpose –In India• For personal

purpose orfor relending oragricultural / plantationactivity or for investmentin real estate businessF di t i t t i

relending or agricultural /plantation activity or forinvestment in real estatebusinessF di t i t t i

business purposeexcept forrelending oragricultural /plantation activity• For direct investment in

India in firms / companieson non-repatriation basis

• For purchase of flat inIndia for own residential

• For direct investment inIndia in firms / companieson non-repatriation basis

• For purchase of flat in Indiafor own residential purpose

plantation activityor for investmentin real estatebusiness

Outside IndiaIndia for own residentialpurpose

Outside India• Fund based or non-fund

based facilities for

for own residential purposeOutside India• Fund based or non-fund

based facilities for bonafidepurposes

• Not permitted


based facilities forbonafide purposes

purposes


PARTICULARS FCNR(B) ACCOUNT NRE ACCOUNT NRO ACCOUNTLoan – to Rupee Loan - Rupee Loan - Rupee Loan -Loan tothird parties


million• Outside India –

Permitted provided no


million• Outside India – Permitted

provided no funds are

Rupee Loan• India - Permitted• Outside India – Not

permittedPermitted provided nofunds are remitted backto India and are usedabroad only

provided no funds areremitted back to Indiaand are used abroad only



Foreign Currency Loanin India -Not permitted




L P P PLoan – tothird parties(contd.)

Purpose –In India• Fund based and / or non-

fund based facilities for

Purpose –In India• Fund based and / or non-

fund based facilities for

Purpose –In India• For personal

purpose orpersonal purposes orbusiness purposes exceptfor relending oragricultural / plantationactivity or for investment

personal purposes orbusiness purposes exceptfor relending or agricultural/ plantation activity or forinvestment in real estate

business purposeexcept forrelending oragricultural /plantation activityactivity or for investment

in real estate businessOutside India• Fund based or non-fund

based facilities for

investment in real estatebusiness

Outside India• Fund based or non-fund

based facilities for bonafide

plantation activityor for investmentin real estatebusiness

Outside Indiabased facilities forbonafide purposes

based facilities for bonafidepurposes • Not permitted


Income exempt for NRIs

Sec. 10 (4) (ii) Interest on NRE Account (w.e.f. A.Y.1991-92)Conditions:

Account should be maintained as per FEMAPerson should be Person Resident Outside India as per FEMAPerson should be Person Resident Outside India as per FEMAAvailable only to Individuals & not to HUF

Sec. 10(15)(iv)(fa)- Interest on deposits made in foreign currencyConditions:Conditions:

Deposits in foreign currency (will include Resident ForeignCurrency (RFC) deposits and FCNR(B) deposits.)Available to individuals and HUFs who are either Non Resident orAvailable to individuals and HUFs who are either Non Resident orResident But Not Ordinarily Resident in terms of Sec. 6(6)Account should be with SBI or Scheduled Bank


Inbound Investments

Shah & ModiCHARTERED ACCOUNTANTS

Background

FDI policy is formulated by Government of Indiap y yFEMA regulations prescribe the mode of investmentsi.e. manner of receipt of funds, issue ofh / tibl d b t d f hshares/convertible debentures and preference shares

and reporting of the investments to RBI


Inbound Investments - Process

Investor Proposed Mode of (Other than citizen & entity of Pakistan)

pActivity in India• Prohibited

Activities

Remittance• NRE• Inward

Remittance

Procedural Compliance Annual )

• NRI• Non-

Resident

Activities• Approval

Route• Automatic

Route

Remittance at the time of

Investment

Annual Compliance

Route


Inbound Investments - Overview

Inbound InvestmentsInbound Investments

Corporate Limited Partnership firm/ Venture Establishment of Corporate

Entity Liability Partnership

firm/ Proprietary

concern

Venture Capital Fund Branch / Liaison

/ Project office

Fresh Investment FDI, Portfolio Investment,

FVCI, Investment on

Transfer of existing shares

Investment on non-repatriation

basis, Investment in securities other

than shares & debentures

To Non-Resident

By Non-


debentures By NonResident

Inbound Regulations –Broad FrameworkBroad Framework

Inbound investment in India is governed by the ForeignE h M (T f I f S i b PExchange Management (Transfer or Issue of Security by a PersonResident Outside India) Regulations, 2000 ("InboundRegulations") and Consolidated FDI Policy issued by DIPP.Inbound Regulations provides for the following schemes forInbound Regulations provides for the following schemes forinbound investment in India.Schedule 1 : Foreign Direct Investment (FDI) SchemeSchedule 2 : Investment in shares / debentures by FII under Portfolioy

Investment SchemeSchedule 3 : Portfolio Investment Scheme for NRI (Repatriable)Schedule 4 : Investment Scheme for NRI (Non-repatriable)Schedule 5 : Investment Scheme for securities other than share /

convertible debenturesSchedule 6 : Investment Scheme for Foreign Venture Capital


Undertaking

Inbound Regulations –B d F kBroad Framework

Regulation 4 – Except as provided in FEMA or Rules orRegulations made thereunder an Indian entity shall not issueRegulations made thereunder, an Indian entity shall not issueany security to any person resident outside India or record in itsbooks any transfer of security from or to such person.Regulation 5 prescribes various schemes under inboundRegulation 5 - prescribes various schemes under inboundinvestment for NR and NRIsRegulation 6 & 7 - Acquisition of Right Shares & undermerger/de mergermerger/de-mergerRegulation 8 - Issue of shares under ESOPRegulation 9 & 10 - provisions relating to transfer of sharesg p gby/to Non ResidentRegulation 11 - Repatriation of sale proceeds


FDI Scheme – Corporate Entity

Types of instruments permittedEquity Shares; Fully, compulsorily and mandatorily convertibledebentures; and Fully, compulsorily and mandatorily convertiblepreference sharesRemittance received via issuance of Depository Receipts (DRs) andForeign Currency Convertible Bonds (FCCBs) are treated as FDI

Other types of Preference shares/Debentures i.e. non-convertible,ll bl ll bl d doptionally convertible or partially convertible are considered as

debt and accordingly all norms applicable for External CommercialBorrowings (ECB) applies to such instruments.Citizens of Pakistan or entities of Pakistan are prohibited frommaking investment in IndiaCitizens & entities of Bangladesh are allowed with approval of


FIPB

FDI Scheme

FDI Scheme is divided into 3 parts:pProhibited Sectors - Sectors/activities where FDI is prohibitedApproval Route - Sectors/activities which require Approval fromGovernment i.e. SIA or FIPB -Automatic Route - Sectors/activities which require proceduralcompliance and intimation to RBI without any approval


FDI Scheme – Prohibited sectors

Paragraph 5.1 of Consolidated FDI Policy:Retail Trading (except single brand product retailing)Lottery Business including Government /private lottery, online lotteriesetc.Gambling and Betting including casinos etc.Gambling and Betting including casinos etc.Business of chit fundNidhi companyTrading in Transferable Development Rights (TDRs)R l E t t B i C t ti f F HReal Estate Business or Construction of Farm HousesManufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or oftobacco substitutesActivities / sectors not opened to private sector investment including/ p p gAtomic Energy and Railway Transport (other than Mass Rapid TransportSystems).

Besides above foreign investment in any form, foreign technology collaboration in anyform including licensing for franchise trademark brand name management contract is


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

FDI Scheme – Automatic Route

In those sectors/activities listed under paragraph 5.2 of/ p g pConsolidated FDI Policy, where FDI upto limit specifiedagainst each sector /activity is allowed/permitted underautomatic route subject to other conditions indicated &jsecurity conditions where applicable.FDI is permitted upto 100% under the automatic route, insectors/activities not listed in paragraph 5.2 of Consolidatedsectors/activities not listed in paragraph 5.2 of ConsolidatedFDI Policy, subject to applicable laws/sectoralrules/regulations/security conditions.General permission is available for issue of shares/preferenceGeneral permission is available for issue of shares/preferenceshares against conversion of ECB (excluding those deemed asECB) lump sum technical know-how fee, royalty, subject toentry route sectoral cap and pricing guidelines and


entry route, sectoral cap and pricing guidelines andcompliance with applicable tax laws.

FDI Scheme – Approval Route

In those sectors/activities listed under paragraph 5.2 of/ p g pConsolidated FDI Policy, where FDI upto limit specifiedagainst each sector /activity is allowed/permitted underapproval route subject to other conditions indicated &pp jsecurity conditions where applicableProposals falling outside sectoral policy/capAny industrial undertaking manufacturing items reserved forAny industrial undertaking manufacturing items reserved forthe MSE sector would require Government approval whereforeign investment is more than 24% in the capitalIssue of equity shares import of capital goods/ machinery/Issue of equity shares import of capital goods/ machinery/equipment (including second-hand machinery) and pre-operative/ pre-incorporation expenses (including paymentsof rent etc ) subject to pricing guidelines of RBI and


of rent etc.) subject to pricing guidelines of RBI andappropriate tax clearance and other specified conditions.

FDI Scheme – Other Provisions

Pricing Guidelines - Issue Price shall not be less thanListed Company- price as per SEBI guidelinesUnlisted Company – price as per Discounted Free Cash Flow (DCF)method

Mode of payment for inbound investmentInward remittance through banking channelsDebit to NRE/FCNR (B) AccountCapitalization of lumpsum fee, royalty and ECBs (other than importdues deemed as ECB or Trade Credit)Capitalization of import of capital goods/ machinery/ equipment(including second-hand machinery) and pre-operative/ pre-incorporation expenses (including payments of rent etc.)


Portfolio Investment on repatriation / non-repatriation basis by NRIs Schedule 3repatriation basis by NRIs – Schedule 3

Limit of 5% by single NRI, 10% by all NRIs (this can be increased to24%) b i i d24%) to be maintainedPayment for purchase to be made by way of inward remittancethrough normal banking channels or out of funds held inNRE/FCNR(B) account or NRO account (only in case of nonNRE/FCNR(B) account or NRO account (only in case of nonrepatriable investment)Only delivery based purchase and sale permittedShares purchased under PIS cannot be transferred under privateShares purchased under PIS cannot be transferred under privatearrangements or by way of gift to person resident in India oroutside India without prior approval of RBI

Gift to relatives defined in Section 6 of Companies Act, 1956 or top ,charitable trust in India is permitted without RBI approval

OCBs are not permitted after 29/11/2001 to invest in PIS


Investment in shares and debentures on non-repatriation basis by NRIs – Schedule 4repatriation basis by NRIs Schedule 4

Scheme applies to investment other than Portfolio InvestmentsNRIs may acquire without any limit, shares under public issue,private placement or right issuePayment for purchase to be made by way of inward remittancethrough normal banking channels or out of funds held inNRE/FCNR(B) account or NRO accountNot permitted - investment in companies engaged in chitf d/ idhi i lt l/ l t ti l t t b ifund/nidhi, agricultural/plantation or real estate business orconstruction of farm house or dealing in TDRs


Investment in Securities other than shares or debentures by Non-Resident – Schedule 5debentures by Non Resident Schedule 5

Scheme available to FIIs & NRIsInvestment on repatriation basis in

dated Govt., securities/treasury bills, NCD issued by Indiancompany and units of domestic MFcompany and units of domestic MFother conditions on FII for composition of investment andregistration with SEBI

NRIs can also invest in shares of Public Sector enterpriseNRIs can also invest in shares of Public Sector enterprisein disinvestment process and in bonds of Public SectorUndertaking in IndiaInvestment on non repatriation basis by NRIs in – alsounits of money market funds in India or NationalPlan/Saving Certificates


g

Procedure under Automatic Route

Intimation to RBI through Authorized Dealer:within 30 days from receipt of funds in the Advance Reporting Formto be filed along with copy of FIRC and KYC Report (in prescribed format)on the non-resident investor

R ti f i f hReporting of issue of shares:Shares shall be issued within 180 days from the date of from the date ofreceipt of fund (from the date of receipt of the inward remittance or date ofdebit to NRE/FCNR(B) account)/ ( ) )

If the shares are not issued within 180 days, then amount received shall berefunded backRefund / allotment of shares beyond a period of 180 days from the date ofreceipt of fund may be considered by RBI, on the merits of the case.p y y

Report to be filed in Part A of form FC-GPR within 30 days from the date ofissue of shares alongwith valuation certificate and certificate from theCompany Secretary for compliance of Companies Act, 1956Annual Return in shall be filed in the revised format by 15th July every year


Annual Return in shall be filed in the revised format by 15t July every year

Procedure under Approval Route

Applications for NRI investment, Export Oriented Unitspp pand Retail Trading (Single Brand) should be submittedto SIA in DIPPApplications for FDI other than above should beApplications for FDI other than above should besubmitted to FIPB unit, Department of EconomicAffairs, Ministry of FinanceA li ti i F FC ILApplication in Form FC-IL


Investment in Limited Liability Partnership (LLP)Partnership (LLP)

Permitted under approval routeppAllowed in sectors/activities with 100% FDI under theautomatic route and where there are no FDI-linkedperformance related conditionsperformance related conditionsLLP should not undertake - Print Media, Agricultural/Plantation & real estate businessNot allowed to make downstream investmentInvestment shall be brought in cash by way of inwardremittance or by debit to NRE/FCNR accountremittance or by debit to NRE/FCNR accountNot allowed to avail ECBs


Investment in Partnership Firm or Proprietary concernProprietary concern

Permitted to NRIs/PIOsPIOs who are not citizen of Bangladesh, Pakistan or SriLankaFi h ld t d t k P i t M di A i lt l/Firm should not undertake - Print Media, Agricultural/Plantation & real estate businessCapital invested cannot be repatriatedp pIncome can however be repatriated


Investment in Venture Capital Fund (VCF)(VCF)

Allowed under automatic route in VCF set-up as apcompany under the Companies Act, 1956Investment in VCF set up as a trust is allowed only

d l tunder approval route


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