The Foreign Exchange Management (Cross Border Merger) Regulations, 2018

The Foreign Exchange Management (Cross Border Merger) Regulations, 2018

NO PRIOR APPROVAL IS REQUIRED FROM RBI IF CROSS BORDER MERGER IF IT IS IN COMPLIANCE WITH THE FEMA 389/ 2018-RB dated 20 March, 2018.

Section 234 of the Companies Act, 2013 (notified with effect from 13 April, 2017) provided for the cross border merger of Indian and foreign companies. Further, Companies (Compromises, Arrangements and Amalgamation) Rules, 2016, as amended by the Companies (Compromises, Arrangements and Amalgamation) Amendment Rules, 2017 (Co. Rules) were issued. Section 234 provides for prior Reserve Bank of India (RBI) approval in case of cross border merger.

On 26 April, 2017, the RBI issued draft regulations relating to cross border mergers for comments from the public. The Foreign Exchange Management (Cross Border Merger) Regulations, 2018 have now been notified vide notification no. FEMA 389/ 2018-RB dated 20 March, 2018 and are effective from the date of notification. As per the Regulations, merger transactions in compliance with these regulations shall be deemed to have been approved by RBI, and hence, no separate approval should be required. In other cases, merger transactions should require prior RBI approval.

The Cross Border Regulations, 2018 Makes International Merger And Acquisition Transactions More Flexible

The notification of FEMA regulations laying down the framework in relation to cross border mergers is an extremely positive development, which should facilitate international merger and acquisition transactions. Given that the guidelines deal with a new set of transactions, they are likely to evolve based on practical experience, as may be encountered in the due course of time.

The Salient Ingredients of the RBI Regulations are:

The Meaning of Inbound Merger

The resulting company (or transferee) is in India in case of inbound merger.

The Meaning of Outbound Merger

The resulting company (or transferee) is a foreign company in case of outbound merger.

Procedure to be followed by an Indian Company

 In an inbound merger, the Indian company can issue securities in compliance of pricing guidelines and within the limits of applicable sector cap and applicable regulations under Foreign Management Act, 1999 (FEMA).

Compliances under ECB Regulations

A period of two years is provided for compliance with External Commercial Borrowings (ECB) Regulations in respect of loans, borrowings or guarantees of the transferor company outside India.

Other Criteria

Further any asset not permitted to be acquired under FEMA needs to be disposed off twenty-four months immediately after merger.

Deemed Branch Office

 Offices of foreign company will be deemed to be branch office of Indian company post-merger.

Outbound Merger

The resident Indian is allowed to hold securities issued on the basis of fair market value and in terms of Liberalized Remittance Scheme (LRS) of RBI in the case of an outbound merger.

Foreign company can hold assets in India in subject to compliance of FEMA. Offices of Indian company post-merger will be deemed to be branches of the foreign company post-merger.

VALUATION

 Valuation of the Indian company and the foreign company to be conducted by Valuers who are members of a recognized professional body and further to be ensured that such valuation is in accordance with internationally accepted principles on accounting and valuation.

REPORTING TO RBI

 The resultant company and/or the companies involved in the cross border merger shall be required to furnish reports as may be prescribed by RBI.

CERTIFICATION

 A certificate from the Managing Director/Whole Time Director and Company Secretary, if available, of the company concerned ensuring compliance to these Regulations shall be furnished along with the application to be made to the NCLT for approval of the scheme.

Regulatory actions in respect of Non-Compliances under FEMA

 Regulatory actions, if any, with respect to non-compliance, contravention under FEMA shall be completed prior to merger by the companies involved in cross border merger.

Compensation

Compensation by the resultant company, to a holder of a security of the Indian company or the foreign company, as the case may be, may be paid, in accordance with the scheme sanctioned by the NCLT.

ED probing 81 FDI cases over FEMA violation: Commerce and Industry Minister Nirmala Seetharaman

ED probing 81 FDI cases over FEMA violation: Commerce and Industry Minister Nirmala Seetharaman

As many as 81 cases have been under investigation by the Enforcement Directorate (ED) for alleged violation of provisions of the Foreign Exchange Management Act (FEMA) relating to foreign direct investment (FDI).

“Of the 81 cases, show-cause notices were issued in 22 cases,” Commerce and Industry Minister Nirmala Seetharaman said in a written reply to the Lok Sabha.

The other remaining 59 cases are at various stages of probe, she said, adding “disclosure of names of companies and other details of these cases at this stage may not be in public interest, as the same may hamper the investigations”.

These 81 cases were between 2013 and June 30, 2016. Replying to a separate question, she said no decision had been taken by the government to impose a ban on FDI in the tobacco sector. According to the policy, FDI is banned in manufacturing of cigars, cheroots, cigarillos and cigarettes of tobacco or tobacco substitutes. FDI in other activities relating to these products, including wholesale cash and carry, retail trading and the like shall be governed by the applicable restrictions.

Courtesy: Press Trust of India

IF Advance Reporting and FC-GPR is not filed within proposed due dates, Companies are required to pay a fine of 1% of the Aggregate of the FDI received – RBI Proposal Says

RBI Invites Comments from Stakeholders for its proposal for Changes in Timeframe for Issue of Shares and Reporting of FDI;

The Reserve Bank of India has proposed certain changes in respect of the time frame for issue of shares to align the provisions of Foreign Exchange Management Act, 1999 which requires an investee company receiving Foreign Direct Investments to issue shares within 180 days of receipt of foreign investment with the provisions of the Companies Act, 2013 and in respect of filing of report with the Reserve Bank regarding receipt of foreign investment and issue of shares and to further streamline the compliance process, as below:

S. No.	Paragraph of Schedule 1	Proposed Amendments
1	8	Time frame for issue of shares: At the time of filing FC-GPR the investee company shall be required to submit a certificate from a practising Company Secretary/Chartered Accountant to the effect that provisions of section 42 of Companies Act, 2013 have been complied with.
2	9(1) (A) and 9(1) (B)	Time frame for reporting: Delay in reporting beyond the prescribed period (30 days from receipt of funds in case of report ARF and 30 days from issue of shares in case of report FC-GPR) shall attract a penalty of one percent of the total amount of investment subject to a minimum of Rupees Five thousand and maximum of Rupees Five lakh per month or part thereof for the first six month of delay and twice that rate thereafter, to be paid online into a designated account in Reserve Bank of India.

Any company receiving foreign investment and submitting the required reports with delay but without paying the penalty as mentioned above shall be liable to penal provisions mentioned in FEMA, 1999 and the rules/regulations framed thereunder including compounding.

It is also proposed to introduce similar penalty structure for other mandatory reporting requirements under FEMA, 1999.

Members of public, including the stakeholders and experts in the area, are requested to offer their views and comments on the proposed changes. The comments may be sent latest by February 22, 2016 to email.

Background

Schedule 1 to Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000 (FEMA 20), stipulates timelines for an investee company receiving FDI for issue of shares within 180 days of receipt of foreign investment and requires filing of a report with the Reserve Bank regarding receipt of foreign investment and issuance of shares.

As per Section 42 of Companies Act, 2013, an Indian company is required to issue shares within 60 days from the date of receipt of share application money. This provision is applicable to a company receiving share application money from foreign investors as well. In view of the specific and express provisions under Companies Act, 2013 it was felt that there is no need to have a separate and different time frame for these purposes in FEMA provisions.

 

Further, FEMA 20 also provides for reporting of inflow of funds/issue of shares, the descriptive guidelines for which are stated in paragraphs 9 (1) (A) and 9(1) (B) of Schedule 1 to FEMA 20. It was observed that many companies fail to comply with these provisions and it becomes a contravention of FEMA, 1999 which requires compounding. Since compounding is an elaborate process imposing a burden on the contravener as well as the Reserve Bank, it was felt that with a view to improving the ease of compliance, a summary framework may be put in place for dealing with reporting delays without compromising with the reporting discipline.

 

 

 

Loans to Non Residents / third parties against security of Non Resident (External) Rupee Accounts [NR (E) RA] / Foreign Currency Non Resident (Bank) Accounts [FCNR (B)] Deposits

Loans to Non Residents / third parties against security of Non Resident (External) Rupee Accounts [NR (E) RA] / Foreign Currency Non Resident (Bank) Accounts [FCNR (B)] Deposits

The Committee to review the facilities for individuals under FEMA, 1999 (Chairperson: Smt. K.J.Udeshi) has recommended that the banks may sanction Rupee loans in India or foreign currency loans outside India to either the account holder or a third party to the extent of the balance in the NRE/FCNR (B) account subject to margin requirements. The existing position in this regard has been reviewed and it has been decided, in exercise of powers under paragraph 6(d) of Schedule-1 read with para 9(1) of Schedule-2 of the Foreign Exchange Management (Deposit) Regulations, 2000, that the banks may now grant loans against NR(E)RA and FCNR(B) deposits either to the depositors or the third parties as under:-

	Existing provision	Proposed provision
Rupee loans* in India
Loans against NRE/FCNR(B) Fixed Deposits	Rs. 100 lakhs ceiling applicable	Rupee loans to be allowed to depositor/third party without any ceiling subject to usual margin requirements**
Foreign Currency loan* in India/ outside India
Loans against NRE/FCNR(B) Fixed Deposits	Rs. 100 lakhs ceiling applicable	Foreign Currency loans to be allowed to depositor/third party without any ceiling subject to usual margin requirements **

* The term ‘loan’ shall include all types of fund based/non-fund based facilities.

** In case of FCNR deposits, the margin requirement shall be notionally calculated on the rupee equivalent of the deposits in accordance with para 9(2) of Schedule-2 of Foreign Exchange Management (Deposit) Regulations, 2000.

Further, the facility of premature withdrawal of NRE/FCNR deposits shall not be available where loans against such deposits are to be availed of. This requirement may specifically be brought to the notice of the deposit holder at the time of sanction of the loan. The existing loans which are not in conformity with the above instructions shall continue for their existing term and shall not be rolled over/renewed. Other conditions as regards grant of loan against NRE/FCNR deposits shall remain unchanged

PROCEDURE FOR INVESTING IN WOS IN ABROAD

INITIAL COMPLIANCE'S -

1. Board Resolution under Section 292(1) (d) & S.372A for investment and incorporation of Wholly Owned Subsidiary.
   
   
2. Form ODI – Part I (i. e. details of JV/ WOS, Indian Parties and the financing pattern of the overseas entity) is required to be filed by Investing Indian Company with Designated Authorised Dealer Bank. Certificate by the Statutory Auditor for compliance of FEMA is also required to be submitted along with ODI form.
   
   
3. Under Automatic Route, in case of new proposals, immediately after effecting remittance, the Designated Authorised Dealer Bank will forward Form ODI – Part I along with Part II (i. e. Remittance Report) to RBI for obtaining Unique Identification Number.
   
   
4. On receipt of the Form from the AD bank, RBI will allot an Unique Identification Number to each JV/ WOS, which is required to be quoted in all the future correspondence by AD Bank/ Indian Company.

How Much Quantum can be Invested:

Under automatic route , up to 100% net worth of investing company in its foreign subsidiary or JV Company.

If your Indian Company net worth is say Rs 1 Crore , you can invest up to 1 Crore under automatic route in the WOS / JV company in foreign country.

How Much can be invested in WOS / JV by an Indian Listed Company  ?

As per RBI guidelines , if  there is no JV or WOS , Listed 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 by way of portfolio investment.

Prohibitions

Indian parties are prohibited from making investment in a foreign entity engaged in real estate (meaning 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) or banking business, without the prior approval of the Reserve Bank.

POST INVESTMENT COMPLIANCE'S -

1. An Indian Company which has made direct investment abroad is under obligation to receive share certificate or any other document as an evidence of investment, and submit the documents / Annual Performance Report to the Reserve Bank, in accordance with the provisions specified in Regulation 15 of the Notification. The share certificate or any other document as evidence of investment has to be submitted to and retained by the designated AD Category - I bank, who is required to monitor the receipt of such documents and satisfy themselves about the bonafides of the documents. A certificate to this effect should be submitted by the designated AD category – I bank to the Reserve Bank along with the APR (Part III of Form ODI). 
   
   
2. Annual Performance Report (APR) should be submitted, through the designated AD Category-I bank, every year within 3 months of the closing of the annual accounts of the WOS i. e. on or before 30.06.2010
   
   
3. A JV / WOS set up by the Indian party as per the Regulations may diversify its activities / set up step down subsidiary / alter the shareholding pattern in the overseas entity . The Indian Company should report to the Reserve Bank through the AD Category - I bank, the details of such decisions within 30 days of the approval of those decisions by the competent authority of the JV / WOS concerned in terms of local laws of the host country and include the same in the Annual Performance Report (APR—Part III of form ODI) required to be forwarded to the AD Category-I bank.
   
   

   R.V.Seckar

    

   rvsekar2007@gmail.com

   
   

   919848915177

Can a Indian Company can extend loan or guarantee to its WOS or JV Company in Abroad?

An Indian Company can extend loan  to its JV / WOS and 100 per cent of guarantees issued to or on behalf of the JV/WOS.

The investments are subject to the following conditions:

a) The Indian party / entity may extend loan / guarantee only to an overseas concern in which it has equity participation. Indian entities may offer any form of guarantee - corporate or personal / primary or collateral / guarantee by the promoter company / guarantee by group company, sister concern or associate company in India provided that:

i) All financial commitments including all forms of guarantees are within the overall ceiling prescribed for overseas investment by the Indian party i.e. currently within 400 per cent of the net worth as on the date of the last audited balance sheet of the Indian party;

ii) No guarantee is 'open ended' i.e. the amount and period of the guarantee should be specified upfront; and

iii) As in the case of corporate guarantees, all guarantees are required to be reported to the Reserve Bank, in Form ODI-Part II. Guarantees issued by banks in India in favour of WOSs / JVs outside India, would be outside this ceiling and would be subject to prudential norms, issued by the Reserve Bank (DBOD) from time to time.

The Indian party should not be on the Reserve Bank’s Exporters' caution list / list of defaulters to the banking system circulated by the Reserve Bank / Credit Information Bureau (India) Ltd. (CIBIL) / or any other credit information company as approved by the Reserve Bank or under investigation by any investigation / enforcement agency or regulatory body.

All transactions relating to a JV / WOS should be routed through one branch of an Authorised Dealer bank to be designated by the Indian party.

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