ANALYSIS OF RECENT COMPOUNDING ORDERS
An analysis of some interesting compounding orders
passed by the Reserve Bank of India in the period March to June, 2019 and
uploaded on the website1 is given below. This article refers to
regulatory provisions as existing at the time of offence. Changes in regulatory
provisions are noted in the comments section.
FOREIGN DIRECT INVESTMENT (FDI)
A. M/s. Shri Naveen Trehan
Date of order: 1st March, 2019
Regulation: FEMA 20/2000-RB Foreign Exchange
Management (Transfer or issue of security by a person resident outside India)
Regulations, 2000
ISSUE
1. Purchase
of equity shares of an Indian company by an NRI through a resident savings bank
account.
FACTS
- The NRI acquired equity shares of an Indian
company from an individual resident in India.
- On 28th January, 2016 the NRI
buyer issued a cheque drawn on HDFC Bank in favour of Indian resident
individuals towards payment of the sale consideration.
- The said amounts were paid through the
resident savings bank account of the NRI maintained with HDFC Bank.
- However, the NRI got converted his ordinary
resident savings account into an NRO account; the Foreign Investment Division
(FID) of FED advised the AD Bank to let the NRI know that his investment is
being treated as non-repatriable.
Regulatory Provisions
- Paragraph 3 of schedule 4 of Notification No.
FEMA 20/2000-RB states that the amount of consideration for purchase of shares
or convertible debentures of an Indian company on non-repatriation basis shall
be paid by way of inward remittance through normal banking channels from abroad
or out of funds held in NRE/FCNR/NRO/NRSR/NRNR account maintained with an
authorised dealer or as the case may be with an authorised bank in India.
- Regulation 5(3) (ii) of Notification No. FEMA
20/2000-RB states that a non-resident Indian or an overseas corporate body may
purchase shares or convertible debentures of an Indian company on
non-repatriation basis other than under Portfolio Investment Scheme, subject to
the terms and conditions specified in schedule 4.
Contravention
|
Relevant para of FEMA 20 Regulation
|
Nature of default
|
Amount involved (in rupees)
|
Time period of default
|
|
Para 3 of schedule 4 read with regulation 5(3) (ii) of this
regulation
|
Purchase of equity shares of an Indian company by an
individual pursuant to becoming a Non-Resident Indian (NRI) through a
resident savings bank account
|
Rs. 39,00,000
|
15th April, 2015 to 26th April, 2018
|
Compounding penalty
A compounding penalty of Rs.75,350 was levied.
Comments
Under provisions of FEMA, once an Indian resident
becomes non-resident, his Indian savings bank account will be designated as NRO
bank account. However, the balance lying in this NRO bank account cannot be
utilised for buying shares of an Indian company either on repatriation or
non-repatriation basis.
The said funds can be utilised for undertaking
permissible transactions in the nature of local payments, transfers to another
NRO account, remittance of current income outside India net of applicable
taxes, etc., as permitted by the Foreign Exchange Management (Deposit)
Regulations, 2016.
B. M/s. Celon Laboratories Private Limited
Date of order: 15th March, 2019
Regulation: FEMA 20/2000-RB Foreign Exchange
Management (Transfer or issue of security by a person resident outside India)
Regulations, 2000
ISSUE
1. Received
consideration amount from third party for the allotment of shares to NRI on
non-repatriation basis.
2. Transfer
of repatriable shares issued to non-resident to another non-resident on
non-repatriation basis.
FACTS
- The applicant, an NRI, was allotted equity
shares on non-repatriation basis, whereas the consideration of those shares was
received from DNA Biotec Limited, a resident Indian company on behalf of the
NRIs.
- Further, NRIs were also allotted equity
shares of an Indian company on repatriation basis. These shares were
subsequently transferred to another NRI without any consideration and on
non-repatriation basis.
Regulatory Provisions
- Regulation 4 of Notification No. FEMA
20/2000-RB which states that remittance has to be received from the same person
to whom shares are to be allotted.
- Once shares are issued on repatriation basis,
the same cannot be converted into non-repatriation basis.
Contravention
|
Relevant para of FEMA 20 Regulation
|
Nature of default
|
Amount involved (in rupees)
|
Time period of default
|
|
Regulation 4
|
Issue 1: Receiving
consideration amount from third party for the allotment of shares to resident
outside India on non-repatriation basis
Issue 2: Transfer of
shares to non-resident under non-repatriation, which were originally held on
repatriation
|
Issue 1:
Rs. 1,07,25,000
Issue 2:
Rs. 71,68,340
|
Issue 1: 10 years, 3
months, 7 days
approximately
Issue 2: 8 years, 6
months, 1 day approximately
|
Compounding penalty
A compounding penalty of Rs. 2,15,470 was levied.
Comments
Under provisions of FEMA, extreme care needs to be
taken that entity / person to whom shares are issued is the same as the one who
has paid consideration and shares cannot be issued on behalf of anyone. Care
also needs to be taken for ensuring that once shares are issued on repatriation basis, the same cannot be transferred on non-repatriation basis.
C. M/s. Ibiz Consultancy Services India Pvt. Ltd.
Date of order: 13th March, 2019
Regulation: FEMA 20/2000-RB Foreign Exchange
Management (Transfer or issue of security by a person resident outside India)
Regulations, 2000
ISSUE
Taking on record the transfer of shares in the
books of the company without certified FC-TRS.
FACTS
- The company has taken the transfer of 40,000
shares on record without certified Form FC-TRS.
- Form FC-TRS was submitted for certification
to the AD Bank on 14th August, 2015, whereas the company has taken
the transfer of shares on record 18 days prior to filing of Form FCTRS with AD
Bank
Regulatory Provisions
- Regulation 4 of Notification No. FEMA 20/
2000-RB which states that Indian company will record share transfer only upon
receipt of Form FC-TRS acknowledged by AD Bank
Contravention
|
Relevant para of FEMA 20 Regulation
|
Nature of default
|
Amount involved (in rupees)
|
Time period of default
|
|
Regulation 4
|
Taking on record the transfer of shares in the books of the
company without certified FC-TRS
|
Rs. 4,00,000
|
18 days approximately
|
Compounding penalty
Compounding penalty of Rs. 10,080 was levied.
Comments
Any Indian company having non-resident
shareholders should ensure that any share transfer between resident and
non-resident is not taken on record without receiving Form FC-TRS duly
acknowledged by AD Bank.
D. Vijay P Uttarwar
Date of order: 12th April, 2019
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 Indian company by way of
gift by a resident to non-resident without RBI approval.
FACTS
- An Indian resident individual transferred
2,50,000 equity shares of Re. 1 each of an Indian company as gift to a
non-resident on 31st March, 2016 without obtaining prior RBI
approval.
- Post-facto approval was granted by RBI
on 12th March, 2018.
Regulatory Provisions
- Regulation 10A(a) of Notification No.
FEMA20/2000-RB which provides that transfer of shares by way of gift from
resident to non-resident is subject to prior RBI approval.
Contravention
|
Relevant para of FEMA 20 Regulation
|
Nature of default
|
Amount involved (in rupees)
|
Time period of default
|
|
Regulation 10A(a)
|
Transfer of shares by way of gift by a resident to
non-resident without RBI approval
|
Rs. 2,50,000
|
2 years approx.
|
Compounding penalty
Compounding penalty of Rs. 51,375 was levied.
Comments
Transfer of shares by an Indian resident to
non-resident by way of gift requires prior RBI approval both under earlier FEMA
20 regulation as well as revised FEMA 20(R), dated 7th November,
2017.
E. Ramasubramanian Balasubramanian
Date of order: 12th April, 2019
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 by way of gift by a resident to
a non-resident without RBI approval.
FACTS
- The applicant is an NRI and is also a
promoter / director of an Indian company, viz., IBIZ Consulting Services India
Pvt. Ltd.
- The applicant transferred 40,000 shares held
by him in the Indian company to IBIZCS Group Pte. Ltd, Singapore (a
non-resident entity) for a consideration of Rs. 4,00,000 on 9th
July, 2015.
- Transfer of shares by an NRI to an NR was not
a permitted transaction under automatic route during the said period.
Regulatory Provisions
- Regulation 9(2)(ii) of Notification No. FEMA
20/2000 states that an NRI can transfer shares of an Indian company by way of
gift or sale only to another NRI.
- Hence, NRI cannot transfer shares of an
Indian company to another person resident outside India.
Contravention
|
Relevant para of FEMA 20 Regulation
|
Nature of default
|
Amount involved (in rupees)
|
Time period of default
|
|
Regulation 9(2)(ii) read with Regulation 3 of FEMA 20.
|
Transfer of shares by way of gift by an NRI to non-resident
without RBI approval
|
Rs. 4,00,000
|
2 years and 4 months
|
Compounding penalty
Compounding penalty of Rs. 52,400 was
levied.
Comments
It is interesting to note that earlier
Notification No. FEMA 20 provided that NRI could transfer shares only to
another NRI and not to any other person resident outside India without prior
RBI approval. The revised Notification No. FEMA 20(R) permits an NRI to
transfer shares to any other person resident outside India, including an NRI.
OVERSEAS DIRECT INVESTMENT
(ODI)
F. Aricent Technologies (Holdings) Limited
Date of order: 15th April, 2019
Regulation: FEMA 20/2000-RB Foreign Exchange
Management (Transfer or issue of security by a person resident outside India)
Regulations, 2004
ISSUE
Making Overseas Direct Investment (ODI) in an
entity with an already existing Foreign Direct Investment (FDI) structure.
FACTS
- The applicant, an Indian company, acquired
the shares of a Mauritian company, Aricent Mauritius Engineering Services PCC
(Aricent Mauritius), from its existing shareholders.
- The total amount remitted by the applicant to
the existing shareholders for acquiring equity participation of 50.28%,
amounted to USD 9,00,00,000 (Rs. 572,58,60,000).
- However, Aricent Mauritius was already
holding investment in an existing Indian company, Aricent Technologies Private
Limited, India (Aricent India) when ODI was made by the applicant Indian
company.
- The resultant structure amounted to making
ODI in an entity with pre-existing FDI, which is not permitted without the
prior approval of RBI.
- The entire structure, i.e., FDI and ODI, was
unwound before compounding application was filed.
Regulatory Provisions
Regulation 5(1) read with Regulation 13 of
Notification No. FEMA 120/2004-RB (‘FEMA 120’).
Contravention
|
Relevant para of FEMA 120 Regulation
|
Nature of default
|
Amount involved (in rupees)
|
Time period of default
|
|
Regulation 5(1)
|
Making Overseas Direct Investment (ODI) in a company with an
already existing Foreign Direct Investment (FDI) structure
|
Rs. 572,58,60,000
|
Three years, one month
|
Compounding penalty
Compounding penalty of Rs. 3,72,68,090 was levied.
Comments
It is interesting to note that existing Regulation
FEMA 120 governing outbound investment does not specifically mention that ODI
is not allowed in an entity which has FDI structure. Further, in the instant
case, RBI has specifically mentioned in the compounding order that the entire
structure, i.e., both FDI and ODI, was wound up before compounding application
was considered indicates that if both FDI and ODI are existing in one
structure, RBI may not compound the same unless it is unwound. Besides, in the
revised FAQs on ODI published by RBI in May, 2019, a specific answer has been
provided that FDI and ODI in one structure is not permissible under existing
ODI regulations.
Hence, care needs to be taken to ensure that even
in cases where an Indian entity is buying stake from existing investors of a
foreign company, the foreign company should not have any FDI in India to avoid
FDI and ODI in one structure.
ACQUISITION AND TRANSFER OF IMMOVABLE PROPERTY
G. Mr. Sha Mathew
Date of order: 8th March, 2019
Regulation: FEMA 21/2000-RB Foreign Exchange
Management (Acquisition and Transfer of Immovable property in India)
Regulations, 2000
ISSUE
Acquisition of immovable property in India by an
NRI without RBI permission.
FACTS
- The applicant, Mr. Sha Mathew, an NRI,
acquired two agricultural properties in Kerala in the year 2012 without
obtaining prior permission from the Reserve Bank of India.
- The immovable properties were acquired for a
total consideration of Rs. 16,38,700.
Regulatory Provisions
- Regulation 8 of Notification No.
FEMA-21/2000-RB dated 3rd May, 2000 provides that an NRI is not
eligible to purchase any agricultural property in India. Accordingly, the NRI
was advised to transfer the property to any resident person within six months
and not to repatriate the sale proceeds outside India without prior permission
of the RBI.
Contravention
|
Relevant para of FEMA 21/2000 Regulation
|
Nature of default
|
Amount involved (in rupees)
|
Approx. Time period of default
|
|
Regulation 8
|
Purchase of immovable property, being agricultural land, by
an NRI without RBI permission
|
Rs. 16,38,700
|
05 years, 10 months, 04 days, i.e., from 13th
July, 2012 to 17th May, 2018
|
Compounding penalty
Compounding penalty of Rs. 24,53,590
was levied.
Comments
In the instant case, based upon the
RBI’s letter to transfer the immovable property to a resident in India, the
applicant transferred the property in favour of his son, who was resident in
India. However, RBI determined the value of land at Rs. 40,30,000 based on a
valuation report as on the date of filing the compounding application.
Accordingly, undue gain was computed at Rs. 23,91,300 (difference between value
as per valuation report, i.e., Rs. 40,30,000 minus Rs. 16,38,700, being cost of
land). Hence, the compounding penalty of Rs. 24,53,590 was levied through which
the entire undue gain derived by the NRI on purchasing agricultural land was
neutralised. The quantum of penalty reflects the stringent view taken by RBI on
purchase of immovable property by citizens from select countries. The said
restriction is not applicable if such nationals are OCI card-holders2
.
OPENING AND MAINTAINING
ORDINARY SAVINGS ACCOUNT
H. Mr. Thakorbhai Dahyabhai Patel
Date of order: 18th March, 2019
Regulation: FEMA5/2000-RB Foreign Exchange
Management (Deposit) Regulations, 2000
ISSUE
- Transfer of funds from NRE account to
ordinary savings account.
FACTS
- The applicant, Mr. Thakorbhai Dahyabhai
Patel, was an OCI and a person non-resident in India in terms of section 2(w)
of FEMA.
- The applicant had opened and maintained an
ordinary savings bank account with ICICI Bank and Prime Co-operative Bank
Limited.
- Being a non-resident, he was not eligible to
open and maintain an ordinary savings account as per extant FEMA guidelines.
- The applicant had granted a loan of Rs.
1,39,01,100 to his friend, Mr. Narendra V. Solanki, a person resident in India,
in five tranches starting from 1st April, 2013 to 4th
September, 2013, from his ordinary savings account maintained with ICICI Bank.
- He had also charged interest at the rate of
6% per annum on the above loan.
- The amount given as loan represented either
transfer of funds from his NRE Account maintained with HDFC Bank or amount
received from LIC on his father’s death.
- For this purpose, the applicant has
transferred Rs. 85,01,100 from his NRE Account maintained with HDFC Bank to his
ordinary savings account maintained with ICICI Bank.
- The loan was subsequently repaid in FY
2017-18.
Regulatory Provisions
- Regulation 4(C) of schedule 1 to Notification
No. FEMA.5/2000-RB states that permissible debit of NRE account is transfer to
NRE / FCNR (B) accounts of the account holder or any other person eligible to
maintain such an account.
- Regulation 4(i) and (ii) of Notification No.
FEMA.4/2000-RB regulates borrowing and lending in rupees between a person
resident in India and a person resident outside India.
Contravention
The amount of contravention is Rs. 85,01,100 and
the period of contravention is five years, seven months and six days from 4th
January 2013 to 10th August, 2018.
Compounding penalty
A compounding penalty of Rs. 1,13,758 was levied
in the case.
Comments
This case reflects a common violation wherein
persons resident outside India, specifically NRIs and OCI card-holders, open
savings bank accounts even when they are not resident in India. Once a person
becomes non-resident, he / she cannot open savings bank accounts and can
transact only through NRE / NRO Account in the manner which is permissible.
Further, if an Indian resident individual becomes non-resident, all his
existing savings accounts would be converted into NRO accounts and hence he
cannot operate his old savings account without changing its status to NRO
account.
