FEMA Regulations for Foreign Investments

1

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:

T

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OVERVIEW



Overseas Direct Investment including ODI

under Liberalized remittance Scheme (LRS)

for Residents; Immovable property outside

India by Residents



External commercial borrowings(ECB)

3

FOREIGN EXCHANGE

MANAGEMENT ACT 1999

FEMA – Introduction and Basic Structure



The Act



The regulation/ The rules



Master Circulars



Master Directions



AP DIR Circulars



Notifications



Press notes



Respective ministry Guidelines

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Foreign Exchange Management

(Transfer or issue of any foreign security)

Regulations  2004

Read together with



 Master Circular



Master directions



FAQs of RBI

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 "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

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 "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

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Eligible Investor:



Companies



Partnerships  registered under Indian

Partnership Act 1932



Limited Liability Partnership



Body created under act of parliament

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"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;

"

N

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h

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;

8

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Financial 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

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•

Form ODI to be submitted to designated

branch of authorised dealer

•

For 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 Pakistan

10

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•

Partial/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

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Method of Funding:

•

EEFC account

•

Drawl of Forex from authorised dealers

•

ADR/GDR

•

Proceeds of ECB

•

Capitalization of exports

•

Swap of shares

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Procedure:



Selection of AD I bank



ODI form



CA Certificate in prescribed format



Certificate of Incorporation and MA/AA of

foreign entity



Bank particulars of Foreign entity.

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General Permission for Resident Individuals:

•

As gift from any person resident outside India

•

Cashless employees stock option scheme

•

By inheritance from resident or NR

•

ESOP offered by foreign company to employees

of its branch/subsidiary

•

Qualification shares up to LRS limit

•

In lieu of professional services

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General Permission for Resident Individuals:

•

Right shares against eligible holding

•

Bonus shares against existing shareholding

•

Out of Funds held in RFC account.

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•

Form ODI

•

Factors considered by RBI:



Viability of project



Benefit which will accrue to India



Financial position & track record



Expertise of Indian party

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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).

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Proprietary concern/unregistered partnership

•

Only who are status holder exporters

•

Having proven track record

•

Unrealised exports <10%

•

Limited to 10% of average of last 3 years

realised export turnover or 200% of net

owned Funds which ever is lower

Trusts and societies:

 subject to eligibility criteria

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Reporting:



APR by 31

st

 Dec.



Annual return of Foreign Liabilities and

Assets by 15

th

 July- FLA



Post investment Changes like diversification,

step down subsidiary, shareholding pattern

within 30 days

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Other Obligations of Indian Party:



Receive share certificates or instruments



Repatriation of all dues from JV/WOS within

60 days



ESOP reporting by Indian party

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 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 off



If listed through stock exch.



if unlisted the share price is not less than the value

certified by a CA / CPA



the 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.

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 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. and



where 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

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S



"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

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L

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B

Y

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S



Individuals can avail LRS to make capital

account transaction only up to limit available

under LRS thus net of other capital/current

account transactions



It should be an operating entity only and

cannot have any step down subsidiary



In form of equity or compulsory convertible

preference shares

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L

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B

Y

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S



ODI needs to be submitted for such

investment



Any change in the shareholding pattern

should be intimated within 30 days.



APR is required to be filed



Disinvestment to be reported within 30 days

25

26

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.

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(

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)

:



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27

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.

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D

B

Y

R

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S

.

FEM( Acquisition and Transfer of Imm. Prop.

outside India) regulation 2000



Residents can hold property acquired as

non-resident



Can acquire property out of RFC account



Out of liberalized 2.5 Lac USD scheme



Can inherit/receive as gift



Can resident borrow outside?

28

IMMOVABLE 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/transfer



Corporate having branches can acquire

within the monetary limits set for branch

expenses



Other acquisitions by RBI approval

29

IMMOVABLE PROP.   Cont..

Case Study:

Resident individual acquiring shares under

LRS of a foreign company having

immovable property which is let out and

earning rental income

The property is under mortgage and loan is

served out of rental income.

EXTERNAL COMMERCIAL BORROWINGS(ECB)

FAQ:

1.

Who is eligible borrower

2.

Who is eligible lender

3.

Purpose for which borrowings can be made

4.

Automatic route/ Approval route

5.

Time period/ interest rate

6.

Whether an individual can borrow from Non

resident relative

EXTERNAL COMMERCIAL BORROWINGS(ECB)

FAQ:

7.

Whether an individual can borrow from non

related non resident person

8.

Whether company partnership or proprietor can

accept deposit/ loan/ advance from non residents

9.

What are the compliances required under FEMA

EXTERNAL COMMERCIAL BORROWINGS(ECB)

•

Regulation : Foreign exchange Management

( Borrowing and Lending in Foreign exchange)

regulation 2000

•

Master direction  5/2015-16

•

AP(dir) circulars issued from time to time

E

X

T

E

R

N

A

L

C

O

M

M

E

R

C

I

A

L

B

O

R

R

O

W

I

N

G

S

(

E

C

B

)

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.

EXTERNAL COMMERCIAL BORROWINGS(ECB)

AUTOMATIC ROUTE:

•

 Applicable to industrial sector,

•

infrastructure sector

•

service sector in-Hotel Hospital &

software

E

X

T

E

R

N

A

L

C

O

M

M

E

R

C

I

A

L

B

O

R

R

O

W

I

N

G

S

(

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C

B

)

E

l

i

g

i

b

l

e

b

o

r

r

o

w

e

r

s

:



Corporate ( i.e companies registered under

companies act 1956)



Infrastructure Finance companies



Units in SEZ



NGOs engaged in micro finance

I

n

e

l

i

g

i

b

l

e

b

o

r

r

o

w

e

r

s

:



Individuals/Firms not eligible



Financial intermediaries and NBFCs

E

X

T

E

R

N

A

L

C

O

M

M

E

R

C

I

A

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B

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)

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:

•

International banks

•

International capital Markets

•

Financial Institutions

•

Equipment Suppliers

•

Foreign Collaborators

•

Foreign Equity Holders

E

X

T

E

R

N

A

L

C

O

M

M

E

R

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I

A

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B

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R

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G

S

(

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)

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E

Amount & Maturity:

F

o

r

c

o

r

p

o

r

a

t

e

•

Up to USD 

50

m- maturity >/= 

3

yrs

•

Beyond USD 50m maturity >/= 

5

yrs

•

Maximum permissible amount

    USD 

750

m during a financial year

S

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:

USD up to 

200m

USD

E

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M

M

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A

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B

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S

(

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C

B

)

A

U

T

O

M

A

T

I

C

R

O

U

T

E

Eligible 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

E

X

T

E

R

N

A

L

C

O

M

M

E

R

C

I

A

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B

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R

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W

I

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G

S

(

E

C

B

)

A

U

T

O

M

A

T

I

C

R

O

U

T

E

Infrastructure Sector Defined:

•

Power

•

Tele communication

•

Railways

•

Roads & Bridges

•

Sea Ports & Airports

•

Industrial Parks

•

Urban Infrastructure (water & sewage)

•

Mining exploration and refining

•

Cold storage for agriculture and allied produce

E

X

T

E

R

N

A

L

C

O

M

M

E

R

C

I

A

L

B

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R

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I

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G

S

(

E

C

B

)

A

U

T

O

M

A

T

I

C

R

O

U

T

E

Permissible End-use:

•

Capital Investment in Industrial Sector , Infrastructure

Sector and specified service sector

•

As part of FDI in JV/ WOS

•

Payment for spectrum allocation

•

For lending by micro finance companies

E

X

T

E

R

N

A

L

C

O

M

M

E

R

C

I

A

L

B

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R

R

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I

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G

S

(

E

C

B

)

A

U

T

O

M

A

T

I

C

R

O

U

T

E

Prohibited use

•

Not permitted for onward lending

•

Not permitted for Investment in Capital Market

•

Not permitted in Real Estate

•

Repayment of existing Rupee loan

•

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u

r

p

o

s

e

s

u

n

l

e

s

s

i

t

c

o

m

e

s

f

r

o

m

e

q

u

i

t

y

h

o

l

d

e

r

a

n

d

w

i

t

h

m

i

n

i

m

u

m

a

v

e

r

a

g

e

m

a

t

u

r

i

t

y

o

f

5

y

e

a

r

s

.

E

X

T

E

R

N

A

L

C

O

M

M

E

R

C

I

A

L

B

O

R

R

O

W

I

N

G

S

(

E

C

B

)

A

U

T

O

M

A

T

I

C

R

O

U

T

E

C

o

s

t

c

e

i

l

i

n

g

f

o

r

E

C

B

•

For ECB for 

3

 to 

5 

years- 

300 

basis points over 6 month

LIBOR

•

For ECB > 

5 

Years – 4

50 

basis points over  

6

 months

LIBOR

•

Withholding Tax excluded for computing the limit

E

X

T

E

R

N

A

L

C

O

M

M

E

R

C

I

A

L

B

O

R

R

O

W

I

N

G

S

(

E

C

B

)

A

U

T

O

M

A

T

I

C

R

O

U

T

E

:

G

u

a

r

a

n

t

e

e

f

o

r

E

C

B

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

E

X

T

E

R

N

A

L

C

O

M

M

E

R

C

I

A

L

B

O

R

R

O

W

I

N

G

S

(

E

C

B

)

A

U

T

O

M

A

T

I

C

R

O

U

T

E

PARKING 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

account



ECB required for rupee investment must be

brought into India.

E

X

T

E

R

N

A

L

C

O

M

M

E

R

C

I

A

L

B

O

R

R

O

W

I

N

G

S

(

E

C

B

)

A

U

T

O

M

A

T

I

C

R

O

U

T

E

Procedure & Reporting:

•

Enter into Loan agreement

•

Submit form 

83

 for allotment of loan registration no. to

RBI (certified by CA) through AD Bank

•

Draw down of loan only after obtaining regd. No.

•

Remittance only after obtaining regd. No.

•

Periodical Returns with RBI in Form ECB-

2

E

X

T

E

R

N

A

L

C

O

M

M

E

R

C

I

A

L

B

O

R

R

O

W

I

N

G

S

(

E

C

B

)

A

U

T

O

M

A

T

I

C

R

O

U

T

E

RESPONSIBILITY:

•

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.

E

X

T

E

R

N

A

L

C

O

M

M

E

R

C

I

A

L

B

O

R

R

O

W

I

N

G

S

(

E

C

B

)

A

P

P

R

O

V

A

L

R

O

U

T

E

•

Eligible lender/borrower, permissible end-use, limit not

covered under automatic route will require prior approval

E

X

T

E

R

N

A

L

C

O

M

M

E

R

C

I

A

L

B

O

R

R

O

W

I

N

G

S

(

E

C

B

)

A

P

P

R

O

V

A

L

R

O

U

T

E

Eligible borrower (beyond auto route):



Borrowings beyond USD 750 Million

•

ECB by service sector – Hotels, Hospitals and software

Companies beyond $ 200 million limit

•

ECB by Banks, Financial Institutions, NBFCs subject to

certain conditions.

E

X

T

E

R

N

A

L

C

O

M

M

E

R

C

I

A

L

B

O

R

R

O

W

I

N

G

S

(

E

C

B

)

A

P

P

R

O

V

A

L

R

O

U

T

E

Recognized Lenders:

•

All those covered under auto route

•

Foreign equity holders not complying ECB/ foreign equity

ratio of 

4:1

E

X

T

E

R

N

A

L

C

O

M

M

E

R

C

I

A

L

B

O

R

R

O

W

I

N

G

S

(

E

C

B

)

A

P

P

R

O

V

A

L

R

O

U

T

E

Limits & Maturity:

•

Corporate can avail additional ECB with average

maturity > 

10

 years

•

Service Sector beyond USD 

200

 Million for import of

capital goods

E

X

T

E

R

N

A

L

C

O

M

M

E

R

C

I

A

L

B

O

R

R

O

W

I

N

G

S

(

E

C

B

)

A

P

P

R

O

V

A

L

R

O

U

T

E

PROCEDURE COMPLIANCE FOR

APPROVAL ROUTE:

•

Application in form ECB through AD bank to be

submitted to ECB Division, Mumbai

•

Form 

83

 for obtaining loan registration number

•

Periodical filing of ECB-

2

 within 

7

 days of close of the

month

E

X

T

E

R

N

A

L

C

O

M

M

E

R

C

I

A

L

B

O

R

R

O

W

I

N

G

S

(

E

C

B

)

A

P

P

R

O

V

A

L

R

O

U

T

E

:

G

u

a

r

a

n

t

e

e

f

o

r

E

C

B

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.

E

X

T

E

R

N

A

L

C

O

M

M

E

R

C

I

A

L

B

O

R

R

O

W

I

N

G

S

(

E

C

B

)

A

P

P

R

O

V

A

L

R

O

U

T

E

P

a

r

k

i

n

g

o

f

F

u

n

d

s

P

e

n

d

i

n

g

U

t

i

l

i

s

a

t

i

o

n

:

•

ECB may be parked outside in India

•

May be kept in rupee account in India with AD Category-

I bank in India

P

r

e

-

P

a

y

m

e

n

t

s

:

•

Upto USD 

500

 million by bank otherwise RBI permission

subject to compliance with minimum average maturity

period

E

X

T

E

R

N

A

L

C

O

M

M

E

R

C

I

A

L

B

O

R

R

O

W

I

N

G

S

(

E

C

B

)

O

T

H

E

R

I

M

P

O

R

T

A

N

T

P

O

I

N

T

S

C

o

n

v

e

r

s

i

o

n

o

f

E

C

B

i

n

t

o

e

q

u

i

t

y

:

•

For eligible investment under FDI rules including sectoral

cap and pricing guidelines.

E

X

T

E

R

N

A

L

C

O

M

M

E

R

C

I

A

L

B

O

R

R

O

W

I

N

G

S

(

E

C

B

)

O

T

H

E

R

I

M

P

O

R

T

A

N

T

P

O

I

N

T

S

T

r

a

d

e

C

r

e

d

i

t

s

f

o

r

I

m

p

o

r

t

s

:

•

Maturity < 

3

 years

•

Supplier, overseas bank and financial institutions

•

Include suppliers credits: credit extended by foreign

supplier.

•

buyers credits: loan by importer from bank FI from

outside India

•

USD 

20

 Million per import transactions

•

All costs 

200

 basis points above LIBOR

E

X

T

E

R

N

A

L

C

O

M

M

E

R

C

I

A

L

B

O

R

R

O

W

I

N

G

S

(

E

C

B

)

O

T

H

E

R

I

M

P

O

R

T

A

N

T

P

O

I

N

T

S

Borrowings by Individual Residents from NRI

relatives:

•

Permitted up to USD 

2,50,000

•

Maturity exceeding 

1

 year

•

Interest free

•

Remittance from abroad

•

Repatriation allowed

•

Not to be used for agriculture/ plantation/ immovable

property/shares debentures/ re-lending

E

X

T

E

R

N

A

L

C

O

M

M

E

R

C

I

A

L

B

O

R

R

O

W

I

N

G

S

(

E

C

B

)

O

T

H

E

R

I

M

P

O

R

T

A

N

T

P

O

I

N

T

S

Acceptance of borrowing in RUPEE by

Proprietorship/ Firm from NRIs/ PIO:

•

Only on non-repatriation basis

•

Maturity not exceeding 

3

 years

•

Remittance from NRE/NRO A/c/Inward remittance

•

Not to be utilized for re-lending agriculture, real estate,

etc.

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

E

X

T

E

R

N

A

L

C

O

M

M

E

R

C

I

A

L

B

O

R

R

O

W

I

N

G

S

(

E

C

B

)



A person who borrowed loan as resident and

subsequently becomes resident can continue

the loan



Rupee Loan granted by a resident to another

resident may be continued even after lender

becoming non resident.

E

X

T

E

R

N

A

L

C

O

M

M

E

R

C

I

A

L

B

O

R

R

O

W

I

N

G

S

(

E

C

B

)

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

E

x

t

e

r

n

a

l

C

o

m

m

e

r

c

i

a

l

B

o

r

r

o

w

i

n

g

Borrowing in Rupee by Indian companies



Through NCD by public offer



Redemption > /= 3 years



Utilization not in agriculture/plantation/real

estate



Non repatriation/ repatriation options

available



Only from NRI/PIO

63

Thank you

              E-mail:

 kca_delhi@yahoo.co.in

k

c

a

@

k

c

a

c

o

n

s

u

l

t

a

n

c

y

.

c

o

m

w

w

w

.

k

c

a

c

o

n

s

u

l

t

a

n

c

y

.

c

o

m

64

F

E

M

A

R

e

m

i

t

t

a

n

c

e

s

f

a

c

i

l

i

t

i

e

s

f

o

r

R

e

s

i

d

e

n

t

s

-

T

h

e

s

t

a

t

u

t

e

:

S

e

c

t

i

o

n

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

L

i

b

e

r

a

l

i

z

e

d

R

e

m

i

t

t

a

n

c

e

S

c

h

e

m

e

(

L

R

S

)



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

transactions



Immovable property, shares, donations, gifts and

other permissible transactions



Opening of bank account outside India



To Pak, Bhutan, Nepal not permitted

66

R

e

m

i

t

t

a

n

c

e

s

f

a

c

i

l

i

t

i

e

s

f

o

r

R

e

s

i

d

e

n

t

s

-

T

h

e

s

t

a

t

u

t

e

:

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

F

E

M

A

R

e

m

i

t

t

a

n

c

e

s

f

a

c

i

l

i

t

i

e

s

f

o

r

R

e

s

i

d

e

n

t

s

-

T

h

e

s

t

a

t

u

t

e

:

S

e

c

t

i

o

n

6

  RBI in consultation with Central Govt to

make regulations for capital account

transactions

68

L

i

b

e

r

a

l

i

z

e

d

R

e

m

i

t

t

a

n

c

e

S

c

h

e

m

e

(

L

R

S

)



The limit is subsumed with other permitted

current account transactions listed in

schedule III of rules



T

r

a

n

s

a

c

t

i

o

n

s

o

t

h

e

r

w

i

s

e

p

r

o

h

i

b

i

t

e

d

u

n

d

e

r

F

E

M

A

n

o

t

a

v

a

i

l

a

b

l

e

u

n

d

e

r

t

h

e

s

c

h

e

m

e

.



B

a

n

k

s

n

o

t

t

o

e

x

t

e

n

d

c

r

e

d

i

t

f

a

c

i

l

i

t

y

f

o

r

r

e

m

i

t

t

a

n

c

e

u

n

d

e

r

t

h

i

s

s

c

h

e

m

e

.

69

L

i

b

e

r

a

l

i

z

e

d

R

e

m

i

t

t

a

n

c

e

S

c

h

e

m

e



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

L

i

b

e

r

a

l

i

z

e

d

R

e

m

i

t

t

a

n

c

e

S

c

h

e

m

e



*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

L

i

b

e

r

a

l

i

z

e

d

R

e

m

i

t

t

a

n

c

e

S

c

h

e

m

e

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

L

i

b

e

r

a

l

i

z

e

d

R

e

m

i

t

t

a

n

c

e

s

S

c

h

e

m

e



Income and sale proceeds of assets held

abroad through remittances under the

scheme need not be repatriated except in

case of ODI



Rent, dividend, interest, capital gain,

Exception to the general rule that all funds be

Repatriated

73

L

i

b

e

r

a

l

i

z

e

d

R

e

m

i

t

t

a

n

c

e

s

S

c

h

e

m

e

L

o

a

n

t

o

N

R

I

r

e

l

a

t

i

v

e



Interest free with minimum maturity of 1 year



Within the overall limit under LRS



Borrowers personal / business requirements

in India



Not to be utilized for prohibited purposes



Loan to be credited to NRO account



Cannot be remitted outside India



Repayment out of NRO / NRE / FCNR