An
analysis of some interesting compounding orders passed by Reserve Bank of India
in recent months of August 2018 and September 2018 and uploaded on the website[1]
are given below. Article refers to regulatory provisions as existing at the
time of offence. Changes in regulatory provisions are noted in comments
section.
A. (Comment: Deleted since this section covers
orders passed under FDI / ECB and investment in partnerships, otherwise should
be bifurcated as (a) FDI compounding orders (b) ODI Compounding orders and (c)
Other compounding orders)
Aditya
Birla Idea Payments Bank Limited
Date
of order: 6th August 2018
Regulation:
FEMA 20/2000-RB Foreign Exchange Management (Transfer or Issue of Security
by a Person Resident Outside India) Regulations, 2000 (FEMA 20).
Issue:
Delay in meeting minimum capitalisation norms beyond the stipulated time
period.
Facts
Regulatory
provisions:
Contravention:
Relevant Para of FEMA 20 Regulation |
Nature of default |
Amount involved (in INR) |
Time period of default |
Paragraph F.8.2 (1) (iii) of Annexure B of Schedule I |
Delay in meeting the minimum capitalisation norms. |
Rs. 26,79,00,000/- |
2 years 4 months approximately |
Compounding
penalty:
Compounding
penalty of Rs.16,57,400 was levied.
Comments:
(I) Scenario until October, 2016
• Until October, 2016, 100% FDI in NBFC
sector under automatic route was permitted only for prescribed 18 activities.
Further, such activities were classified as fund based and non-fund based
activities and the investment was subject to minimum capitalisation norms as
prescribed in the FDI Policy and FEMA 20.
(II) Replacement of NBFC sector by OFS in October
2016
• On 25th October, 2016,
Department of Industrial Policy and Promotion (DIPP) released Press Note 6 of
2016[3] and liberalised the FDI Policy by replacing
the existing NBFC sector with Other Financial Services
(OFS) Sector.
• OFS includes activities which are regulated
by any financial sector regulator — RBI, SEBI, IRDA, Pension Fund Regulatory
and Development Authority, National Housing Bank or any other financial sector
regulator as may be notified by the government in this regard.
• OFS are categorised as (A) Regulated OFS
and (B) Unregulated / Unregistered / Exempted OFS. Entities engaged in
Regulated OFS are permitted to receive up to 100% FDI under automatic route
whereas entities engaged in Unregulated OFS are permitted to receive up to 100%
FDI only with Government approval.
• The said Press Note further provided that
FDI in OFS Sector (both Regulated OFS and Unregulated OFS) shall be subject to
conditionalities and minimum capitalisation norms that may be prescribed by the
concerned Financial Services Regulator or Government agency, as applicable.
However, the Government did not prescribe such minimum capitalisation norms
pursuant to Press Note 6.
• The same conditions applicable to OFS
Sector under the 2016 FDI Policy have been retained under the current
consolidated FDI policy of 2018, FEMA 20R and RBI Master Directions on FDI in
India.
(III) 2018 Press Release introducing Minimum
Capitalisation Norms for unregulated OFS
• Ministry of Finance vide press release
dated 16th April 2018[4],
proposed to introduce Minimum Capital Requirements for Unregulated OFS. The
said press release prescribes minimum FDI Capital of US $ 20 Mn for Unregulated
/ Exempted / Unregistered Fund-Based activities and US $ 2 Mn for Unregulated /
Exempted / Unregistered Non Fund-Based activities. It has further given a list
of what activities which are fund based and non-fund based.
• However, it may be noted that this press
release has not yet been notified.
B. Aircom International India Private Limited
Date of Order: 23rd August 2018
Regulation:
FEMA 3/2000-RB Foreign Exchange Management (Borrowing or Lending in Foreign
Exchange) Regulations, 2000
Issue:
1. Availing ECB from a non-recognized lender
2. Availing ECB for an end-use that was not
permitted
3. Drawdown of ECB before obtaining Loan
Registration Number (LRN) from RBI
4. Delay in meeting the reporting requirements
Facts:
Regulatory
Provisions:
Regulation
6 of Notification No. FEMA 3/2000-RB read with paragraphs 1(iii), 1(iv), (xi)
and (xii) of Schedule I.
Contravention:
Relevant |
Nature |
Paragraph 1(iii) of |
Availing ECB from a |
Paragraph 1(iv) of |
Availing ECB for an |
Paragraph 1(xi) of |
Drawdown of ECB |
Paragraph 1 (xii) |
Delay in meeting |
Compounding
penalty
Compounding
penalty of Rs. 5,05,935 was levied.
Comments:
Under
the erstwhile ECB Policy, ECB was not permitted to be utilised for General
Corporate Purpose. RBI vide notification[5]
dated 4th September 2013, permitted eligible borrowers to avail ECB
under approval route from their foreign equity holder company for general
corporate purposes subject to certain conditions.
As a
simplification measure, RBI vide notification[6] dated 16th May 2014 permitted
companies belonging to manufacturing, infrastructure, hotels, hospitals and
software development sectors to avail ECB only from Direct Equity Holders
for general corporate purpose (including working capital financing) under
the Automatic Route.
As
on date, ECB Policy permits Eligible Borrowers to avail ECB for general
corporate and working capital purpose from ‘Foreign Direct Equity
Holders as well as Indirect Equity Holders and Group Companies (as defined
under FEMA 3/2000) under Automatic Route provided that the minimum
average maturity period is of 5 years.
Further,
extant ECB guidelines permits companies engaged in software development sector
to avail ECB for general corporate purpose (including working capital).
Software development sector is not defined but it would generally mean
development of software. In facts of case, applicant is engaged in business of
import of software for further resale in India and export of management
services, software consultancy and training services. Accordingly, even though
other disabilities in terms of permitted lender, end-use restriction are
removed over period of time, trading of software would not fall within scope of
‘software development sector’. It is advisable to obtain upfront clarification
from RBI by companies engaged in IT and ITES services before obtaining ECB.
C. ElringKlinger Automotive Components (India)
Private Limited.
Date of Order: 6th September 2018
Regulation FEMA 20/2000-RB Foreign Exchange Management (Transfer or Issue of
Security by a Person Resident Outside India) Regulations, 2000 (FEMA 20).
Issue:
Facts:
Contravention:
Relevant |
Nature |
Amount |
Approx. |
Paragraph |
Shares |
Rs.8,31,25,640 |
5 |
Paragraph |
Delay |
Rs.37,10,75,095 |
3 |
Paragraph |
Delay |
Rs.62,14,24,090 |
12 |
Para |
Issue |
Rs. |
11 |
Compounding
penalty:
Compounding
penalty of Rs.35,28,759/-was levied.
Comments:
Erstwhile
FEMA Regulations did not permit issue of shares against pre- incorporation
expenses.
Existing
FDI Regulations permit issue of Capital Instruments against pre -incorporation
/ pre-operative expenses by Indian Entities which are WOS of a non-resident
entity subject to the following conditions:
• WOS should be operating in a sector where
100 percent foreign investment is allowed under the automatic route and there
are no FDI linked performance conditions.
• Issue of Capital Instruments by such WOS
against such pre -incorporation expenses is allowed only upto 5% of the
Authorised Share Capital of the Indian Entity or USD 500,000 whichever is less.
• Form FC-GPR to be filed by the Indian
Entity within 30 days from the date of issue of such Capital Instruments but
not later than 1 year from the date of incorporation
• Certificate
issued by the statutory auditor of the Indian company that the amount of
pre-incorporation/ pre-operative expenses against which capital instruments
have been issued has been utilised for the purpose for which it was received
should be submitted with Form FC-GPR.
An
inclusive definition of Pre-incorporation/ pre-operative expenses has been set
out in the regulations which is as under :
“Pre-incorporation/
pre-operative expenses will include amounts remitted to the investee Company’s
account or to the investor’s account in India if it exists or to any consultant
or attorney or to any other material/ service provider for expenditure relating
to incorporation or necessary for commencement of operations”
As
can be seen, issue of shares to compensate parent for pre-incorporation/
pre-operative expense even though permitted is subject to various conditions
especially that WOS is operating in sector where 100% FDI is permitted and
there are no FDI linked performance condition. In facts of case, FIPB has taken
a strict view and asked Applicant to unwind said transaction by repatriation of
proceeds to parent. Unwinding may have significant tax and regulatory
implications and hence FEMA regulations should be complied at threshold.
D. Expedition Voyages
Date
of Order: 3rd September 2018
Regulation:
Notification No. FEMA 24/2000-RB Foreign Exchange Management (Investment in
Firm or Proprietary Concern in India) Regulations, 2000
Issue:
FDI in partnership without obtaining prior approval.
Facts:
Regulatory
Provision:
Regulation
3 of FEMA 24/2000-RB – a person resident outside India shall not make any
investment by way of contribution to the capital of a firm or a proprietary
concern or any association of persons in India without prior approval of RBI
Contravention:
The
period of default is around 2 years approximately and total amount of
contravention is Rs.38,51,373.22
Compounding
penalty:
Compounding
penalty of Rs. 73,108/- was levied.
Comments:
FEMA regulations also do not allow non-residents to
invest in / contribute to the capital of any firm or proprietary concern in
India without prior approval of RBI. However, NRIs or OCIs are allowed to
invest on a non-repatriation basis, by way of contribution to the capital of a
firm or a proprietary concern in India provided such firm or proprietary
concern is not engaged in any agricultural/ plantation activity or print media
or real estate business. Accordingly it is necessary to undertake suitable restructuring
in partnership firm to ensure that entity in which FDI capital is infused is
FEMA compliant.
E. Invesco Asset Management (India) Private
Limited
Date
of Order: 9th August 2018
Regulation:
Notification No. FEMA 20/2000-RB Foreign Exchange Management (Transfer or
Issue of Security by a Person Resident Outside India) Regulations, 2000
Issue: Indirect foreign investment in Indian
Company without prior Government approval.
Facts:
Regulatory
Provision:
Regulation14(6)(i)
of FEMA 20 – Downstream investment by an Indian Company owned or controlled by
Non Residents have to comply with the relevant sectoral conditions on entry
route, conditionalities and caps
Para 2(1) of Schedule 1 to FEMA 20 – An Indian company,
not engaged in any activity / sector mentioned in Annex A to this Schedule may
issue [shares or convertible debentures or warrants] to a person resident
outside India, subject to the limits prescribed in Annex B to this Schedule, in
accordance with the Entry Routes specified therein and the provisions of
Foreign Direct Investment Policy….”
Sr.No.F.8
of Annex B to Schedule 1 of FEMA 20 – Foreign investment in ‘Other Financial
Services’, other than those specifically stated therein, would require prior
approval of the Government.
Contravention:
Period
of default is 5 months approximately and total amount of contravention is Rs.
5,00,000/-
Compounding
penalty:
Compounding
penalty of Rs. 52,500 /-was levied.
Comments:
Until
October, 2016, 100% FDI in NBFC sector under automatic route was permitted only
for prescribed 18 activities. This did not include mutual funds.
On
25th October, 2016, Department of Industrial Policy and Promotion
(DIPP) released Press Note 6 of 2016[7]
and liberalised the FDI Policy by replacing the existing NBFC sector with Other
Financial Services (OFS) Sector.
OFS
includes activities which are regulated by any financial sector regulator —
RBI, SEBI, IRDA, Pension Fund Regulatory and Development Authority, National
Housing Bank or any other financial sector regulator as may be notified by the
government in this regard
Foreign
owned and controlled Indian Entities need to be extra cautious before making
any downstream investment in other Indian Entities and especially check whether
the operations carried on by such Investee Indian Entities fall under the
Automatic or Approval route of RBI. Sectoral caps and other conditionalities
associated with the operations of the Indian Investee Entities also need to be
taken care of. Furthermore, compliance in term of sectorial condition is not to
be seen at the time of investment but needs to be monitored continuously. This
aspect is relevant just not for FDI entity receiving investment but also for
downstream investment held by FDI entity.
F. Jetair Private Limited
Date
of Order: 28th August 2018
Regulation:
Notification No. FEMA 20/2000-RB Foreign Exchange Management (Transfer or
Issue of Security By a Person Resident Outside India) Regulations, 2000.
Issue: Delay in reporting of downstream investment to the designated
agencies within 30 days of such investment
Facts:
Regulatory
Provision:
Regulation
14(6)(ii)(a) of Notification No.FEMA.20/2000-RB, as then applicable –
Downstream investments by Indian companies was required to be notified to
Secretariat for Industrial Assistance (SIA), DIPP and FIPB within 30 days of
such investment.
Contravention:
The
period of default is 2 years 11 months approximately. Total amount of
contravention is Rs. 4.81 crore.
Compounding
penalty:
Compounding
penalty of Rs. 1,55,833/- was levied.
Comments:
Under
the existing regulations, downstream investments made by Indian companies which
are majority owned / controlled by non-residents are required to be reported to
DIPP in Form DI within a period of 30 days of the Indian Entity making such
downstream Investment.
G. Take Business Cloud Private Limited
Date of Order: 8th August 2018
Regulation:
FEMA 120/2004-RB – Foreign Exchange Management (Transfer or Issue of any
Foreign Security) Regulations, 2004
Issue:
1. Delay in reporting outward remittances made
to overseas entity
2. Delay in receipt of share certificate
towards outward remittance made to overseas entity
3. Disinvestment
of stake in overseas entity with write-off without necessary prior approval
when Applicant was not eligible to undertake disinvestment under automatic route
4. Disinvestment from the overseas entity
without submission of Annual Performance Reports (APRs).
Facts:
Contravention:
Relevant Para of FEMA 20 Regulation |
Nature of default |
Amount involved |
Approx time period of default |
Regulation 6(2)(vi) |
Applicant |
USD 21 million |
10 years |
Regulation 15(i) |
Delay |
USD 21 million |
10 years |
Regulation 16(1)(v) |
Applicant |
USD 184,68,121 (Rs. |
5 years |
Regulation 16(1A) |
Applicant prior RBI approval |
USD 184,68,121 (Rs. |
5 years |
Compounding
penalty:
Compounding
penalty of Rs.1,49,78,167 was levied.
Comments:
Indian
Entities to take care of various FEMA compliances while remitting funds outside
India and also at the time of disinvestment as such non-compliance / breach of
regulations invites heavy compounding penalties.
H. Wipro Limited
Date
of Order: 10th August, 2018
Regulation:
FEMA 120 / RB-2004 Foreign Exchange Management (Transfer or Issue of any
Foreign Security) Regulations, 2004
Issue: Issuance of corporate guarantees by Applicant
on behalf of its overseas step-down subsidiaries beyond the 1st level
subsidiary, without prior RBI approval
Facts:
Regulatory Provisions:
Regulation
6(4) of Notification No. FEMA.120/2004-RB, as then applicable provided that An
Indian Party may extend a loan or a guarantee to or on behalf of the Joint
Venture/ Wholly Owned Subsidiary abroad, within the permissible financial
commitment, provided that the Indian Party has made investment by way of
contribution to the equity capital of the Joint Venture.
Contravention:
Issuance
of corporate guarantees by the applicant on behalf of its overseas step-down
subsidiaries, which were 2nd, 3rd and 4th level step down subsidiary, i.e.
beyond the 1st level subsidiary, without prior approval of the Reserve Bank of
India.? Period of contravention is 8 to 10 years. ? Amount of contravention is
Rs. 855.71 crore.
Compounding penalty:
Compounding penalty of Rs. 69,17,862/- was
levied.
Comments:
Under the erstwhile ODI Regulations, an Indian Party was permitted
to extend corporate guarantees only on behalf of its JV / WOS.
In
2013, ODI Regulations have been amended whereby in addition to the above,
Indian Parties are permitted to extend corporate guarantees on behalf of its
firstgeneration step down operating company within the prevailing ODI Limit.
Issue of Corporate guarantee on behalf of second level or subsequent level
operating step-down subsidiaries may be permitted with RBI Approval.It is to be
noted that the above Amendment has been given retrospective effect from 27th
May, 2011.
[1] https://www.rbi.org.in/scripts/Compoundingorders.aspx
[2] Currently, Idea
Cellular Limited (Idea) and Grasim Industries Limited (Grasim), hold 49% and
51% stake in the applicant respectively. Subject violation was prior to change
in shareholding of Applicant
[3] http://dipp.nic.in/sites/default/files/pn6_2016.pdf
[4] http://pib.nic.in/PressReleaseIframePage.aspx?PRID=1529264
[5] RBI/2013-14/221
A.P. (DIR Series) Circular No.31
[6] RBI/2013-14/594
A.P. (DIR Series) Circular No.130
[7] http://dipp.nic.in/sites/default/files/pn6_016.pdf