A Private company in India wants to accept deposit from a non-resident shareholder.
Can it do so? What are the compliance's required under FEMA?
If your company is a private limited company and if you accept deposits from non-resident , then it contravenes the provisions of 3 (iii) of the Companies Act ,1956 which is reproduced as below:
(iii) "private company" 5[means a company which has a minimum paid-up capital of one lakh rupees or such higher paid-up capital as may be prescribed, and by its articles,-]
(a) restricts the right to transfer its shares, if any;
(b) limits the number of its members to fifty not including-
(i) persons who are in the employment of the company, and
(ii) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased; and
(c) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company;
6[(d) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives:]
Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this definition, be treated as a single member.
There is no question of accepting deposits from a non- resident shareholders . Then , the private company will loose its character. Please term it as unsecured loan from a non-resident member. ( as private limited companies can avail unsecured loans from its members).
Preference shares that are fully and mandatorily convertible into equity shares within a specified time will be considered a part of the investee company’s share capital—and only such preference shares will be issued to foreign investors under the automatic approval route (that is, without requiring permission from the Ministry of Commerce) of Foreign Direct Investments (FDI).
The transaction would attract ECB Guidelines under FEMA. The Indian private company qualifies as eligible borrower. The non resident shareholder in order to qualify as recognized lender shall must be holding at-least 25% of paid up equity in the stated Indian private company. Further the funds can be raised only for permissible end uses and in compliance with other formalities as enumerated in the Master Circular on ECB dated July 01, 2010.
As per Regulation 7 1) of Foreign Exchange Management (Deposit) Regulations, 2000, A company registered under Companies Act, 1956 or a body corporate or created under an act of Parliament or State Legislature may accept deposits from a nonresident Indian on repatriation basis, subject to the terms and conditions mentioned in Schedule 6 of the regulation. Schedule 6 of the Regulation specifies certain conditions.
The regulation 7(1) of the FEMA deals generally and it is meant for public companies and I assume that it is not for private companies. In view of the ambiguity in FEMA regulation , it is wise to term it unsecured loan from non-resident shareholders and intimation to such effect may be given to your local RBI ECD Division through your authorised dealer.
Thus , a private Ltd company can issue on-convertible, optionally convertible or partially convertible preference shares are considered as debt finance and therefore subject to stringent External Commercial Borrowings (ECBs) guidelines to its overseas directors who wants to lend to their Indian Company.
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