1 NIRC - ICSI PRESENTATION ON FEMA - PowerPoint Presentation

1. 1NIRC - ICSIPRESENTATION ON FEMABY CA. SUNIL JAIN FCA DISAkca@kcaconsultancy.comkca_delhi@yahoo.co.inwww.kcaconsultancy.com

2. 2 FEMA: TOPICSOVERVIEWOverseas Direct Investment including ODI under Liberalized remittance Scheme (LRS) for Residents; Immovable property outside India by ResidentsExternal commercial borrowings(ECB)

3. 3FOREIGN EXCHANGE MANAGEMENT ACT 1999 FEMA – Introduction and Basic StructureThe ActThe regulation/ The rulesMaster Circulars Master DirectionsAP DIR CircularsNotificationsPress notesRespective ministry Guidelines

4. DIRECT INVESTMENTS IN JV/WOS ABROADForeign Exchange Management (Transfer or issue of any foreign security) Regulations 2004Read together with Master CircularMaster directionsFAQs of RBI4

5. DIRECT INVESTMENTS IN JV/WOS ABROAD "Direct investment outside India" means investment by way of contribution to the capital or subscription to the Memorandum of Association of a foreign entity or by way of purchase of existing shares of a foreign entity either by market purchase or private placement or through stock exchange, but does not include portfolio investment;5

6. DIRECT INVESTMENTS IN JV/WOS ABROAD "Financial Commitment" means the amount of direct investment by way of contribution to equity, loan and 100 per cent of the amount of guarantees and 50 per cent of the performance guarantees issued by an Indian Party to or on behalf of its overseas Joint Venture Company or Wholly Owned Subsidiary;6

7. DIRECT INVESTMENTS IN JV/WOS ABROADAUTOMATIC ROUTEEligible Investor:Companies Partnerships registered under Indian Partnership Act 1932Limited Liability PartnershipBody created under act of parliament7

8. DIRECT INVESTMENTS IN JV/WOS ABROAD"Joint Venture (JV)/WOS" means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country in which the Indian Party makes a direct investment; "Net Worth" means paid up capital and free reserves;8

9. DIRECT INVESTMENTS IN JV/WOS ABROADAUTOMATIC ROUTEFinancial commitment Limit:Up to 400% of the net worth as on the date of the last audited balance sheet.Investment to be in the shape of capital, loan &/or guarantees issued to or on behalf of JV/WOS 9

10. DIRECT INVESTMENTS IN JV/WOS ABROADAUTOMATIC ROUTEForm ODI to be submitted to designated branch of authorised dealerFor all transactions one branch of authorised dealer to be designated Indian Investor should not be on RBI’s caution list or defaulters list Auto route not available for Pakistan10

11. DIRECT INVESTMENTS IN JV/WOS ABROADAUTOMATIC ROUTEPartial/Full acquisition of an existing foreign company permissible Valuation of shares in such cases upto investment of USD 5m to be certified by CA/CPA Otherwise by category I merchant banker 11

12. DIRECT INVESTMENTS IN JV/WOS ABROADAUTOMATIC ROUTEMethod of Funding:EEFC account Drawl of Forex from authorised dealers ADR/GDR Proceeds of ECB Capitalization of exportsSwap of shares12

13. DIRECT INVESTMENTS IN JV/WOS ABROADAUTOMATIC ROUTEProcedure:Selection of AD I bankODI form CA Certificate in prescribed formatCertificate of Incorporation and MA/AA of foreign entityBank particulars of Foreign entity.13

14. DIRECT INVESTMENTS IN JV/WOS ABROADAUTOMATIC ROUTEGeneral Permission for Resident Individuals:As gift from any person resident outside India Cashless employees stock option scheme By inheritance from resident or NRESOP offered by foreign company to employees of its branch/subsidiary Qualification shares up to LRS limitIn lieu of professional services14

15. DIRECT INVESTMENTS IN JV/WOS ABROADAUTOMATIC ROUTEGeneral Permission for Resident Individuals:Right shares against eligible holding Bonus shares against existing shareholdingOut of Funds held in RFC account.15

16. DIRECT INVESTMENTS IN JV/WOS ABROADAPPROVAL ROUTE Form ODI Factors considered by RBI:Viability of project Benefit which will accrue to India Financial position & track record Expertise of Indian party16

17. DIRECT INVESTMENTS IN JV/WOS ABROADAPPROVAL ROUTE ODI exceeding USD 1 (one) billion (or its equivalent) in a financial year would require prior approval of the Reserve Bank even when the total FC of the Indian Party is within the eligible limit under the automatic route (i.e., within 400% of the net worth as per the last audited balance sheet).17

18. DIRECT INVESTMENTS IN JV/WOS ABROADAPPROVAL ROUTE Proprietary concern/unregistered partnership Only who are status holder exportersHaving proven track recordUnrealised exports <10%Limited to 10% of average of last 3 years realised export turnover or 200% of net owned Funds which ever is lowerTrusts and societies: subject to eligibility criteria18

19. DIRECT INVESTMENTS IN JV/WOS ABROADReporting:APR by 31st Dec.Annual return of Foreign Liabilities and Assets by 15th July- FLAPost investment Changes like diversification, step down subsidiary, shareholding pattern within 30 days 19

20. DIRECT INVESTMENTS IN JV/WOS ABROADOther Obligations of Indian Party:Receive share certificates or instrumentsRepatriation of all dues from JV/WOS within 60 daysESOP reporting by Indian party 20

21. DISINVESTMENTS IN JV/WOS ABROAD An Indian Party, without approval of RBI transfer by way of sale to another Indian Party or to a person resident outside India provided:the sale does not result in any write offIf listed through stock exch.if unlisted the share price is not less than the value certified by a CA / CPAthe Indian Party does not have any outstanding dues from the JV or WOS;the overseas concern has been in operation for at least one full year and APR filed.21

22. DISINVESTMENTS IN JV/WOS ABROAD Without approval of RBI at less than the original amount invested: where the JV / WOS is listed in the overseas stock exchange; where the Indian Party is listed on a stock exchange in India and has a net worth of not less than ₹ 100 crore;where the Indian Party is an unlisted company and the investment (or financial commitment) in the overseas venture does not exceed USD 10 million. andwhere the Indian Party is a listed company with net worth of less than ₹ 100 crore but investment (or financial commitment) in an overseas JV/WOS does not exceed USD 10 million.22

23. ODI UNDER LRS BY INDIVIDUALS"Real estate business" means buying and selling of real estate or trading in Transferable Development Rights (TDRs) but does not include development of townships, construction of residential/commercial premises, roads or bridges;23

24. ODI UNDER LRS BY INDIVIDUALSIndividuals can avail LRS to make capital account transaction only up to limit available under LRS thus net of other capital/current account transactionsIt should be an operating entity only and cannot have any step down subsidiaryIn form of equity or compulsory convertible preference shares24

25. ODI UNDER LRS BY INDIVIDUALSODI needs to be submitted for such investmentAny change in the shareholding pattern should be intimated within 30 days.APR is required to be filed Disinvestment to be reported within 30 days25

26. 26 IMMOVABLE PROP. ABROAD BY RES. Section 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 asset was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India

27. 27IMMOVABLE PROP. ABROAD BY RES.FEM( Acquisition and Transfer of Imm. Prop. outside India) regulation 2000Residents can hold property acquired as non-resident Can acquire property out of RFC accountOut of liberalized 2.5 Lac USD schemeCan inherit/receive as gift Can resident borrow outside?

28. 28IMMOVABLE PROP. Cont..Such property can be transferred by way of gift to relative resident.Resident but national of a foreign state permitted to acquire/hold/transferCorporate having branches can acquire within the monetary limits set for branch expensesOther acquisitions by RBI approval

29. 29IMMOVABLE PROP. Cont..Case Study:Resident individual acquiring shares under LRS of a foreign company having immovable property which is let out and earning rental incomeThe property is under mortgage and loan is served out of rental income.

30. EXTERNAL COMMERCIAL BORROWINGS(ECB)FAQ:Who is eligible borrowerWho is eligible lenderPurpose for which borrowings can be madeAutomatic route/ Approval routeTime period/ interest rateWhether an individual can borrow from Non resident relative

31. EXTERNAL COMMERCIAL BORROWINGS(ECB)FAQ:Whether an individual can borrow from non related non resident personWhether company partnership or proprietor can accept deposit/ loan/ advance from non residentsWhat are the compliances required under FEMA

32. Section 6(2) : The reserve bank may in consultation with the central government specify-Any class or classes of capital account transactions which are permissible;The limit up to which foreign exchange shall be admissible for such transactions

33. EXTERNAL COMMERCIAL BORROWINGS(ECB)Regulation : Foreign exchange Management ( Borrowing and Lending in Foreign exchange) regulation 2000Master direction 5/2015-16AP(dir) circulars issued from time to time

34. EXTERNAL COMMERCIAL BORROWINGS(ECB)Regulation 3:Save as otherwise provided, no person resident in India shall borrow or lend in foreign exchange from or to a person resident in or outside India. RBI authorised to specify the exceptions through regulations and circulars.

35. EXTERNAL COMMERCIAL BORROWINGS(ECB)AUTOMATIC ROUTE: Applicable to industrial sector, infrastructure sectorservice sector in-Hotel Hospital & software

36. EXTERNAL COMMERCIAL BORROWINGS(ECB) Eligible borrowers: Corporate ( i.e companies registered under companies act 1956) Infrastructure Finance companiesUnits in SEZNGOs engaged in micro finance Ineligible borrowers:Individuals/Firms not eligible Financial intermediaries and NBFCs

37. EXTERNAL COMMERCIAL BORROWINGS(ECB)AUTOMATIC ROUTEEligible lenders:International banks International capital Markets Financial InstitutionsEquipment SuppliersForeign CollaboratorsForeign Equity Holders

38. EXTERNAL COMMERCIAL BORROWINGS(ECB)AUTOMATIC ROUTEAmount & Maturity:For corporateUp to USD 50m- maturity >/= 3yrs Beyond USD 50m maturity >/= 5yrsMaximum permissible amount USD 750m during a financial yearService sector viz. Hotel Hospital Software:USD up to 200mUSD

39. EXTERNAL COMMERCIAL BORROWINGS(ECB)AUTOMATIC ROUTEEligible Foreign Equity Holders:For ECB Up to 5 Million-Minimum equity 25%For ECB exceeding USD 5 Million-Minimum equity 25% and Maximum ECB 4 times of foreign equity

40. EXTERNAL COMMERCIAL BORROWINGS(ECB)AUTOMATIC ROUTEInfrastructure Sector Defined:PowerTele communicationRailwaysRoads & BridgesSea Ports & AirportsIndustrial ParksUrban Infrastructure (water & sewage)Mining exploration and refiningCold storage for agriculture and allied produce

41. EXTERNAL COMMERCIAL BORROWINGS(ECB)AUTOMATIC ROUTEPermissible End-use:Capital Investment in Industrial Sector , Infrastructure Sector and specified service sectorAs part of FDI in JV/ WOS Payment for spectrum allocationFor lending by micro finance companies

42. EXTERNAL COMMERCIAL BORROWINGS(ECB)AUTOMATIC ROUTEProhibited useNot permitted for onward lending Not permitted for Investment in Capital MarketNot permitted in Real Estate Repayment of existing Rupee loanNot permitted for Working Capital / general corporate purposes unless it comes from equity holder and with minimum average maturity of 5 years.

43. EXTERNAL COMMERCIAL BORROWINGS(ECB)AUTOMATIC ROUTECost ceiling for ECBFor ECB for 3 to 5 years- 300 basis points over 6 month LIBORFor ECB > 5 Years – 450 basis points over 6 months LIBORWithholding Tax excluded for computing the limit

44. EXTERNAL COMMERCIAL BORROWINGS(ECB)AUTOMATIC ROUTE: Guarantee for ECB Issuance of guarantees, stand by letter of credit, letter of undertaking, or letter of comforts by banks, financial institutions and NBFCs from India relating to ECB is not permitted

45. EXTERNAL COMMERCIAL BORROWINGS(ECB)AUTOMATIC ROUTEPARKING OF ECB PROCEEDS:Pending utilization, the funds required in foreign currency may be retained outside or brought into India Can be temporarily invested in certificate of deposits, treasury bills etc which are highly liquid.May be repatriated to India in regular rupee accountECB required for rupee investment must be brought into India.

46. EXTERNAL COMMERCIAL BORROWINGS(ECB)AUTOMATIC ROUTEProcedure & Reporting:Enter into Loan agreement Submit form 83 for allotment of loan registration no. to RBI (certified by CA) through AD BankDraw down of loan only after obtaining regd. No.Remittance only after obtaining regd. No. Periodical Returns with RBI in Form ECB-2

47. EXTERNAL COMMERCIAL BORROWINGS(ECB)AUTOMATIC ROUTERESPONSIBILITY:The primary responsibility to ensure the compliance of regulation regarding auto route, eligibility of lender /borrower, costs, maturity period, etc. is that of the concerned borrower and contravention will be viewed seriously and invite penal action.In case of doubt as regards eligibility to access the automatic route, applicant should take recourse to approval route.

48. EXTERNAL COMMERCIAL BORROWINGS(ECB)APPROVAL ROUTEEligible lender/borrower, permissible end-use, limit not covered under automatic route will require prior approval

49. EXTERNAL COMMERCIAL BORROWINGS(ECB)APPROVAL ROUTE Eligible borrower (beyond auto route):Borrowings beyond USD 750 MillionECB by service sector – Hotels, Hospitals and software Companies beyond $ 200 million limitECB by Banks, Financial Institutions, NBFCs subject to certain conditions.

50. EXTERNAL COMMERCIAL BORROWINGS(ECB)APPROVAL ROUTERecognized Lenders:All those covered under auto routeForeign equity holders not complying ECB/ foreign equity ratio of 4:1

51. EXTERNAL COMMERCIAL BORROWINGS(ECB)APPROVAL ROUTELimits & Maturity:Corporate can avail additional ECB with average maturity > 10 yearsService Sector beyond USD 200 Million for import of capital goods

52. EXTERNAL COMMERCIAL BORROWINGS(ECB)APPROVAL ROUTEPROCEDURE COMPLIANCE FOR APPROVAL ROUTE:Application in form ECB through AD bank to be submitted to ECB Division, MumbaiForm 83 for obtaining loan registration numberPeriodical filing of ECB-2 within 7 days of close of the month

53. EXTERNAL COMMERCIAL BORROWINGS(ECB)APPROVAL ROUTE: Guarantee for ECB Issuance of guarantees, stand by letter of credit, letter of undertaking, or letter of comforts by banks, financial institutions and NBFCs from India relating to ECB is not permitted except in case of SME where it may be allowed with specific prior approval.

54. EXTERNAL COMMERCIAL BORROWINGS(ECB)APPROVAL ROUTEParking of Funds Pending Utilisation :ECB may be parked outside in IndiaMay be kept in rupee account in India with AD Category-I bank in IndiaPre-Payments:Upto USD 500 million by bank otherwise RBI permission subject to compliance with minimum average maturity period

55. EXTERNAL COMMERCIAL BORROWINGS(ECB)OTHER IMPORTANT POINTSConversion of ECB into equity:For eligible investment under FDI rules including sectoral cap and pricing guidelines.

56. EXTERNAL COMMERCIAL BORROWINGS(ECB)OTHER IMPORTANT POINTSTrade Credits for Imports:Maturity < 3 yearsSupplier, overseas bank and financial institutionsInclude suppliers credits: credit extended by foreign supplier.buyers credits: loan by importer from bank FI from outside IndiaUSD 20 Million per import transactionsAll costs 200 basis points above LIBOR

57. EXTERNAL COMMERCIAL BORROWINGS(ECB)OTHER IMPORTANT POINTSBorrowings by Individual Residents from NRI relatives:Permitted up to USD 2,50,000 Maturity exceeding 1 yearInterest freeRemittance from abroadRepatriation allowedNot to be used for agriculture/ plantation/ immovable property/shares debentures/ re-lending

58. EXTERNAL COMMERCIAL BORROWINGS(ECB)OTHER IMPORTANT POINTSAcceptance of borrowing in RUPEE by Proprietorship/ Firm from NRIs/ PIO:Only on non-repatriation basisMaturity not exceeding 3 yearsRemittance from NRE/NRO A/c/Inward remittanceNot to be utilized for re-lending agriculture, real estate, etc.

59. EXTERNAL COMMERCIAL BORROWINGS(ECB)Resident can borrow by way of loan/overdraft etc from a bank situated outside India for execution outside India of a turnkey project or civil construction contract

60. EXTERNAL COMMERCIAL BORROWINGS(ECB)A person who borrowed loan as resident and subsequently becomes resident can continue the loanRupee Loan granted by a resident to another resident may be continued even after lender becoming non resident.

61. EXTERNAL COMMERCIAL BORROWINGS(ECB)SECURITY BY BORROWER:The borrower can provide security of its choice to the lender.Creation of charge of immovable property or shares of company in India is subject to obtaining prior no objection from the authorised dealer, who will give such permission on case to case basis.Period of security should be co terminus with loan period

62. External Commercial BorrowingBorrowing in Rupee by Indian companiesThrough NCD by public offerRedemption > /= 3 yearsUtilization not in agriculture/plantation/real estateNon repatriation/ repatriation options availableOnly from NRI/PIO

63. 63 Thank you E-mail: kca_delhi@yahoo.co.in kca@kcaconsultancy.com www.kcaconsultancy.com

64. 64FEMA Remittances facilities for Residents-The statute: Section 8 Save as otherwise provided in this Act where any amount of foreign exchange is due or has accrued to any person resident in India such person shall take all reasonable steps to realize and repatriate to India such Foreign Exchange within such period and in such manner as may be specified by RBI

65. 65Liberalized Remittance Scheme(LRS) Liberalised scheme of remittance up to 2.5 Lac USD per FY by individuals (only) including minors( PAN Mandatory )Eligible for current account/capital account transactionsImmovable property, shares, donations, gifts and other permissible transactionsOpening of bank account outside IndiaTo Pak, Bhutan, Nepal not permitted

66. 66Remittances facilities for Residents-The statute:Section 4:Save as otherwise provided in this Act, no person resident in India shall acquire, hold, own, posses, or transfer any Foreign exchange, Foreign Security, or any Immovable property outside India

67. 67FEMA Remittances facilities for Residents-The statute: Section 6 RBI in consultation with Central Govt to make regulations for capital account transactions

68. 68Liberalized Remittance Scheme(LRS)The limit is subsumed with other permitted current account transactions listed in schedule III of rulesTransactions otherwise prohibited under FEMA not available under the scheme.Banks not to extend credit facility for remittance under this scheme.

69. 69Liberalized Remittance Scheme Permitted capital account transactions:-Bank A/c -Purchase of property-Investment in listed/unlisted shares-Debt Instruments, MF etc-WOS/JV-Loan to NRI relatives

70. 70Liberalized Remittance Scheme *Remittance can be consolidated among family members for all current account transactions*Consolidation for capital account transaction possible only if asset acquired in joint name.

71. 71Liberalized Remittance Scheme Remittance procedure:> Identify designated AD> Application cum Declaration in prescribed format cum Form A2> PAN Card for remittance >25000 USD> KYC norms to be complied> AD to ensure compliance

72. 72Liberalized Remittances SchemeIncome and sale proceeds of assets held abroad through remittances under the scheme need not be repatriated except in case of ODIRent, dividend, interest, capital gain, Exception to the general rule that all funds be Repatriated

73. 73Liberalized Remittances SchemeLoan to NRI relativeInterest free with minimum maturity of 1 yearWithin the overall limit under LRSBorrowers personal / business requirements in IndiaNot to be utilized for prohibited purposesLoan to be credited to NRO accountCannot be remitted outside IndiaRepayment out of NRO / NRE / FCNR