Understanding FEMA Regulations for Foreign Investments
This presentation by CA Sunil Jain provides a comprehensive overview of the Foreign Exchange Management Act (FEMA) including topics such as overseas direct investments, immovable property transactions, commercial borrowings, and regulations governing investments in Joint Ventures/Wholly Owned Subsidiaries abroad under the Automatic Route.
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NIRC - ICSI PRESENTATION ON FEMA BY CA. SUNIL JAIN FCA DISA kca@kcaconsultancy.com kca_delhi@yahoo.co.in www.kcaconsultancy.com 1
FEMA: TOPICS OVERVIEW Overseas Direct Investment including ODI under Liberalized remittance Scheme (LRS) for Residents; Immovable property outside India by Residents External commercial borrowings(ECB) 2
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 3
DIRECT INVESTMENTS IN JV/WOS ABROAD Foreign Exchange Management (Transfer or issue of any foreign security) Regulations 2004 Read together with Master Circular Master directions FAQs of RBI 4
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
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 Subsidiary; or Wholly Owned 6
DIRECT INVESTMENTS IN JV/WOS ABROAD AUTOMATIC ROUTE Eligible Investor: Companies Partnerships registered under Indian Partnership Act 1932 Limited Liability Partnership Body created under act of parliament 7
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
DIRECT INVESTMENTS IN JV/WOS ABROAD AUTOMATIC ROUTE 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 9
DIRECT INVESTMENTS IN JV/WOS ABROAD AUTOMATIC ROUTE 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
DIRECT INVESTMENTS IN JV/WOS ABROAD AUTOMATIC ROUTE 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
DIRECT INVESTMENTS IN JV/WOS ABROAD AUTOMATIC ROUTE Method of Funding: EEFC account Drawl of Forex from authorised dealers ADR/GDR Proceeds of ECB Capitalization of exports Swap of shares 12
DIRECT INVESTMENTS IN JV/WOS ABROAD AUTOMATIC ROUTE 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. 13
DIRECT INVESTMENTS IN JV/WOS ABROAD AUTOMATIC ROUTE 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 14
DIRECT INVESTMENTS IN JV/WOS ABROAD AUTOMATIC ROUTE General Permission for Resident Individuals: Right shares against eligible holding Bonus shares against existing shareholding Out of Funds held in RFC account. 15
DIRECT INVESTMENTS IN JV/WOS ABROAD APPROVAL ROUTE Form ODI Factors considered by RBI: Viability of project Benefit which will accrue to India Financial position & track record Expertise of Indian party 16
DIRECT INVESTMENTS IN JV/WOS ABROAD APPROVAL 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
DIRECT INVESTMENTS IN JV/WOS ABROAD APPROVAL ROUTE 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 18
DIRECT INVESTMENTS IN JV/WOS ABROAD Reporting: APR by 31st Dec. Annual return of Foreign Liabilities and Assets by 15th July- FLA Post investment Changes like diversification, step down subsidiary, shareholding pattern within 30 days 19
DIRECT INVESTMENTS IN JV/WOS ABROAD 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 20
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 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. 21
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. 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
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
ODI UNDER LRS BY INDIVIDUALS 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 24
ODI UNDER LRS BY INDIVIDUALS 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
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 26
IMMOVABLE PROP. ABROAD BY RES. 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? 27
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 28
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. 29
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
Section 6(2) : The reserve bank may in consultation with the central government specify- a. Any class or classes of capital account transactions which are permissible; b. The limit up to which foreign exchange shall be admissible for such transactions
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
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.
EXTERNAL COMMERCIAL BORROWINGS(ECB) AUTOMATIC ROUTE: Applicable to industrial sector, infrastructure sector service sector in-Hotel Hospital & software
EXTERNAL COMMERCIAL BORROWINGS(ECB) Eligible borrowers: Corporate ( i.e companies registered under companies act 1956) Infrastructure Finance companies Units in SEZ NGOs engaged in micro finance Ineligible borrowers: Individuals/Firms not eligible Financial intermediaries and NBFCs
EXTERNAL COMMERCIAL BORROWINGS(ECB) AUTOMATIC ROUTE Eligible lenders: International banks International capital Markets Financial Institutions Equipment Suppliers Foreign Collaborators Foreign Equity Holders
EXTERNAL COMMERCIAL BORROWINGS(ECB) AUTOMATIC ROUTE Amount & Maturity: For corporate Up to USD 50m- maturity >/= 3yrs Beyond USD 50m maturity >/= 5yrs Maximum permissible amount USD 750m during a financial year Service sector viz. Hotel Hospital Software: USD up to 200mUSD
EXTERNAL COMMERCIAL BORROWINGS(ECB) AUTOMATIC ROUTE 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
EXTERNAL COMMERCIAL BORROWINGS(ECB) AUTOMATIC ROUTE 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
EXTERNAL COMMERCIAL BORROWINGS(ECB) AUTOMATIC ROUTE 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
EXTERNAL COMMERCIAL BORROWINGS(ECB) AUTOMATIC ROUTE Prohibited use Not permitted for onward lending Not permitted for Investment in Capital Market Not permitted in Real Estate Repayment of existing Rupee loan Not permitted for Working Capital/ general corporate purposes unless it comes from equity holder and with minimum average maturity of 5 years.
EXTERNAL COMMERCIAL BORROWINGS(ECB) AUTOMATIC ROUTE Cost ceiling for ECB For ECB for 3 to 5 years- 300 basis points over 6 month LIBOR For ECB > 5 Years 450 basis points over 6 months LIBOR Withholding Tax excluded for computing the limit
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
EXTERNAL COMMERCIAL BORROWINGS(ECB) AUTOMATIC ROUTE 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.
EXTERNAL COMMERCIAL BORROWINGS(ECB) AUTOMATIC ROUTE 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
EXTERNAL COMMERCIAL BORROWINGS(ECB) AUTOMATIC ROUTE 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.
EXTERNAL COMMERCIAL BORROWINGS(ECB) APPROVAL ROUTE Eligible lender/borrower, permissible end-use, limit not covered under automatic route will require prior approval
EXTERNAL COMMERCIAL BORROWINGS(ECB) APPROVAL ROUTE 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.
EXTERNAL COMMERCIAL BORROWINGS(ECB) APPROVAL ROUTE Recognized Lenders: All those covered under auto route Foreign equity holders not complying ECB/ foreign equity ratio of 4:1
