PROCEDURES FOR APPEALS UNDER FEMA

SPECIAL DIRECTOR OF APPEALS

Any person aggrieved by the order passed by the Deputy director , additional director , special director , Special Director with Deputy Legal Adviser, Director of Enforcement may appeal to Special Director ( Appeals).

Such appeal should be filed within 45 days from the date on which the copy of the order is made by the Adjudicating Authority . Appeal should be verified by the appellant in a proper manner and should accompany with the requisite fees.

The special director (appeals) has power to condone the delay beyond 45 days to file an appeal if he believes that there was enough cause for not filing the appeal within the due date.

The special director after receiving the appeal may give an opportunity to be heard and shall pass such an order thereby confirming or setting aside or modifying the earlier order passed by the authorities against which the present appeal lies. The Special Director (Appeals ) will have the powers analogues to that of civil court which are conferred n the Appellate Tribunal.

Appeals to Appellate Tribunal

If any party aggrieved by the order passed by the Special Director (Appeals ) can apply to  Appellate Tribunal. However , any penalty levied by the enforcing authority or Special Director (Appeals ) should be deposited by the aggrieved party before applying to the Appellate Tribunal. However , an aggrieved party may apply to the Appellate Tribunal to waive the payment penalty and he Appellate Tribunal may dispense with such deposit subject to such conditions as i may deem fit to impose so as to safeguard the realisation of penalty.

Every appeal  to Appellate Tribunal  shall be filed within a period of forty-five days from the date on which a copy of the order made by the Adjudicating Authority or the Special Director (Appeals) is received by the aggrieved person. Appeal should be verified by the appellant in a proper manner and should accompany with the requisite fees. On receipt of an appeal , the Appellate Tribunal may, after giving the parties to the appeal ,an opportunity of being heard, pass such orders thereon as it thinks fit, confirming, modifying or setting aside the order appealed against.    The Appellate Tribunal shall send a copy of every order made by it to the parties to the appeal and to the concerned Adjudicating Authority or the Special Director (Appeals).

Appeal to High Court Any person aggrieved by any decision or order of the Appellate Tribunal may file an appeal to the High Court within sixty days from the date of communication of the decision or order of the Appellate Tribunal to him on any quest on of law arising out of such order: Provided that the High Court may, if it is satisfied that the appellant was prevented by sufficient cause from filing the appeal within the said period, allow it to be filed within a further period not exceeding sixty days. Explanation.-In this section "High Court" means –

(a) 1.the High Court within the jurisdiction of which the aggrieved party ordinarily resides or carries on business or personally works for gain; and (b) 2.where the Central Government is the aggrieved party, the High Court within the jurisdiction of which the respondent, or in a case where there are more than one respondent, any of the respondents, ordinarily resides or carries on business or personal works for gain. R.V.Seckar   rvsekar2007@gmail.com 919848915177

COMPOUNDING OF OFFENSES UNDER FEMA

According to RBI , persons charged with violation of the Foreign Exchange Management Act should apply for compounding, which is paying a sum to get relief from punitive action under the act, at the earliest. Thus , the onus under FEMA is on the persons concerned and  should,  in their own interest submit their applications for compounding of contravention under FEMA to the Reserve Bank at the earliest opportunity.

Persons who have contravened provisions of FEMA should not take upon themselves, suo motto or on the basis of external advice, to decide whether a particular contravention is of a technical or minor in nature and, hence, no compounding application need be submitted to the RBI. According to RBI , a decision on the exact pattern of treating contraventions under FEMA would be based on the merit of each individual case.

The following is the procedure for compounding of offenses under FEMA: 

1.     An application under prescribed format either through suo motto or through a memorandum with a fee of Rs 5000/= by way of demand draft in favor of compounding authority.

1.   If the contravention is  Rs 5 lacs or below , then application for compounding of offense shall be made to the Deputy director of the Directorate of Enforcement.
2.   If contravention is more than Rs 5 lacs but less than Rs 10 lacs , then application has to be made to  Additional Director  of the Directorate of Enforcement .
3.  If it is more than Rs 10 lacs but less than Rs 50 lacs , then to Special Director of the Directorate of Enforcement .
4.  If it is more than Rs 50 lacs but less than Rs 1 Crore , then application is to be made to Special Director with Deputy Legal Adviser of the Directorate of Enforcement .
5.    If the sum involved is more than Rs 1 Crore or more , then application is to be made to Director of the Enforcement  with Special Director of the Enforcement Directorate  of the Directorate of Enforcement .

7.     The Compounding Authority may call for any information, record or any other documents relevant to the compounding proceedings.

8.     Where additional information/document is called for, such additional information/ document shall be submitted within 30 days or such additional period as may be given by the Compounding Authority from the date of the said letter.

 9. The Compounding Authority shall provide an opportunity of being heard to all the concerned.9a.                        The application will be disposed by RBI within 180 on receipt of application.

10.                        RBI will evaluate whether there is any contravention and if so , the quantum of contravention.

11.                        In case , contravention is minor or technical in nature , RBI will issue only administrative cautionary advice or caution or warning only.

12.     Contravention will be considered serious by RBI if there is any money-laundering , security or national issues thereby involving grave violations of FEMA regulations.

       13.The Compounding Authority (CA) will issue final order of fine amount if he finds if there is any contravention.

14.      The fine amount so levied will have to remitted to RBI within 15 days  of passing order by the CA by way of demand draft.

15.    Finally, a compounding certificate will be issued by RBI after receipt of the fine by RBI.

16.    If a company commits same type of contravention within 3 years of first contravention, then no compounding will be available and relevant provisions of FEMA, 1999 will be applicable.

17.     If second contravention is committed by a company after the lapse of first contravention (same type), then it will be construed as a first contravention by RBI.

18.If a company fails to get approval or permissions from any statutory authorities or governments, then such contravention will not be compounded by RBI till the required approvals are obtained from the relevant authorities.
       

R.V.Seckar

 

rvsekar2007@gmail.com

919848915177

Whether a NRI can Make Donations to any resident in India ? Will it Fall under FEMA or FCRA ?

Whether a NRI can Make Donations to any resident in India ? Will it Fall under FEMA or FCRA ?

A NRI can make donation to an Indian or any institution in India. There is no restriction for such donation either in FEMA or in FCRA.  For instances, many temples have online donation facility for a  NRI to pay donation from his NRE account or in foreign exchange.

Further, donation received from a NRI in foreign currency is not a foreign contribution if the NRI holds a valid Indian passport

For a .NRI (Non-Resident Indians) donors who are Indian citizens having an Indian passport and he can make donations to any one in India and he has to quote his passport number as this is because their contribution goes into a separate account as per the Foreign Contribution Regulation Act, (FCRA), 1976.

How much a Indian Resident can make as a gift to a resident outside India or donation to a foreign charitable institution?

Any resident individual, if he so desires, may remit the entire limit of USD 200,000 in one financial year under LRS as gift to a person residing outside India or as donation to a charitable/educational/ religious/cultural organization outside India.  Remittances exceeding the limit of USD 200,000 will require prior permission from the Reserve Bank.

Can a Resident or an Indian Company Accept Deposits from foreign national or Company?

There is a restriction for accepting deposits by a resident from a person outside India. As per FEMA Management of Deposits Regulation of 2000 vide circular FEMA 5/2000 dated 3-5-2007,

Save as otherwise provided in the Act or Regulations or in Rules , directions or orders made or issued under the Act , no person resident in India shall accept any deposits from , or make any deposits with , a person resident outside India ; Provided that RBI may , on an application made to it and on being satisfied that it is necessary so to do so, allow a person resident in India to accept or make deposit from or with a person resident outside India

Further , the master circular released on 1st Oct 2010 does not speak about any exemption the above and hence the restriction in accepting deposits continues.

Further , in case of listed companies , acceptance of deposits from overseas will need prior approval from RBI as deposit definition include under Laws relating to invitation & acceptance of fixeLaws relating to invitation & acceptance of fixed deposits by companiesd deposits by companies FEMA Management of Deposits Regulation of 2000 vide circular FEMA 5/2000 dated 3-5-2007,

v ) Deposit includes deposit of money with a bank , company ,proprietorship concern, partnership firm , corporate body , trust or any other person.


Alternatively  , a company may accept ECB by adhering the guidelines for accepting ECB under automatic route by satisfying ECB guidelines issued by RBI.

Whether an NRI can invest in Partnership Firm or in Properitorship in India?

FDI in Partnership Firm / Proprietary Concern by an NRI in India:

On Non -Repatriation Basis 

(i) A Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) resident outside India can invest by way of contribution to the capital of a partner firm or a proprietary concern in India on non-repatriation basis provided;

(a) Amount is invested by inward remittance or out of NRE/FCNR(B)/NRO account maintained with Authorized Dealers / Authorized banks.

(b) The firm or proprietary concern is not engaged in any agricultural/plantation or real estate business or print media sector.

(c) Amount invested shall not be eligible for repatriation outside India.

On Repatriation Basis 

Investments with repatriation benefits: NRIs/PIO may seek prior permission of Reserve Bank for investment in sole proprietorship concerns/partnership firms with repatriation benefits. The application will be decided in consultation with the Government of India.
 

FDI by Foreign Nationals in a Partnership Firm of Proprietorship

(iii)Investment by non-residents: Investment by non-residents other than NRIs/PIO: A person resident outside India other than NRIs/PIO may make an application and seek prior approval of Reserve Bank for making investment by way of contribution to the capital of a firm or a proprietorship concern or any association of persons in India. The application will be decided in consultation with the Government of India.

ECB Norms Violation . Rs 125 Crores was slapped on Reliance Infrastructure by RBI !!

ECB Norms Violation . Rs 125 Crores was slapped on Reliance Infrastructure by RBI

Under FEMA guidelines issued in 2000,  and as well as under  RBI Master circular on ECB 07/09/10 dated 1-7-2010 , a borrower is required to keep ECB funds parked abroad till the actual requirement in India. Further,  as per RBI norms, a borrower cannot utilize the funds for any other purpose as there is end use restrictions for ECB.

However, Reliance Infrastructure now Reliance Energy has parked its foreign loan proceeds worth $300 million with its mutual fund in India for 315 days, and then repatriated the money abroad to a joint venture company. These actions, according to an RBI , violated various provisions of the Foreign Exchange Management Act (FEMA).

Reliance Energy admitted that there was contravention and sought compounding. The company said due to unforeseen circumstances, its Dadri power project was delayed. Therefore, the ECB proceeds of $300 million were bought to India and was parked in liquid debt mutual fund schemes, it added.

Afterward, Reliance Energy repatriated the above sum for alternate use of investment in an overseas joint venture on March 5, 2008.

In doing so, Reliance had not applied for prior approval of RBI as it contravened the end use restrictions and also it repatriated the ECB funds for investments in its overseas joint venture without prior approval of RBI.

For the justification of its levy of fine of Rs 125 Crores , RBI viewed that as the Reliance has made additional income of Rs 124 crores by parking its ECB in its mutual funds in contravention of ECB end use restrictions , Reliance Energy was  liable to pay a fine of Rs 124.68 crores.

Courtesy : Economic Times

CONVERSION OF ECB INTO EQUITY- IS IT ALLLOWABLE UNDER FEMA ?

As per  RBI Master Circular No. 8 /2010-11 dated July 01, 2010, an Indian company is eligible to convert its ECB INTO EQUITY if it satisfies the following conditions:

 (a) The activity of the company is covered under the Automatic Route for Foreign Direct Investment or Government (FIPB) approval for foreign equity participation has been obtained by the company, wherever applicable.

(b) The foreign equity holding after such conversion of debt into equity is within the sectoral cap, if any,

(c) Pricing of shares is as per the pricing guidelines issued under FEMA, 1999 in the case of listed/ unlisted companies.

(ii) Conversion of ECB may be reported to the Reserve Bank as follows :

(a) Borrowers are required to report full conversion of outstanding ECB into equity in the form FC-GPR to the Regional Office concerned of the Reserve Bank as well as in form ECB-2 submitted to the DSIM, RBI within seven working days from the close of month to which it relates. The words "ECB wholly converted to equity" should be clearly indicated on top of the ECB-2 form. Once reported, filing of ECB-2 in the subsequent months is not necessary.

(b) In case of partial conversion of outstanding ECB into equity, borrowers are required to report the converted portion in form FC-GPR to the Regional Office concerned as well as in form ECB-2 clearly differentiating the converted portion from the unconverted portion. The words "ECB partially converted to equity" should be indicated on top of the ECB-2 form. In subsequent months, the outstanding portion of ECB should be reported in ECB-2 form to DSIM.

(ii) General permission is also available for issue of shares/preference shares against lump sum technical know-how fee, royalty, under automatic route or SIA/FIPB route, subject to pricing guidelines of SEBI/CCI and compliance with applicable tax laws.

Illustrations :

• M/s Kerns Aero Products Private Limited was allowed by FIPB to issue shares for the value of machinery imported to the supplier .

• Issue of sweat equity shares by Quatrro BPO Solutions Private Limited was allowed under the rules ““Unlisted Companies (Issue of Sweat Equity Shares) Rules, 2003” and Regulation 8 of FEMA 20.

• FIPB allowed Actis Biologics Private Limited to issue equity share against transfer of technology.

• GIA India Laboratory Private Ltd was allowed by FIPB to issue shares against rent as a part of pro-incorporation expenses .

•  In case of Misuba Sical India P Ltd , FIPB allowed to issue of shares instead of redemption of preference shares.

•  In the case of MD Group Inc, Canada, issuance of shares was sought against Franchisee rights.  FIPB  viewed that the extant policy permits issuance of shares for consideration other than cash in the case of lump sum fees, royalty and ECB. Issuance of shares against internal accruals, import of second hand machinery etc. has also been allowed on a case to case basis, but it cannot be allowed against an intangible asset like Franchisee rights.

There are instances where FIPB has refused to accord its approval for issue of shares against trade payable .( Macroni Telecommunications (I)  Private Limited and in the case of Sun Technics Energy Systems Private Limited ).

Formalities for the transfering of shares held by a foreign investor to an Indian Buyer ?

For transfer of Indian company shares held by a foreign company or investor to the Indian buyer, the following procedures have to be observed:

An agreement between the parties as regards to selling price. Share transfer form has to be signed by the seller and to be sent to Indian company for registering the transfer .

The company may make transfer of shares after observing the formalities at its end.

In case of individual buyers , they can route the payment ( Sales consideration) through any authorised dealer to the foreign seller.


For making payment to overseas investor towards purchasing shares from foreign company by resident Indian,s the Authorised dealer would require the following documents.

1. Application for Outward Remittance in Annexure & Form A2.
2. Form 15CA & 15 CB
3. Letter from the Company Secretary - Existing share holding pattern of the company.
4. Letter from the Chartered Accountant - Appropriate taxes have been deducted and valuation of shares under discounted cash flow method.
5. Copy of FC-GPR B - Latest annual return submitted to RBI (31 July 2010)
6. FC-TRS return in duplicate within 60 days of transfer .
7. Any Agreement/letter between seller & Purchaser.

Can Indian Company can extend Guarantee to a foreign company which is a subsidiary of its 100% owned foreign subsidiary ?

Company A can give Corporate Guarantee to a Bank abroad on behalf of Company C. Company B is a 100% subsidiary of A and B is having a 49% holding in Company C.
. Which Guidelines govern the same and what would be the statutory formalities for the same???


Notification No.FEMA 8/2000-RB dated 3rd May 2000 . The notification provides the following prohibition:

Prohibition :-

Save as otherwise provided in these regulations, or with the general or special permission of the Reserve Bank, no person resident in India shall give a guarantee or surety in respect of, or undertake a transaction, by whatever name called, which has the effect of guaranteeing, a debt, obligation or other liability owed by a person resident in India to, or incurred by, a person resident outside India.

RBI master circular on WOS / JV abroad dated July 1, 2010.. In terms of the circular guarantee can ben given on behalf of a subsidiary / JV in which Company 'A' has equity participation. Going by this, Company A can't give guarantee on behalf of Company 'C'

Hence , Guarantee can be offered by a Indian Company to a foreign company in a structured business transactions only. The prohibition clause says even with the general or special permission from RBI , Guarantee cannot be given unless there is a structured business transaction.

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Whether 3 -Year Lock -in Period for FDI in Reality Sector should go ?

The three-year lock-in period for Foreign Direct Investment (FDI) in the real estate sector in India is “too restrictive.” This is the comments of many observers.

The real estate industry has long been asking for the dilution of FDI lock-in clause.

Many in the industry have been demanding that the three-year lock-in stipulation for repatriation of foreign investments in SPV projects, be done away with as it deters foreign investors.

A recent study by FICCI-Ernst & Young has also made a case for permitting an early exit with prior Foreign Investment Promotion Board (FIPB) approval in instances where the project is completed; where a dispute arises between the resident and the non-resident, and the non-resident wishes to exit the project; or where the project could not be initiated due to lack of statutory clearances.

Also, the Government should clarify whether the three-year lock-in period is for minimum capitalization amount of the entire investment sum,” the report said.

At present, India allows up to 100 per cent FDI on the automatic route for townships, housing, built-up infrastructure and construction-development projects (including housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure).

This is, however, subject to certain conditions. For instance, the minimum area to be developed under each project in case of serviced plots is 10 hectares; and for construction development at 50,000 square meters (built-up space).

In addition, there is a minimum capitalization requirement of $10 million for a wholly-owned subsidiary, and $5 million for joint ventures.

Although there is a blanket lock-in period stipulated for repatriation, investors are allowed to exit in specific cases with prior permission of the FIPB. However, such approvals have been rare.

In 2009, the Department of Industrial Policy and Promotion had considered a proposal to do away with the lock-in condition and had even sought the views of Ministries of Urban Development, Housing and Finance, on the issue. However, there is no clarity on the fate of that particular proposal
.

How Much An Indian Resident can transfer to aquire foreign equity , immovable property , assets etc per financial year?

Up to $ 75,000 per Financial Year!

As per RBI guidelines, resident Indians are allowed to transfer up to $75,000 (around Rs 45 lakh year) abroad without its approval under the Liberalized Remittance Scheme (LRS) in a financial year. The earlier limit was $ two lakhs (Rs 90 lakh) a year. Indians can transfer $ 75000 lakh to acquire and hold immovable property, make investment in financial instruments or purchase any other asset abroad without any prior approval.

Hence , if a resident Indian wants to invest in shares of foreign company , he can invest up to $ 75,000 per financial year through his authorised dealer.

Please note that a Indian resident can transfer up to $ 75,000 for overseas investment per financial year and this is not an one time investment and he can make investment of $75,000 on each financial year basis.

What is the procedure for conversion of suppliers credit (period of less than 3years) into equity shares?

What is the procedure for conversion of suppliers credit (period of less than 3years) into equity shares?

ECB refer to commercial loans [in the form of bank loans, buyers’ credit, suppliers’ credit, securitised instruments (e.g. floating rate notes and fixed rate bonds)] availed from non-resident lenders with minimum average maturity of 3 years. ECB can be accessed under two routes, viz., (i) Automatic Route outlined in paragraph 1(A) and (ii) Approval Route indicated in paragraph 1(B).

Since ECB definition includes Supplier's Credit , conversion of suppliers credit to equity is permitted and the procedures are detailed in the under mentioned master circular issued by the RBI for conversion of ECB into Equity is also applicable to conversion of supplier's credit to Equity as per the following terms and conditions.


http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=5786#L37

CONVERSION OF ECB INTO EQUITY

(i) Conversion of ECB into equity is permitted subject to the following conditions :
(a) The activity of the company is covered under the Automatic Route for Foreign Direct Investment or Government (FIPB) approval for foreign equity participation has been obtained by the company, wherever applicable
(b) The foreign equity holding after such conversion of debt into equity is within the sectoral cap, if any,
(c) Pricing of shares is as per the pricing guidelines issued under FEMA, 1999 in the case of listed/ unlisted companies.

(ii) Conversion of ECB may be reported to the Reserve Bank as follows :
(a) Borrowers are required to report full conversion of outstanding ECB into equity in the form FC-GPR to the Regional Office concerned of the Reserve Bank as well as in form ECB-2 submitted to the DSIM, RBI within seven working days from the close of month to which it relates. The words "ECB wholly converted to equity" should be clearly indicated on top of the ECB-2 form. Once reported, filing of ECB-2 in the subsequent months is not necessary.

(b) In case of partial conversion of outstanding ECB into equity, borrowers are required to report the converted portion in form FC-GPR to the Regional Office concerned as well as in form ECB-2 clearly differentiating the converted portion from the unconverted portion. The words "ECB partially converted to equity" should be indicated on top of the ECB-2 form. In subsequent months, the outstanding portion of ECB should be reported in ECB-2 form to DSIM.

How Much An Indian Company Can Pay to a Foreign Consultant as Consultation Fees?

In the RBI Circular “RBI/ 2004/39 A.P. (DIR Series) Circular No. 64 February 4, 2004, and in Schedule III(See Rule 5), under paragraph 13 it has been clearly stated that authorised dealers can release the payment as per details given below : Up to Remittance not exceeding USD 1,000,000 per project, for any consultancy service procured from outside India.

Remittance exceeding USD 1,000,000 per project, for any consultancy service procured from outside India needs RBI prior approval.

Thus as per the above circular, the Authorised dealers are allowed to release 1 million US dollars for any foreign consultancy services and hence it falls under automatic approval of RBI if the remittance does not exceed USD 1 Million.
It is to be noted that there are no other preconditions attached to this and an Indian Company wish to pay a foreign consultant need not necessarily to have earnings in dollars or other foreign currencies. Even there is nil foreign currency income for a Indian company , it can pay to a foreign consultant up to USD 1 Million.

However , if a Indian company wants to pay more than USD 1 Million, then it has to get the prior approval from RBI by substantiating its foreign revenues.

All About Investment by an Indian Company in its Foreign JV OR WOS

How much an Indian Company can invest in the shares of a foreign company? How much an Indian Resident can invest in shares of a foreign company?

As per RBI Master Circular No.05/2010-11 dated July 01, 2010, in terms of Regulation 6 of the Notification, an Indian party has been permitted to make investment in overseas Joint Ventures (JV) / Wholly Owned Subsidiaries (WOS), not exceeding 100 per cent of the net worth of the Indian party, i.e. a company incorporated in India or a body created under an Act of Parliament or a partnership firm registered under the Indian Partnership Act, 1932, making investment in a JV/WOS abroad and includes any other entity in India excluding individuals as may be notified by the Reserve Bank as on the date of the last audited balance sheet.

How much it can invest ?

Under automatic route , up-to 100% net worth of investing company in its foreign subsidiary or JV Company.
Financial commitment means the amount of direct investment outside India by way of contribution to equity and loans and 100% of the amount of guarantee issued by an Indian Party to or on behalf of its overseas Holding company.

Payment should be routed through your authorised dealer (banker).

No prior registration with the Reserve Bank is necessary for making direct investments under the automatic route. After the report of the first remittance/investment in form ODI is received by the Reserve Bank, from the designated Authorized Dealer, an Identification Number for that particular JV/WOS will be issued for the purpose of taking on record the overseas direct investment with the objective of maintaining a database for monitoring the outflows/inflows in respect of the overseas entities. Subsequent investments in the same project can be made only after allotment of the Identification Number.

Loans can be made by a subsidiary to foreign holding company and Form ODI has to be submitted to Authorised dealer. Under FEMA , investment in equity , lending loan and extending guarantee will all fall under ODI.

A subsidiary can make direct investment outside India by way of contribution to equity and loans and 100% of the amount of guarantee issued by an Indian Party to or on behalf of its overseas Holding company.
However , the holding company cannot make further investment in the subsidiary if it is making a loan to the holding company..

Can an Indian Company invest in shares of a Foreign Company where there is no JV or WOS?

Yes. As per RBI guidelines , if there is no JV or WOS , an Indian companies can invest up to 50 % of their net worth as on the date of the last audited Balance Sheet in overseas companies, listed on a recognized stock exchange, or by way of rated debt securities issued by such companies.

If the investing company is an Indian  company , then it can invest in any foreign listed company up to 50% of its net worth under automatic route else it has get the prior approval from RBI if it wants to invest in unlisted foreign company , or if the Indian company is not a listed company.

Can proceeds raised through ECB are allowed to invest in Equity shares of JV or WOS in abroad?


ECB proceeds can be utilised for overseas direct investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS) subject to the existing guidelines on Indian Direct Investment in JV/WOS abroad.

CAP on FDI in India and Procedures to be observed on receipt of FDI by an Investee Company:

CAP on FDI in India and Procedures to be observed on receipt of FDI by an Investee Company:


In majority of cases , 100% FDI is permitted without any prior approval from RBI or FIPB.

However , Approval is required for licensed industries such as hazardous chemicals and defense equipment .

Some Sectors have FDI cap which is detailed below :

Sector FDI Cap
• Private Banking 74%
• Telecom 74%
• Civil Aviation 49%
• Insurance 26%
• Single Brand Retail 51%
• News Media 26%
• Defense Sector 26%

• Development of Townships , Housing , Built-up infrastructure and Construction -development projects- 100% 

Prohibited Sectors

• Agriculture with some exceptions
• Gambling & Lottery
• Retail (except Single Brand retail)
• REAL estate - Real Estate Business or Construction of Farm Houses
• Tobacco Products
Chitfund
Nidhi Company
Trading in Transferable Development Rights (TDRs).
Reserved For Government Sector only
• Atomic Energy
• Railways

Reporting of FDI to RBI –Procedures

In case of FDI only , allotment has to be made within 180 days of receipt of funds in India and investee company has to report to RBI within 30 days on receipt of funds. There is a separate form for this and it is known as “ Foreign Inward Remittance Reporting Form “. After filing this , RBI will allot a UIN (Unique Identification Number ) for each FDI reported to RBI. Allotment has to be made within 180 days of receipt of funds and Form FC-GPR is to be filed with your regional RBI within 30 days of allotment through your authorised dealer ( banker).
Along with the Form FC-GPR , the following certificates will have to be enclosed:
• A certificate from the Company Secretary of the company accepting investment from persons resident outside India certifying that
o All the requirements of the Companies Act, 1956 have been complied with;
o Terms and conditions of the Government approval, if any, have been complied with;
o The company is eligible to issue shares under these Regulations, and
o The company has all original certificates issued by Authorized Dealers in India evidencing receipt of amount of consideration.
• A certificate from Statutory Auditors or a Chartered Accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India.

In case of issue of bonus shares by an Indian company , even though there is no inflow of funds and but , the company has to file Form FC-GPR within 30 days of allotment of bonus shares to a foreign company through its authorised dealer.

R.V.Seckar

Can ECB raised for repayment of Term Loan or Working Capital ?

There are end use restrictions and as of now , ECB cannot be availed for working capital purpose.

ECBs are being permitted by the Government as a source of finance for Indian Corporates for expansion of existing capacity as well as for fresh investment.

END-USE REQUIREMENTS

.(A) External commercial loans are to be utilized for import of capital goods and services (on FOB or CIF basis) and for the project related expenditure in all sectors subject to following conditions :

(a) ECB raised for project-related rupee expenditure must be brought into the country immediately.

(b) ECB raised for import of capital goods and services should be utilized at the earliest and corporates should strictly comply with RBI's extant guidelines on parking ECBs outside till actual imports. RBI would be monitoring ECB proceeds parked outside.

(c) ECB raised is not permitted for investment in stock market or in real estate.

(B) Corporate borrowers will be permitted to raise ECB to acquire ships/vessels from Indian shipyards. (C) Under no circumstances, ECB proceeds will be utilized for -
( i) Investment in stock market; and
(ii) Speculation in real estate.

ECBs only for import of capital goods and project-related rupee expenditure. Such Recycled Funds may not be on lent for the following purposes :

(i) Investment in Real Estate;
(ii) Investment in Stock markets including secondary market trading;
(iii) Working capital purposes;
(iv) General corporate purposes

Corporate’s who have foreign exchange earnings are permitted to raise ECB up to thrice the average amount of annual exports during the previous three years subject to a maximum of USD 200 million without end-use restrictions, i.e. for general corporate objectives excluding investments in stock markets or in real estate.

If you have adequate foreign exchange earnings and you can raise ECB thrice of your annual export earnings without any end use restriction. That is you can use the ECB in such cases to repay your working capital or term loan availed from the bank.

In other scenarios , ECB is not permitted to repay working capital or term loans in India.

Can A Pvt Company Accepts Deposits from Non-resident Shareholder ?

Question:

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?

Comments:

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).

.

Foreign investments through non-convertible, optionally convertible or partially convertible preference shares are considered as debt finance and therefore subject to stringent External Commercial Borrowings (ECBs) guidelines.


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.


For any clarification or further details , please contact me through rvsekar2007@gmail.com or 09848915177.

WHY INDIA IS LACKING IN ATTRACTING FDI AS COMPARED TO CHINA, BRAZIL, MEXICO, RUSSIA?

R.V.Seckar, M.Com, F.C.S, I.C.S.A (UK), LLB.
Company Secretary, Chandra Group of Companies

(This research article has been published in the 35th Regional Conference conducted by Institute of Company Secretaries of India , Chennai ( Southern) region on 23rd and 24th of July in Chennai .This article has secured 5 star ranking in SCRBD website.)

Many may recall the economy of India was in bad shape before 1991 as it had to pledge its entire gold reserves with World Bank when Mr. Chandra Sekhar was the Prime Minister of India to avail IMF loan and to poise its balance of trade.
No doubt, the economic liberalization introduced when Mr.ManMohan Singh was the finance minister in 1991 under then Mr.Narasimha Rao government had contributed acceleration in economic growth which has created substantial employment and reduced the poverty levels. India’s economic reform is supported by flow of FDI (Foreign Direct Investment) both into and outside India. However, India has to introduce further economic reforms to accomplish the government’s development goals like reducing inequality and poverty and increasing employment. In this research essay, I wish to emphasise the need for further reforms to attract more FDI to make India as economic super power by the turn of 2020.
Since 1991, economic reforms are being introduced in many phases. As a first step to attract more foreign investment, industrial licensing was abolished for all except 18 industries under the Industries Act of 1951. Further, in 1991, the number of sectors reserved for the public sector was reduced to eight as government wanted to have control only in railway, atomic energy, defense and other core sectors. Further, no prior
permission was needed to be obtained for investment in MRTP –designated companies in India since 1991.
To accelerate industrial growth and economic development, quantitative restrictions on imports have been virtually abolished and tariffs were reduced. The peak custom’s duty rate was reduced in FY 1991-92 from 150% to just 35% in 2001 and it was further reduced to just 10 % in 2007. India achieved current –account convertibility in 1994 by removing exchange controls on current-account transactions.
Since 1991, both FDI and portfolio investment have been liberalised. Foreign Institutional Investors (FIIs) have been permitted to invest in shares of listed companies in the Indian stock market from 1993 onwards.
In 1991, automatic approval for FDI projects with up to 51% of foreign equity in 34 specified sectors was introduced. Now, FDI is being allowed in almost in all sectors except gambling, lottery, retail trade (except single brand), defense, atomic energy and railways. Now, many sectors have opened for 100% foreign ownership without Indian government prior approval. Since 1991, as balance of payments has improved, Indian government has gradually relaxed its foreign-exchange restrictions on foreign investments.
In the post reform phase, India recorded an average economic growth rate of 6.5% per annum which included growth acceleration to 8.9% per annum since FY 2003-04. Further, poverty rate in India decreased from 26.1% in 1991 to 21.8% in 2007. It is to be noted that services sector, led by insurance, communication and information technology services which has outperformed other sectors.
Foreign Direct Investment (FDI)

FDI increased by ten percent in December 2009 to $1.5 billion as compared to $1.36 billion in December 2008. This is the third consecutive month that FDI inflows have posted a vibrant year-on-year increases. (NASSCOM Mint Report 2010).
BPO Industry performance and FDI in BPO Sector in India.

year Exports (USD bn) Domestic (INR bn)
FY 08-09 47.1 590
FY 09-10 49.7 662
FY 10-11 (outlook) 56-57 761-775

BPO sector has accounted for over 10 percent of the total FDI investment in India in the last decade alone.


Source: http://www.nasscom.in/Nasscom/templates/NormalPage.aspx?id=58639

Outflow Foreign Direct Investment (OFDI)

Since 2000, India has been accumulating its OFDI (Outward Foreign Direct Investment) stocks. As of March 2008, India had invested about USD 49.8 billion in overseas stock which is a landmark development as considering just USD 3.7 billion in 2000. Though, in global level, India occupied 36th rank in OFDI in 2008 having 0.3% in 2008, among developing nations, India has gradually enhanced its dominance thereby becoming 13th largest nation in terms of OFDI stock in 2007. The lion’s share of India’s OFDI was parked in the developed countries and in 2006 about 32.3% was invested in stocks of developed nations. The major OFDI investment in developed nations by India mirrors trade-backing OFDI projects in these developed nations and acquisition of strategic assets have become a vital strategy for many Indian companies to enhance their competitiveness in an ever increasing competing environment.
Bilateral Investment Promotion Agreements (BIPAs)

With the help of BIPAs and double taxation avoidance agreements, government is able to increase the flow of FDI into India. Foreign investors in India have been offered strong guarantees in the post –establishment phase on fair and equitable treatment, national treatment, and non-expropriation without fair compensation, free repatriation of capital and profits and access to International arbitration. Further, to encourage more flow of FDI, double taxation agreement has removed tax disadvantages for MNCs functioning in India.
India is the largest recipient among developing economies in 2007
India has recorded a 3.6 times higher FDI in FY 2006-07 alone as compared to in the year 2003-04. An inflow of USD 34.4 billion in FY 2007 -08 which was in excess of government targeted figure of USD25 billion. It is to be noted that the aggregate of FDI inflows both to the whole world and to the developing world almost tripled from 2003 to 2007, in India, FDI inflows have rose more than five times during the analogues period. India was ranked in the 8th place in the size of FDI flows among developing nations with four percent of total FDI flows to developing economies.
Statistics of FDI inflows in India

CUMULATIVE FDI FLOWS INTO INDIA (1991 -2010).

1 Cumulative Amount of FDI Flows into India
[from April 2000 to March 2010]
(Equity inflows + including data on “Re-invested earnings ‘& Other Capital “which is available from April 2000 onwards. These are the estimates on an average basis, based upon data for the previous two years, published by RBI in their Monthly Bulletin. In INR In USD

USD 1,61,546 million
2 Cumulative Amount of FDI Equity Inflows
( from August 1991 to March 2010) Rs 5,77,108 Crores USD 1,32,428 million
Note: FDI inflows include amount received on account of advance pending for issuing of shares for the year 1999 to 2004.

Source: DIPP, March, 2010
Year –wise FDI Equity Inflows in to India – A comparison

In Rupees in Crores In USD million
2009-10 ( Up to March 2010 ) 123,377 25,888
2008-09 ( Up to March 2009) 123,025 27,331
% of growth over last year (+ ) 03% (-) 05 %
Source: DIPP, March, 2010
Current Position of country wise FDI flow into India

Ranks Country Cumulative Inflows
( April 2000 to March 2010 )
Rupees in crores Cumulative Inflows
( April 2000 to March 2010 )
USD in millions % to total inflows ( in terms of US $)
1 Mauritius 210,906
47,240 43%
2 Singapore 45,147
10,190 9%
3 U.S.A 37,190
8,278) 8%
4 U.K 25,998
5,884 5%
5 Netherlands 20,126
4487 4%
6 Cyprus 17,777
3899 4%
7 Japan 16,895
3714 3%
8 Germany 12,468
2799 3%
9 U.A.E 7,023
1,549 1%
10 France 6,919
1,530 1%
Total FDI Inflows into India 516,503
115,728
Source: DIPP, March, 2010

Note: (i) Indicates inflows under NRI Scheme of RBI, stock swapped and advances pending for issue of shares.
(ii) Cumulative Country –wise FDI equity inflows (from April 2000 to March 2010) – Annex A
( iii) % worked out in US$ terms and FDI inflows received through FIPB / SIA + RBI’s Automatic Route + acquisition of existing shares only.



Sector wise FDI Investment in India

Ranks Sector Cumulative Inflows
( April 2000 to March 2010 )
Rupees in crores Cumulative Inflows
( April 2000 to March 2010 )
USD in millions % to total inflows ( in terms of US $)
1 Service Sector
( financial & non-financial) 105,411
23,640 21%
2 Computer Software and Hardware 43,846
9872
9%
3 Telecommunications
( radio, paging ,cellular mobile , basic telephone services) 40,706 8931 8%
4 Housing & Real Estate 37,369 8357 8%
5 Construction Activities
(including roads & Highways) 35,721 8059 7%
6 Power 20,919 4,627 4%
7 Automobile Industry 20,677 4,565 4%
8 Metallurgical Industries 13,440 3,130 3%
9 Petroleum & Natural Gas 11,504 2,666 2%
10 Chemicals ( other than fertilizers) 11,274 2,496 2%

Source: DIPP, March, 2010




However, FDI inflows in India do not play a pivotal role in capital formation. FDI in India constituted about 4.7% of gross fixed capital formation over 2004-06 which is much lower than the 10.6 percent found in developing Asia , 12.4% in developing nations and 10.4% in the globe as whole. However, India stood at 35th and 13th largest destination for FDI stock which reached USD 118.3 billion in March 2008. India’s FDI stock accounted for 0.5% of aggregate of stocks in the world and 1.5% of FDI stocks in the developing nation.
India’s FDIs stock increased to 10.4% in FY 2007-08 as a ratio to GDP but this number is much lesser than the average ratio of 27.8% in the world as a whole and 29.2% in the developing world in 2007.
Bottlenecks in attracting FDI into India

Statistics about FDI flows to developing nations in 2007

China 14%
Hong Kong ( China) 10%
Russia 9%
Brazil 6%
Mexico 4.2%
Saudi Arabia 4.2%
Singapore 4.1%
India 4%

Why India is in 10th place in attracting FDI into India? Why it has been relegated to the 10th place in attracting FDI. Definitely it is due to rigorous administrative procedures that a recipient company has to follow in case of receipt of foreign investment in India.

Foreign investors wanted to know whether their investments would be safe in India and whether they could rely on the local legal system for redress of grievances. Unlike China, India is a democracy and there is the rule of the law in India. However, there is lack of an effective and expeditious alternative dispute resolution mechanism which India should strengthen in this gamut of law.
Further, in India, administrative procedure is more cumbersome and stringent. On receipt of FDI, investee has to report to RBI through his banker within 30 days and allotment has to be made within six months of receipt of funds. Non-observance of this procedure lands a recipient company in a serious trouble. As RBI officials are toothed with extraordinary authority to levy penalty for simple, non-intentional failure to report to RBI, fine to the tune of three or four times of FDI received are levied by RBI officials arbitrarily.
According to Chartered Accountant’s Association, Mumbai, in one case, an OCB invested in India rupees 8.5 crores (approximately) with the prior approval of FIPB. The OCB wanted to set up a power plant in Chhattisgarh. There was a condition of local participation up to 40per cent. For four years they ran from pillar to post for several Government permissions.
Neither they got Government permission nor could they find a local investor. Ultimately, they were frustrated and gave up the project. Hence they transferred the funds to a sister company where the OCB already had some investments. The Company delayed in filing intimation. The Company could not allot shares to OCB as it could not locate a local
investor which was a pre-condition of FIPB approval. In the meanwhile, RBI issued Circular No. 20 dated 14.12.2007 prohibiting allotment of shares beyond 180 days of receipt of funds.
For these offenses, RBI imposed a Compounding sum of more than Rs. 3 crores! Company admits the violations of non-intimation, non-filing of forms; and step down investment. Still, such a stiff penalty for all procedural violations where there is no foreign exchange loss and nothing illegal or immoral!!!
Policy Changes to attract more FDI into India
To be at par with China in attracting FDI, Indian government should introduce the following policy changes in FDI policy;
• Indian government should come forward to relax the FDI sector gaps in the sectors like retail trade ,insurance and banking and should review regularly the remaining FDI limitations to evaluate whether their cost do not overshadow their anticipated advantages.
• As a basis for cross-state monitoring of FDI performance, India should develop a system of comparable FDI statistics for union territories and states.
• Indian government should carry out a detailed study into the design of mechanisms that can be used by it to stimulate states to strengthen the investment approval procedures.
• By employing OECD’s Checklists for FDI incentive policies as a reference, Indian government should convene a study and or establishing an inter-state forum to evaluate the benefits and costs of investment incentive, their openness and their effect on other states.
• Fortifying implementation of measures to enhance the corporate responsibility and transparency to fine tune India more closely with internationally –acknowledged practices and standards.
Conclusion
RBI has issued a new circular for compounding under FEMA - RBI/2009-10/ 56 A.P. (DIR Series) Circular No. 56 dated June 28, 2010. With this the directions contained in the compounding of contravention/s issued vide A.P. (DIR Series) Circular No.31 dated February 1, 2005 are superseded by this circular. However, Government should come forward to liberalise further by taking bold steps for compounding of non-intentional, non-pecuniary reporting offenses by investee companies under FEMA.
If India really wants to have maximum economic development and to attain the status of economic super power by the year 2020, it should ease the FDI norms and should further liberalise its FDI reporting procedures. An investee company should be allowed to report to RBI within 6 months of receipt of FDI and allotment has to be made within one year from receipt of funds. Further, a separate ombudsman like appellate authority should be created for the redressal of grievances in case of lapse or failure to report the receipt of FDI .In case of non-intentional, non-mens rea lapses, mere warning should be given to the erring investee companies rather than levying hefty fines which is unwarranted. Government should send a study team to China, Hongkong, Brazil, Mexico etc to have a glimpse over their procedures for FDI in these nations and on basis of recommendation of such committee, India should liberalise further its procedures for attracting more FDI in par with the China so that it could be turn itself as economic superpower by the turn of 2020.


List of References
OECD (2010). OECD Investment Policy Reviews: India 2009. New York: OECD Publications.
Nasscom. (4 February 2010) Mint Report from Nasscom. Available from http://www.nasscom.in/Nasscom/templates/NormalPage.aspx?id=58649
Nasscom. (4 February 2010). Indian IT-BPO Industry Exports Touches USD 50 Billion. Available from http://www.nasscom.in/Nasscom/templates/NormalPage.aspx?id=58639