(A) BACKGROUND
Under the erstwhile
FEMA regulations governing Foreign Direct Investment into India (‘FDI’), i.e.
FEM 20(R), Foreign Exchange Management (Transfer of Issue of Security by a
Person Resident outside India) Regulations, 2017 (‘FDI Regulations’) dated 7th
November, 2017, the RBI had powers to govern FDI which included equity
investments into India.
However, the above
position governing FDI has been overhauled since then. The Government of India,
with effect from 15th October, 2019, assumed power from RBI to
regulate non-debt capital account transactions which would include equity
instruments, capital participation in LLP, etc. by issuing the Foreign Exchange
Management (Non-Debt Instruments) Rules, 2019 (‘Non-Debt Rules’) for governing
non-debt transactions.
Therefore, upon
issuance of the above Non-Debt Rules, the power to regulate FDI into India was
taken over by the Central Government from RBI.
(B) AMENDMENTS TO NON-DEBT RULES BY NOTIFICATION
DATED 27TH APRIL, 2020
(I) Acquisition of equity shares by purchasing
rights entitlement from person resident in India
The Government of
India issued the above notification for amending Rule 7 of the Non-Debt Rules
which deals with investment by a person resident outside India in equity shares
(other than share warrants) issued by an Indian company on rights issue which
are renounced by the person to whom it is offered.
The amendment now
inserts Rule 7A which provides that whenever a person resident outside India
purchases rights for investing in equity shares (other than warrants) from a
person resident in India who has renounced it, investment by the person
resident outside India has to follow the applicable pricing guidelines laid
down in Rule 21 of the Non-Debt Rules. The pricing guidelines are given as
under:
(i) In case of listed companies – As per SEBI
guidelines;
(ii) In case of unlisted companies – As per
internationally accepted pricing methodology.
The earlier
Non-Debt Rules did not provide for any different pricing guidelines in case of
investment by person resident outside India in rights shares by purchase of
rights renounced by person resident in India. The earlier Non-Debt Rules
provided for following conditions in case of investment by person resident
outside India through either subscription to rights shares or purchase of
rights renounced by person resident in India:
|
Sr.
No.
|
Rights
issued by
|
Pricing
guidelines for rights issue and subscription pursuant to purchase of rights
renounced
|
|
1
|
Listed Indian company
|
Price determined by Indian company
|
|
2
|
Unlisted Indian company
|
Price not less than price offered to
person resident in India
|
Implications
of above amendment to Non-Debt Rules
Under the erstwhile
Non-Debt Rules which were similar to the FEMA 20(R) provisions governing FDI,
where a person resident outside India purchased rights entitlement to equity
shares which were renounced by a person resident in India, such non-resident
could invest at the same price at which they were offered to the person
resident in India. However, there are no pricing guidelines which are
applicable on issuance of shares on rights basis under the Companies Act, 2013.
Hence, whether a
non-resident purchased rights entitlement which was renounced by a person
resident in India or participated in rights issue as it was holding equity
shares, there was no change in pricing guidelines related to issuance of rights
shares.
However, post amendment to the Non-Debt Rules, a new criterion has been
drawn for a person resident outside India who purchases rights entitlements
from a person resident in India wherein pricing guidelines will be different as
compared to a person resident outside India who invests in rights issue. The
same is summarised as under:
|
Sr.
No.
|
Investment
by person resident outside India
|
Rights
issued by
|
Pricing
guidelines for rights issue
|
|
1
|
Participation in rights issue
|
Listed Indian company
|
Price determined by Indian company
|
|
2
|
Unlisted Indian company
|
Price not less than price offered to
person resident in India
|
|
3
|
Participation in rights issue through
purchase of rights entitlement
|
Listed Indian company
|
As per SEBI guidelines
|
|
4
|
Unlisted Indian company
|
As per internationally accepted
valuation methodology
|
The above amendment
will result in a peculiar situation which can be explained by way of the
following example:
Mr. NRI is a person
resident outside India who is holding 1,000 equity shares in an existing
unlisted Indian company, X Ltd. which has undertaken rights issue wherein Mr.
NRI will be eligible for 100 equity shares on rights basis. Equity shares are
issued on rights basis at the same price of Rs. 20 per equity share to both
resident as well as non-resident shareholders. Accordingly, Mr. NRI will
purchase his entitlement, i.e. 100 rights equity shares at the rights price of
Rs. 20 per share.
Further, Mr. NRI
also purchases rights entitlements for 50 equity shares from a person resident
in India. In such a scenario, the investment by Mr. NRI for purchasing 50
equity shares by way of rights entitlement would be at a price based on an
internationally accepted valuation methodology which can be different from the
price at which X Ltd. has issued the rights shares.
Hence, in a rights issue by an Indian company to the same non-resident
investor, there would be two different prices, one price for the purchase of
rights shares and another price for the purchase of rights shares acquired
through acquiring rights entitlement from a person resident in India.
Further, the new
Rule 7A does not cover situations where a person resident outside India has
purchased rights entitlement from persons resident outside India. In such a
situation the amendment does not apply.
Additionally, as per section 62(1) of the Companies Act, 2013, where a
shareholder to whom rights offer is made declines to exercises his right, the
Board can dispose them in a manner which is not disadvantageous to the company.
In such a situation, if the Board allocates those rights to an existing foreign
investor, the same cannot be considered to be purchase of rights renounced by
Indian investor and hence the amendment will not apply. Thus, a foreign
investor can acquire shares in the Indian company at the rights issue price
even if it is below fair market value.
(II) Amendment in sourcing
norms for single brand product retailing
Earlier regulations
provided that sourcing norms shall not be applicable up to three years from
commencement of the business, i.e., opening of the first store for entities
undertaking single brand retail trading of products having ‘state-of-art’ and
‘cutting-edge’ technology and where local sourcing is not possible.
The amendment now
clarifies that exemption from sourcing would be applicable for three years
starting from the opening of the first store or the start of online retail,
whichever is earlier.
(III) Amendment in FDI limit
for insurance intermediaries
FDI in insurance
intermediaries, including insurance brokers, re-insurance brokers, insurance
consultants, corporate agents, third-party administrators, surveyors and loss
assessors and such other entities, as may be notified by the Insurance
Regulatory and Development Authority of India from time to time, is now
permitted up to 100% under the Automatic Route.
(IV) Amendment for FPIs
The amendment has
now provided that where FPI’s investment breaches the prescribed limit,
divestment of holdings by the FPI and its reclassification into FDI shall be
subject to further conditions, if any, specified by SEBI and RBI in this
regard.
SUMMARY OF
RECENT COMPOUNDING ORDERS
An analysis of some
interesting compounding orders passed by RBI in the months of January and
February, 2020 and uploaded on the website1 are given below. Article refers to regulatory
provisions as existing at the time of offence. Changes in regulatory
provisions, if any, are noted in the comments section.
_________________________________________
1 https://www.rbi.org.in/scripts/Compoundingorders.aspx
FOREIGN DIRECT INVESTMENT (FDI)
A. M/s Congruent Info-tech Pvt. Ltd.
Date of order:
19th December, 2019
Regulation: FEMA
20/2000-RB [Foreign Exchange Management (Transfer or Issue of Security by a
Person Resident Outside India) Regulations, 2000]
ISSUE
(1) Violation of pricing guidelines in issue of
shares,
(2) Delay in refund of consideration,
(3) Transfer of shares from resident to
non-resident by way of gift without RBI’s approval,
(4) Taking on record transfer of shares in the
books of the company without RBI’s approval.
FACTS
- Applicant company was
engaged in the business of writing, modifying, testing of computer programmes
to meet the needs of a particular client excluding web-page designing.
- The company received
foreign inward remittance of Rs. 13,32,900 from Mr. Mani Krishna Murthy, USA
towards subscription to shares which was duly reported to RBI.
- The applicant company
allotted 10,000 equity shares at a face value of Rs.10 each amounting to Rs.
1,00,000 as against their Fair Value of Rs. 92.50 to a person resident outside
India on 9th October, 2003. The shortfall of Rs. 8,25,000 was
brought in by way of inward remittance on 1st July, 2019 after a
delay of approximately 15 years and 8 months.
- Further, the company
refunded an amount of Rs. 10,30,900 without the permission of RBI on 5th
April, 2011 (approximately three years from its deemed date of receipt, i.e. 29th
November, 2007).
- The resident shareholder,
Mr. V.S. Krishna Murthy, had transferred 20,000 equity shares of fair value Rs.
92.50 each, amounting to Rs. 18,50,000, to a non-resident Mr. Mani Krishna
Murthy on 9th October, 2003 by way of gift without RBI’s approval.
- The above transfer of
shares was also taken on record by the applicant company without obtaining
RBI’s approval.
Regulatory provision
- Paragraph 5 of Schedule I
to Notification No. FEMA 20/2000-RB, ‘the price of shares issued to persons
resident outside India shall not be less than the fair value of shares.’
- Paragraph 8 of Schedule I
to Notification No. FEMA 20/2000-RB read with A.P. (DIR Series) Circular No. 20
dated 14th December, 2007, ‘the shares have to be issued / amount
refunded within 180 days from the date of receipt of the inward remittance.’
- Regulation 10A(a) of
Notification No. FEMA 20/2000-RB, ‘a person resident in India who proposes
to transfer to a person resident outside India any security by way of gift
shall make an application to Reserve Bank.’
- Regulation 4 read with
Regulation 10(A)(a) of Notification No. FEMA 20/ 2000-RB, ‘the company can
take the transfer of shares by way of gift, on record, after the approval of
Reserve Bank.’
CONTRAVENTION
|
Relevant
Paragraph of FEMA 20 Regulation
|
Nature
of default
|
Amount
involved
(in INR)
|
Time
period of default (approximately)
|
|
Paragraph 5 of Schedule I
|
Violation of pricing guidelines in issue
of shares to non-resident
|
Rs. 8,25,000
|
15 years, 8 months and 22 days
|
|
Paragraph 8 of Schedule I read with A.P.
(DIR Series) Circular No. 20
|
Delay in refund of receipt of
consideration
|
Rs. 10,32,900
|
2 years, 10 months and 9 days
|
|
Regulation 10(A)(a)
|
Transfer of shares by way of gift from
resident to non-resident without prior approval from RBI
|
Rs. 18,50,000
|
15 years, 10 months and 18 days
|
|
Regulation 4 read with Regulation
10(A)(a)
|
Taking on record transfer of shares by
way of gift without RBI approval
|
Rs. 18,50,000
|
15 years, 10 months and 17 days
|
Compounding
penalty
Compounding penalty
of Rs. 2,15,519 was levied.
Comments
Under the erstwhile FEMA 20 Regulations as well as under Non-Debt
Rules, transfer of shares from resident to non-resident by way of gift requires
prior approval of RBI. Hence, unless approval from RBI is obtained, the Indian
company whose shares are being transferred should also not record the transfer
from resident to non-resident by way of gift.
B. Atrenta (India) Private Limited
Date of order:
30th January, 2020
Regulation: FEMA
20/2000-RB [Foreign Exchange Management (Transfer or Issue of Security by a
Person Resident Outside India) Regulations, 2000]
ISSUE
Transfer of shares
of the applicant from NRI to Non-Resident company without prior approval of
RBI.
FACTS
- Applicant Company had
allotted 96,600 and 4,600 fully paid up equity shares to M/s Atrenta Inc. (NR)
and Mr. Ajoy Kumar Bose (NRI), respectively, as part of subscription to the
memorandum on 26th May, 2001.
- Further, the applicant
company allotted 2,35,620 and 80 fully paid equity shares to M/s Atrenta Inc.
and Mr. Ajoy Kumar Bose, respectively, on 10th October, 2001.
- Mr. Ajoy Kumar Bose (NRI)
transferred 4,598 and 80 equity shares on 26th May, 2011 and 17th
October, 2001 to M/s Atrenta Inc. (NR) without obtaining prior approval of RBI.
- The applicant company also
took the transfer of shares from NRI to NR on record.
Regulatory
provision
• Regulation 4 of FEMA 20, ‘save as
otherwise provided in the Act or Rules or Regulations made thereunder, an
Indian entity shall not issue any security to a person resident outside India
or shall not record in its books any transfer of security from or to such
person. Provided that the Reserve Bank may, on an application made to it and
for sufficient reasons, permit an entity to issue any security to a person
resident outside India or to record in its books transfer of security from or
to such person, subject to such conditions as may be considered necessary.’
CONTRAVENTION
|
Relevant
paragraph of FEMA 20 Regulation
|
Nature
of default
|
Amount
involved
(in INR)
|
Time
period of default (approximately)
|
|
Regulation 4
|
Transfer of shares of the applicant from
NRI to Non-Resident Company without prior approval of the Reserve Bank of
India
|
Rs. 46,780
|
16 years and 5 months
|
Compounding
penalty
Compounding penalty
of Rs. 79,526 was levied on the applicant company.
Comments
It is interesting
to note that the above penalty was levied on the applicant company for taking
on record transfer of shares from NRI to non-resident without prior approval of
RBI. Additionally, the NRI2
was also levied penalty of similar amount for transferring its shares to
non-resident company without prior approval of RBI. Thus, penalty was levied
twice on the same transaction, one which was levied on the company, and the
second which was levied on the NRI.
It should also be
noted that under the earlier FEMA 20 Regulations (which were applicable till
November, 2017), an NRI could transfer equity shares by way of sale or gift to
another NRI only and not to any other non-resident. However, post November,
2017 under the erstwhile FEMA 20(R) as well as under the revised Non-Debt Rules
governing FDI from October, 2019 an NRI can transfer shares to any person
resident outside India by way of sale or gift without any approval from RBI.
ESTABLISHMENT
IN INDIA OF A BRANCH OFFICE OR A LIAISON OFFICE OR A PROJECT OFFICE OR ANY
OTHER PLACE OF BUSINESS
C. M/s Quanticate
International Limited, Branch Office
Date of order:
27th June, 2019
Regulation: RBI
approval letter dated 24th September, 2010 and Master Direction –
Establishment of Branch Office (BO) / Liaison Office (LO) / Project Office (PO)
or any other place of business in India by foreign entities, FED Master
Direction No. 10/2015-16
ISSUE
Payment of expenses
of the branch office directly by the parent company to the third party.
FACTS
- The applicant company was
engaged in the business of statistical consultancy, statistical programming,
pharmaco-vigilance, analysing and data management services to its head office.
- The applicant company
established a branch office in India with the permission of RBI vide
letter No. FE.CO.FID/7508/10.83.318/2010-11 dated 24th September,
2010.
- The branch office (BO) had
an account with RBS Bank to carry out its transactions. After the closure of
RBS operations in India, the branch office closed this account on 19th
August, 2016 and opened a new account with Standard Chartered Bank on 19th
September, 2016.
______________________________________________
2 Ajoy Kumar Bose – CA. No 5047 / 2019 dated 12th
February, 2020
- Although the BO had an
account with Standard Chartered Bank, the remittances of Rs. 5,40,42,300 were
made directly by the parent company of the BO to a third party account for
payment of expenses, particularly their staff, landlord and supplier in India
during the period 21st September, 2016 to 23rd March,
2017.
Regulatory
provisions
- Paragraph 6 of the
permission letter states that the entire expenses of the office in India will
be met either out of the funds received from abroad through normal banking
channels or through income generated by it in India by undertaking permitted
activities.
- Paragraph 11 of the
permission letter states that the office may approach AD Bank in India to open
an account for its operation in India. Credits to the account should represent
the funds received from the head office through normal banking channels for
meeting the expenses of the office and profit made by the BO. Debits of this
account shall be for the expenses incurred by the BO and towards remittance of
profit / winding up proceeds.
- Paragraph 3(ii) of FED
Master Direction No. 10/2015-16 dated 1st January, 2016 also
reiterates what was stated in paragraph 11 of the permission 11.
CONTRAVENTION
|
Relevant
provision
|
Nature
of default
|
Amount
involved
(in INR)
|
Time
period of default
|
|
Paragraph 6 and Paragraph 11 of RBI
approval letter read with Paragraph 3(ii) and 2(i) of FED Master Direction
No. 10/2015-16
|
Payment of expenses of the Branch Office
directly by the parent company to third party
|
Rs. 5,40,42,300
|
2 years, 3 months and 27 days
|
Compounding
penalty
Compounding penalty
of Rs. 2,46,169 was levied.
Comments
The companies which
have set up branch offices in India need to closely monitor their activities
and it needs to be ensured that all payments of branch offices should be
undertaken only through the branch’s Indian bank account and not directly from its parent company.
D. M/s ETF Gurgaon Project Office (MG-SE-17)
Date of order:
11th October, 2019
Regulation: FEMA
22(R)/2016-RB [Foreign Exchange Management (Establishment in India of a branch
office or a liaison office or a project office or any other place of business)
Regulations, 2016]
ISSUE
Inter-project
transfer of funds and transfer of project assets from one project to another.
FACTS
- The applicant, M/s ETF, a
company incorporated and registered under the laws of France, specialises in
construction and maintenance of railway networks, urban transport networks and
industrial siblings. It was involved in the development of railway
infrastructure, high-speed lines, concrete slab tracks, metal and rubber
wheeled tramway systems, etc.
- The applicant had
established the following project offices in India for executing the following
contracts:
i. Contract MG-SE-17 with IL&FS Rail
Limited (referred to as MG-SE-17, Gurgaon);
ii. Railway Infrastructure contract awarded by
Rail Vikas Nigam Limited (RVNL) – Construction contract with SEW-ETF-AIL JV2
(referred to as RVNL Kanpur);
iii. Contract CT19A (referred as CT-19A Noida).
- Project expenses relating
to a particular contract were met from the contract receipts relating to the
said contract, or from remittances obtained from the Head Office in France
depending upon the requirement of funds.
- There were, however,
occasions where funds available in the bank account for a particular contract
were insufficient to meet the expenses of the said contract necessitating
inter-project transfer of funds.
- During the F.Y. 2016-17, ETF has obtained approval from RBI for
inter-project transfer of funds up to Rs. 1,00,00,000 from the project office
of MG-SE-17 to CT-19A.
- During the F.Ys. 2016-17
and 2017-18, the Gurgaon project office did inter-project utilisation of funds
and allocation of common expenditure amounting to Rs. 4,60,55,459.
- The above activity
(inter-project utilisation of funds) of the Gurgaon project office did not
relate to the contract secured by the foreign entity for which the project office
was established.
- In the Annual Activity
Certificates (AAC) for the years ended 31st March, 2017 and 31st
March, 2018, the auditor had qualified the AACs by observing that the
inter-project transfers were done without RBI approval.
- Further, transfer of
project assets from the Gurgaon project office to another amounting to Rs.
1,06,44,273 was also done without RBI approval.
- The applicant was granted post
facto approval subject to compounding of the contravention.
Regulatory
provisions
- Regulation 4(k) of
Notification No. FEMA.22(R)/RB-2016 dated 31st March, 2016 states
that a person resident outside India permitted under these Regulations to
establish a branch office or liaison office or project office may apply to the
Authorised Dealer Category-I bank concerned for transfer of its assets to a
joint venture / wholly owned subsidiary or any other entity in India.
- Regulation 4(l) (Annex D)
of Notification No. FEMA.22(R)/RB-2016 dated 31st March, 2016 states
that the branch office / liaison office may submit the Annual Activity
Certificate (Annex D) as at the end of 31st March along with the
audited financial statements, including receipt and payment account on or
before 30th September of that year.
CONTRAVENTION
|
Relevant
provision
|
Nature
of default
|
Amount
involved
(in INR)
|
Time
period of default
|
|
Regulation 4(k), Regulation 4(f) read
with Annex D of Regulation 4(l) of Notification No. FEMA.22(R)/RB-2016
|
Inter-project utilisation of funds and
transfer of project assets from one project to another
|
Rs. 5,66,99,732
|
2 years, 9 months and 9 days
|
Compounding
penalty
Compounding penalty
of Rs. 2,56,799 was levied.
Comments
Where foreign companies have set up more than one project office in
India, adequate care needs to be taken to ensure that funds of these project
offices are not transferred amongst themselves without prior approval of RBI.
EXPORT OF GOODS AND SERVICES
E. M/s Dalmia Cement (Bharat)
Limited (Legal Successor of OCL India Ltd.)
Date of order:
28th January, 2020
Regulation: FEMA
23/2000-RB [Foreign Exchange Management (Export of Goods and Services)
Regulations, 2000]
ISSUE
Failure to realise
the export proceeds (by the erstwhile OCL India Ltd.) within the stipulated
time period.
FACTS
- The applicant company, M/s
Dalmia Cement (Bharat) Limited (the legal successor of M/s OCL India Limited,
consequent upon a merger ordered by NCLT vide order dated 18th
July, 2019) was engaged in the business of export of refractory materials,
cement, etc.
- The erstwhile M/s OCL India
Limited, a ‘Star Export House’ engaged in the business of export of refractory
materials, cement, etc., had made exports under 13 different invoices between
February, 2008 and May, 2012.
- M/s OCL India Limited was
not able to realise and repatriate the export proceeds pertaining to 13
invoices within the stipulated time.
- Subsequently, M/s OCL India
Limited had written off the amount in its books.
- However, as the company was
under investigation by the Directorate of Enforcement, the above bills could
not be written-off by the applicant on its own or by its AD bank.
- The applicant filed a
petition in the Hon’ble High Court of Delhi for regularising the above
write-off.
- The Hon’ble Court disposed
of the matter with directions to the applicant to apply for compounding again
to the RBI along with fresh fee for compounding.
Regulatory
provisions
- Regulation 9 of
Notification No. FEMA.23/2000 which states that the amount representing the
full export value of goods or software exported shall be realised and
repatriated to India within six months (applicable up to 3rd June,
2008) and twelve months (as applicable subsequently) from the date of export.
CONTRAVENTION
|
Relevant
Provision
|
Nature
of default
|
Amount
involved (in INR)
|
Time
period of default
|
|
Regulation 9 of FEMA 23/2000-RB
|
Failure to realise export proceeds
within stipulated time period
|
Rs. 39,22,447
|
Approximately 11 years
|
Compounding
penalty
Compounding penalty
of Rs. 79,419 was levied.
Comments3
In the instant
case, the applicant company had initially filed a compounding application with
RBI for write-off of export proceeds. However, the said compounding application
was returned by RBI on the ground that compounding application can be filed
only after transactions are regularised by RBI. Further, RBI advised the
applicant company to approach the Trade Division of RBI for regularising its
export transactions. However, as the applicant company was under investigation
by ED, it could not write off its export receivables and hence had initially
filed compounding application before RBI. As RBI returned its compounding
application, it filed a writ petition with the Delhi High Court for writing off
export receivables.
_________________________________________________________________________
3 Based on Delhi High Court order in case of
OCL India Limited [W.P.(C) 8265/2018 & CM Nos. 31684/2018 dated 18th
July, 2019]
During the
hearing before the Delhi High Court, counsel for RBI submitted that there is no
provision which precluded RBI from considering and processing compounding
application where investigation is pending. Accordingly, based on RBI’s
submission that the matter be remanded back to RBI for fresh consideration, the
Court dismissed the writ petition and directed RBI to consider the compounding
application of the applicant afresh and not reject it on the basis of
approaching another department of RBI. Interestingly, the Delhi High Court also
stayed proceedings initiated by ED till
the applicant’s compounding application was considered by RBI.
