Permission to write-off capital or receivables by Indian Companies in their foreign JV/WOS

The extant FEMA Regulations do not provide for the restructuring of the balance sheet of the overseas JV/WOS not involving winding up of the entity or divestment of the stake by the Indian Party. In order to provide more operational flexibility to the Indian corporates, it has been decided that Indian promoters who have set up WOS abroad or have at least 51 per cent stake in an overseas JV, may write off capital (equity / preference shares) or other receivables, such as, loans, royalty, technical know-how fees and management fees in respect of the JV /WOS, even while such JV /WOS continue to function as under:

1. Listed Indian companies are permitted to write off capital and other receivables up to 25 per cent of the equity investment in the JV /WOS under the Automatic Route; and
   
   
2. Unlisted companies are permitted to write off capital and other receivables up to 25 per cent of the equity investment in the JV /WOS under the Approval Route.

The write-off / restructuring have to be reported to the Reserve Bank through the designated AD bank within 30 days of write-off/ restructuring. The write-off / restructuring is subject to the condition that the Indian Party should submit the following documents for scrutiny along with the applications to the designated AD Category –I bank under the Automatic as well as the Approval Routes:

1. A certified copy of the balance sheet showing the loss in the overseas WOS/JV set up by the Indian Party; and
   
   
2. Projections for the next five years indicating benefit accruing to the Indian company consequent to such write off / restructuring.

Reference-  RBI/2010-11/548 -A.P. (DIR Series) Circular No. 69-May 27, 2011

Liberalization of Performance Guarantee Issued by Indian Company to Foreign Projects by RBI

2. With a view to providing more operational flexibility to Indian corporates having investments abroad, it has been decided to further liberalise / rationalise the following regulations relating to overseas direct investment:

1. Performance Guarantees issued by the Indian Party

At present, ‘financial commitment’ of the Indian Party includes contribution to the capital of the overseas Joint Venture (JV) / Wholly Owned Subsidiary (WOS), loan granted to the JV / WOS and 100 per cent of guarantees issued to or on behalf of the JV/WOS. Keeping in mind the utility and usage of the instrument of performance guarantees in project executions abroad and also considering the risks associated with such guarantees vis-à-vis financial guarantees, it has been decided that only 50 per cent of the amount of the performance guarantees may be reckoned for the purpose of computing financial commitment to its JV/WOS overseas, within the 100 per cent of the net worth of the Indian Party as on the date of the last audited balance sheet. Further, the time specified for the completion of the contract may be considered as the validity period of the related performance guarantee. The Indian Party may report these guarantees in the similar way in which financial guarantees are being presently reported. In cases where invocation of the performance guarantees breach the ceiling for the financial exposure of 100 per cent of the net worth of the Indian Party, the Indian Party shall seek the prior approval of the Reserve Bank before remitting funds from India, on account of such invocation.

Indian Companies has to take into account only 50% of the performance guarantee given by them for execution of projects in abroad in their aggregate 100% ceiling  of the net worth of Indian company .

This is as per RBI Circular -RBI/2010-11/548 -A.P. (DIR Series) Circular No. 69

Procedure for Permission to remit winding up proceeds of branch/office (Other than Project Office)—

 As per  RBI NOTIFICATION NO. G.S.R. 199(E) [NO. FEMA 217/2011-RB], DATED 19-1-2011 Which comes into retrospective effect from 1st Feb 2011

1) A branch or office established in India by a person resident outside India may, for making remittance of its winding up proceeds, apply to the Authorised Dealer concerned supported by the following documents, namely :

(A) copy of the Reserve Bank’s permission for establishing the branch/office in India;

(B) Auditors certificate :—

(i) indicating the manner in which the remittable amount has been arrived and supported by a statement of assets and liabilities of the applicant, and indicating the manner of disposal of assets;

(ii) confirming that all liabilities in India including arrears of gratuity and other benefits to employees etc. of the branch/office have been either fully met or adequately provided for;

(iii) confirming that no income accruing from sources outside India (including proceeds of exports) has remained unrepatriated to India; and

(iv) confirming that the branch/office has complied with all regulatory requirements stipulated by the Reserve Bank of India from time to time regarding functioning of such offices in India

.

(C) no-objection or Tax clearance certificate from the Income-tax authority for the remittance;

 (D) confirmation from the applicant that no legal proceedings in any Court in India are pending and there is no legal impediment to the remittance; and

(E) a report from the Registrar of Companies regarding compliance with the provisions of the Companies Act, 1956, in case of winding up of the office in India.

(2) On consideration of the application made under sub-regulation (1), the authorised dealer concerned may permit the remittance subject to the directions issued by the Reserve Bank in this regard, from time to time.”

.

FEMA VIOLATIONS OF RS 4300 CRORE BY SWAN , LOOP , S-TEL !!!

The Enforcement Directorate today slapped various charges of FEMA violations to the tune of over Rs 4,300 crore against top telecom firms allegedly involved in the 2G spectrum scam including Swan, Loop and S-Tel.

The Directorate in its complaint filed before the Competent Adjudicating Authority for FEMA violations said it is also probing "suspected contravention" of forex rules in Virgin Mobile, a joint venture of Tata group.

The Adjudicating Authority in this case is a Special Director rank officer of the ED.

The ED has charged Shahid Balwa-promoted Swan Telecom, with committing FEMA contraventions to the tune of Rs 3,608 crore.

"This contravention was done by the company in issuing shares to foreign investor and resident investor under an agreement and had issued shares to foreigen investor on an abnormal value to avoid the permission of FIPB (Foreign Investment Promotion Board), Government of India," the ED said in its complaint against Swan Telecom.

Swan Telecom Pvt Ltd issued 44.73 per cent shares to Dubai-based Etisalat and 5.27 per cent shares to Genex Exim as per agreement on September 23, 2009.

Swan Telecom while issuing shares to foreign investor under the agreement also allegedly contravened the provisions of the laid down rules prescribed by the Commerce and Industry Ministry by appointing a Director who had been nominated by Dubai-based Etisalat and arrangement of a steering committee having members of their foreign partner for functioning of Swan Telecom.

The ED also alleged that Swan Telecom had disclosed that issue of equity to Genex Exim was under resident category but during investigations it was found that "it was an indirect foreign investment in Swan because funds into Genex were brought from Dubai."

"Thus issue of equity on December 17, 2008 by Swan to Etisalat and Genex totalling 50 per cent under automatic route was in contravention" of various sections of FEMA "for the amount of Rs 3,608 crore", the ED alleged.

In the case of Loop Mobile India Limited based in Mumbai, the ED alleged FEMA contravention to a total amount of Rs 431 crore.

"These contraventions are done by the said company in not reporting the receipt of funds from abroad within the stipulated period of time to RBI, in not reporting issue of shares to foreign investor within stipulated period of time and in purchasing shares of an Indian company from the funds of Foreign Direct Investment," ED said in its complaint against the firm.

"The Directorate has also come across suspected contravention in Virgin Mobile (Tata group) and is analyzing the pricing issue of shares between Unitech and Telenor," the ED said

ADVANCING LOAN BY INDIAN PARENT COMPANY TO ITS FOREIGN WOS/ OVERSEAS JV

As per recent RBI master circular , an Indian company can make loan to foreign company Loan and guarantee can be extended to an overseas entity only if there is already existing equity participation by way of direct investment, within the overall ceiling of 100% of the Indian party's net worth as on the date of the last audited balance sheet. 

The loan will fall under the term Financial commitment means the amount of direct investment outside India by way of contribution to equity, loans and 100% of the amount of guarantee issued by an Indian Party to or on behalf of  its overseas JV/WOS ( the amount and period of the guarantee should be specified upfront). 

The above ceiling 100% will include contribution to the capital of the overseas JV / WOS, loan granted to the JV / WOS and 100 per cent of  guarantees issued to or on behalf of the JV/WOS. 

The Indian party / entity may extend loan / guarantee only to an overseas  concern in which it has equity participation. 

AD Category – I banks should allow remittance towards loan to the JV / WOS  and / or issue guarantee to / on behalf of the JV / WOS abroad only after  ensuring that the Indian party has an equity stake in the JV / WOS. 

You have to report by way of ODI form through online to RBI . The physical copy has to be given to your authorised dealer and he will file it the same through online.

rvsekar2007@gmail.com

919848915177

100% FDI BY A FOREIGN COMPANY IN CONSTRUCTION OF TOWNSHIPS ,HOTELS Etc

Press Note 2 dated March 3, 2005 specifies the guidelines regarding the size of the project, amount of investment, repatriation of funds, and other matters. As per the said guidelines, minimum area to be developed under each project has been fixed at land area of 10 hectares for development of serviced housing plots, and built-up area of 50,000 square meters for construction-development projects, and fulfillment of any one of the said two conditions in case of a combination project.

Thus in case of combination of project, i.e. serviced housing plots and construction -development projects , either it may have a land area of 10 hectares or 50000 sq mts . Thus , any one of the condition has to be fulfilled in case of combination of project.

Besides, these guidelines prescribe minimum capital at US $ 10 million for wholly owned subsidiaries and US $ 5 million for joint ventures with Indian partners. Moreover, it is also stipulated that the funds would have to be brought in within six months of commencement of business. Regarding repatriation, the said Press Note clarifies that original investment cannot be repatriated before a period of three years from completion of minimum capitalization. However, the investor can exit earlier with Government's permission. It is also laid down that at least 50 per cent of the project must be developed within a period of 5 years from the date of obtaining all statutory clearances.

Subsequently, vide Press Note 4 of 2006 dated 10.2.2006, provisions regarding Foreign Direct Investment in a number of sectors were further liberalized. Vide serial number 11 of paragraph number IV of Annexure to Press Note 4 dated 10.2.2006, provisions regarding automatic entry route, and 100 per cent FDI cap/equity in construction-development projects including housing, commercial premises, resorts, educational institutions, recreational facilities, city and regional level infrastructure, townships, as also other guidelines given in Press Note 2 dated March 3, 2005 were reiterated. The said Press Note dated 10.2.2006 also stated that for investment by Non Resident Indians, conditions mentioned in Press Note 2 dated March 3, 2005 were not applicable. Thus, NRIs have been given a special and preferential treatment in this regard. All these stipulations have been re-affirmed vide items number 23 and 6 of Annexure 2 of Master Circular Number 2/2006-2007 dated July 1, 2006.

Another salient feature is that there is no Income Tax on townships so constructed.

Section 80-IB (10) of the Income Tax Act, 1961 exempting the entire income from specified housing projects from income tax invites Foreign Direct Investment and NRIs to rush to India.

As per recent RBI master circular , a non-resident entity (other than a citizen of Pakistan or an entity incorporated in Pakistan) can invest in India, subject to the FDI Policy.

As per Master Circular with effect from 1st October 2010 , 100% FDI is allowed under Automatic route for Townships, housing, built-up infrastructure and construction , development projects (which would include, but not be restricted to, housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure) .

There is no restriction for the above mentioned projects by NRI.

As per Master Circular dated 1st Oct 2010 , an entity is considered as ‘Owned’ by ‘non resident entities’, if more than 50% of the capital in it is beneficially owned by non-residents or NRI.

Minimum capitalization of US$10 million for wholly owned subsidiaries and US$ 5 million for joint ventures with Indian partners. So , an NRI entity can invest more than the minimum prescribed above.

Master Circular dated 1st Oct 2010 clearly says that the following conditions

* investment

* Capitalization

* -period

* least 50% of the project must be developed within a period of five years

for investment by NRIs, the conditions at (1) to (4) above of section 5.2.13.2 of Master Circular dt 1Oct 2010 would not be applicable.

R.V.Seckar

rvsekar2007@gmail.com

919848915177

FOREIGN TECHNOLOGY COLLOBORATIONS PAYMENTS –ROYALTY PAYMENTS

Royalty and Foreign Technical collaboration payment are governed by the RBI circular AP ( DIR Series) Circular No 5 dated 21 July 2003. Earlier ,only wholly owned subsidiaries are allowed to pay royalty to offshore parent companies abroad without any restriction on the duration of payment under the automatic route.

Earlier, under  liberalized  the foreign technology collaboration agreement policy through Press Note No 2 (2003 Series) dated 24 -06-2003 , irrespective of who have entered into foreign technology collaboration agreements were  permitted on the automatic approval route to make royalty payments at 8% on exports and 5% on domestic sales without any restriction on the duration of royalty payments.

 

Can shares be issued against Lumpsum Fee, Royalty and ECB?

 An Indian company eligible to issue shares under the FDI policy and subject to pricing guidelines as specified by the Reserve Bank from time to time, may issue shares to a person resident outside India :

     i.        being a provider of technology / technical know-how, against Royalty / Lumpsum fees due for payment; and

    ii.        against External Commercial Borrowing (ECB) (other than import dues deemed as ECB or Trade Credit as per RBI Guidelines).

Provided, that the foreign equity in the company, after the conversion of royalty / lumpsum fee / ECB into equity, is within the sectoral cap notified, if any.

RBI has delegated the powers, to make payments for royalty, lumpsum fee for transfer of technology and payment for use of trademark/brand name in terms of the foreign technology collaboration agreement entered by the Indian company with its foreign partners, to the AD banks subject to compliance with the provisions of Foreign Exchange Management (Current Account Transactions) Rules, 2000.

Foreign / technical Collaboration / technology transfer – Royalty or technology transfer fees

Automatic route:

The Government of India has reviewed the extant policy vide the press note no 8 (2009  series ) dated 16th December 2009 and it has been decided to permit, with immediate effect, payments for royalty, lumpsum fee for transfer of technology and payments for use of trademark/brand name on the automatic route without any limit as stated in the following table  i.e. without any approval of the Government of India. All such payments will be subject to Foreign Exchange Management (Current Account Transactions) Rules, 2000 as amended from time to time.

PROCEDURE FOR MAKING ROYALTY PAYMENTS

For making Royalty payment following activities to be completed.

1.     TDS @10% ( to be updated with the necessary rates) has to be paid on the Royalty amount and obtain challan from banker.

2.     R&D Cess @ 5% has to be paid to Reserve Bank of India and obtain proof of payment (challan copy) form the RBI.

3.     Obtain certificate from Chartered Accountant in form 15CB and submit to Income Tax Department as to TDS has been deducted and remitted to the government as per the provisions of Income Tax Act and Double Taxation Avoidance Agreement between India and "The Parent Company Country" &

4.     Obtain TCR Report from Chartered Accountant confirming that TDS and R&D Cess has been remittance to the RBI and submit to the banker to make payment.

5.     Based on the inputs given to the Income Tax department Form 15CA will be generated from the Income Tax website and submit the same to banker to make payment.

Only after completing these activities and providing these documents to the bankers payment can be effected.

R.V.Seckar

rvsekar2007@gmail.com

919848915177

Details	With effect from 16-12.2009,  after issue of Press Note 8 (2009 series)
Lump sum payments	No limit now
Royalty payable	No limits - subject to FEMA  (Current Account Transactions) Rules, 2000
Duration of royalty payments	No Limits
Royalty limits are	Net of taxes and are calculated according to standard conditions

Procedure for Setting up a Branch Office in Singapore

Specialties of Singapore Branch Office

• The name must match that of the parent company.
• It must appoint two staff members who can be Singapore residents or foreign individuals, to act as agents to support the business administration of the Branch Office.
• It is an extension of the foreign parent company; therefore it does not have a separate legal identity.
• The foreign parent company is liable for the acts, losses and debts of its branch office.
• Foreign staff relocating to Singapore to be the agents must obtain an Employment Pass.
• The constitution of the company and its activities are directed by the foreign parent company’s Memorandum and Articles of Association.
• Must have a registered office address in Singapore

• It is considered a non-resident for tax purposes, and therefore not eligible for any tax exemptions or incentives for new start-ups in Singapore.
• It does not have separate legal identity, and therefore the foreign parent company is responsible for all its debts, losses and liabilities.
• The foreign parent company is required to submit annual report and audited accounts within two months of the Branch Office's annual general meeting.
•  

Minimum Requirements for Setting up a Branch Office in Singapore

 

If you choose to set up a Singapore Branch Office, you will need to take the following steps:

1. Register a Singapore Branch Office.
2. Appoint two resident agents to represent the company in accordance with the Singapore Companies Act. The agents can be Singapore residents or appointed staff members from the foreign company who have secured the Employment Pass.

Application for an Employment Pass for the appointed staff member to relocate to Singapore can only be submitted after the successful registration of the Branch Office.

Subsidiary Company vs Singapore Branch Office

A Singapore Branch Office is considered a non-resident company for tax purposes. Non-resident companies are not eligible for tax incentives for new start up or resident companies; and therefore most foreign companies prefer to set up a Subsidiary Company rather than a Branch Office. 

R.V.Seckar

rvsekar2007@gmail.com

919848915177

FOR INCORPORATING A WHOLLY-OWNED SUBSIDIARY IN GERMANY

For incorporation of a GmbH in Germany, one should  have to adhere the guideline prescribed by the Company Register under whose jurisdiction your GMBH would be formed in Germany. Also, German law would govern incorporation issues.

From the Reserve Bank of India perspective, this is an instance of Overseas Direct Investment (ODI) and you would have to follow guidelines laid down by RBI.

First check whether the overseas investment is under automatic route or approval route. 

If under automatic route,

·         The Indian party (investing co.) is eligible to invest in WOS up to 100% of net worth as per last audited balance sheet without prior approval of RBI.

·         But this ceiling of 100% of Net worth is not applicable if investment is out of funds raised thru ADR/GDR, or balances in Exchange Earners' Foreign Currency account of the Indian party. 

·         Reporting is to be done within 30 days of investment to the AD Category - I bank in Form ODI (part I and II) with prescribed enclosures after which you will be granted a Unique Identification Number (UIN). Forms shall be submitted in physical form and your AD will submit the same through online.

If under approval route:

·         Prior approval of RBI would be required

·         For this purpose, application together with necessary documents should be submitted in Form ODI through their Authorised Dealer Category – I banks.

·         Reserve Bank would, inter alia, take into account the following factors while considering such applications:

a) Prima facie viability of the JV  / WOS outside India;

b) Contribution to external trade and other benefits which will accrue to India through such investment;

c) Financial position and business track record of the Indian party and the foreign entity; and

d) Expertise and experience of the Indian party in the same or related line of activity of the JV / WOS outside India.

From Company Law Point of View

As far as Companies Act, 1956 is concerned ensure compliance with Sec.372A as the investment should be within the limit. 

Kindly note that it can be inferred from reading of sec .372 A, that investment in other body corporate for the purpose of "making "it a wholly owned subsidiary is not exempted form applicability of sec. 372A because the exemption is for investment in wholly owned subsidiary. So needless to say that there must be status of wholly owned subsidiary before the proposal of investment in a company.

Every inter corporate investment/loan/guarantee/security falling within section 372A (even within limit) must be sanctioned by a resolution of the board passed at its meeting. Such decision can not be taken by circular resolution nor can it be delegated by the Board.

If investment is beyond limit, then follow provisions of Sec 372A by taking approval of shareholders in General meeting.

R.V.Seckar

rvsekar2007@gmail.com

919848915177

PURCHASE OF PROPERTIES BY NRI / PIO IN INDIA

Under the general permission available, the following categories can freely purchase immovable property in India:

i)             Non-Resident Indian (NRI)- that is a citizen of India resident outside India

ii)            Person of Indian Origin (PIO)- that is an individual (not being a citizen of Pakistan or Bangladesh or Sri Lanka or Afghanistan or China or Iran or Nepal or Bhutan), who

1.     at any time, held Indian passport, or

2.     who or either of whose father or grandfather was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955). 

 The general permission, however, covers only purchase of residential and commercial property and not for purchase of agricultural land / plantation property / farm house in India. 

Whether agricultural land/ plantation property / farm house in India can be purchased by an NRI / PIO ?

No. Since general permission is not available to NRI/PIO to acquire agricultural land/ plantation property / farm house in India, such proposals will require specific approval of Reserve Bank and the proposals are considered in consultation with the Government of India.

Whether an NRI / PIO has to report to RBI after purchase of property in India?

No.  An NRI / PIO who has purchased residential / commercial property under general permission, is not required to file any documents with the Reserve Bank.

IS THERE ANY RESTRICITION FOR NRI / PIO TO PURCHASE ANY PROPERTY IN INDIA?

There are no restrictions on the number of residential / commercial properties that can be purchased.

WHETHER AN INDIAN RESIDENT CAN GIFT A PROPETY TO A NRI / PIO?

Yes, NRIs and  PIOs can freely acquire immovable property by way of gift either  from

i) a person resident in India or
ii) an NRI  or
iii) a PIO.

However, the property can only be commercial or residential. Agricultural land / plantation property / farm house in India cannot be acquired by way of gift.

R.V.Seckar

rvsekar2007@gmail.com

919848915177