FEMA FOCUS

Earlier all Indian companies
receiving share capital from foreign investor were required to file Form ARF
within 30 days of receipt of share capital from foreign investor. The said Form
ARF has been merged with Form FC-GPR with effect from 1^st September,
2018 and is required to be filed online through filing of Single Master Form
(Form SMF) on the FIRMS database.

RBI has now amended the FDI
Regulations governed by FEMA 20 (R)/2017-RB dated 7^th November,
2017 and omitted the requirement to file ARF within 30 days of receipt of
funds towards share capital. Hence, going forward, with respect to receipt of
funds relating to share capital from foreign investor, Form ARF will not be
required to be filed separately and its details would be included in Form
FC-GPR.

(II) Downstream investment

Erstwhile FDI regulations

•     Under earlier FDI
  Regulations governed by FEMA 20(R), Form DI was required to be filed by
  Investor Indian company within 30 days of making downstream investment when
  following conditions were satisfied:

i)    Investor
Indian company makes investment in another Indian company; and

ii)   Such
Investment qualifies as indirect foreign investment;      

•     ‘Indirect Foreign
  Investment’ has been defined to mean downstream investment received by an
  Indian entity from:

(a)   
Indian entities (excluding investment vehicle) provided:

•    Such Indian entity (Investor IE) has
received foreign investment and

•    the investor IE is not owned and not
controlled by resident Indian citizens or is owned or controlled by persons
resident outside India;

(b)    Investment
vehicle

•     by resident Indian
  citizens or is owned or controlled by persons resident outside India

•     It may be noted that Form
  DI was required to be filed within 30 days of investment even when capital
  instruments were not allotted by recipient Indian company.

•     However, Form DI was not
  required to be filed when either the investor entity or investee entity was not
  an Indian company.

Amended FDI regulations w.e.f. from 1^st
September 2018

Under the amended FDI Regulations,
Form DI is now required to be filed by investor entity in all situations where
downstream investment is being made by an Indian entity having FDI investment
irrespective of whether investor or investee entity are Indian companies or
not. Further, Form DI is now required to be filed within 30 days of allotment
of capital instruments and not within 30 days of making investment.

Thus, care needs to be taken to
ensure that Form DI is appropriately filed by Indian investor entities in all
cases of indirect foreign investment being made into investee Indian entities.
Comparison between applicability of filing of Form DI under different scenarios
under old FDI regulations and new FDI regulations are as under:

As per revised reporting format,
Form DI needs to be filed online as part SMF. Form DI is yet to be notified.
Till notified, Indian investor will have to take care of aforesaid
changes. 

Analysis of Recent Compounding Orders

An analysis of some interesting
compounding orders passed by Reserve Bank of India in recent months of June and
July, 2018 and uploaded on the website¹ are given below. Article
refers to regulatory provisions as existing at the time of offence. Changes in
regulatory provisions are noted in comments section.

Foreign Direct Investment (FDI)
compounding orders

A.      Phoenix Managed
Services (India) Private Limited

Date of order: 19^th June
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:

(i)    Allotment of shares to Non-Resident
investors under its Memorandum & Article of Association, prior to receipt
of consideration.

(ii)    Delay in reporting receipt of foreign
inward remittance towards share capital;

(iii) Delay in submission of Form
FC-GPR relating to allotment of shares and;

(iv)  Delay in filing ‘Annual Return on Foreign
Liabilities and Assets’ (FLA Return).

_______________________________________-

1    
https://www.rbi.org.in/scripts/Compoundingorders.aspx

Facts:

•    Applicant is engaged in
  the business of software designing and developing and dealing in computer
  software and solutions etc.

•    Applicant allotted shares
  to Non-Resident investors under its Memorandum & Article of Association,
  prior to receipt of consideration.

•    Applicant reported receipt
  of remittances to RBI with a delay ranging from 3 months to 3 years

•    Applicant filed form
  FC-GPRs with a delay of 4.5 years. Applicant did not file FLA return for FY
  2012-13 to FY 2014-15. Whereas for FY 2015-16 and 2016-17, Applicant filled FLA
  returns with delay.

Regulatory provisions:

•     Paragraph 8 of Schedule 1
  to Notification No. FEMA 20 requires issue of shares within 180 days from the
  date of receipt of the inward remittance. 
  

•     Paragraph 9(1)(A) of
  Schedule 1 to Notification No. FEMA 20 – requires reporting of inward remittance
  for FDI investment within 30 days from receipt of such remittance

•     Paragraph 9(1)(B) of
  Schedule 1 to notification No. FEMA 20 requires filing of Form FC-GPR within 30
  days from the date of issue of shares.

•       Paragraph 9(2) of
  Schedule 1 to Notification No. FEMA 20 read with A. P. (DIR Series) Circular
  No. 29 dated 2^nd February, 2017, requires filing of FLA return on or
  before the 15^th day of July each year.

Contravention:

Compounding penalty:

Compounding penalty of Rs.1,14,732
was levied.

B.      Strides Shasun
Limited

Date of Order: 28^th June
2018

Regulation: FEMA 20

Issue: 

Issuance of Employee Stock Options
(ESOPs) to the person resident outside India in the brownfield pharmaceutical
company without obtaining necessary prior approval at a time when the foreign
investment
in brownfield pharmaceutical sector was under the approval route.

Facts:

•    Applicant is engaged in
  pharmaceutical industry, as manufacturer, producer, processor and formulator of
  proprietary medicine, drugs etc.

•    In February, 2014,
  Applicant issued 50,000 ESOPs exercisable/ convertible into 50,000 equity
  shares to a non-resident employee at an exercise price of Rs.322.30 per share.

•    In March, 2015, the
  non-resident employee exercised 10,000 Options and accordingly, 10,000 shares
  were allotted by the Applicant to the said non-resident employee.

•    FDI upto 100% under the
  Automatic route was permitted in the pharmaceuticals sector till November 2011.

•    Subsequently, with effect
  from 3^rd November 2011, above FDI policy was amended. Different
  criteria was prescribed depending upon whether investment in pharmaceutical
  sector was greenfield (i.e. investments in new companies) or brownfield (investment
  in existing companies).  FDI upto 100%
  under the automatic route was permitted only for greenfield investments in
  pharmceuticals sector. However, for investment in existing Indian pharma
  companies (i.e. brownfield investments), FDI upto 100% was brought under the
  government route.

•    Hence, as issuance of
  ESOPs and allotment of shares to non-resident employees in March 2015 was in
  violation of FDI regulations as amended in November 2011, SSL applied to
  Department of Pharmaceuticals, Ministry of Chemicals & Fertilizers
  (pursuant to abolishment of FIPB) in January 2017.

•    Department of
  Pharmaceuticals, Ministry of Chemicals & Fertilizers granted its approval,
  advising the Applicant to approach RBI for compounding the contravention
  committed by issuing abovementioned ESOPs, as brownfield investment in
  pharmaceutical sector was under approval route at the time of issuance of
  ESOPs, thus requiring prior FIPB approval.

•    In the compounding
  application, SSL submitted that ED had asked it to furnish certain information
  and documents in relation to export / import transactions. Hence, RBI sought
  comments from ED as to whether offence being compounded by RBI, i.e. issuance
  of ESOP was being investigated by ED and if it had any objection in compounding
  the said offence.

•    ED replied to RBI that its
  investigation did not pertain to the offence being compounded by RBI and hence,
  RBI proceeded with this compounding application.

Regulatory
Provisions:

•    FEMA 20 as amended from
  time to time read with Notification No.FEMA.242/2012-RB dated 19^th
  October 2012. 

Contravention:

•    Issuance of ESOPs without
  prior approval from erstwhile FIPB.

•    Period of Contravention is
  approx. 3.9 years. 

•    Amount of Contravention is
  approx. Rs.1.61 crore.

Compounding
penalty

Compounding
penalty of Rs.1,54,748 was levied.

Comments:

•    W.e.f. 3^rd
  November 2011 and until December 2016, FDI in existing Indian companies (i.e.
  brownfield investment) engaged in pharmaceutical sector was permitted upto 100%
  only under FIPB approval route.

•   W.e.f. 7^th December
  2016, FDI in brownfield pharmaceutical sector upto 74% is permitted under the
  Automatic Route and upto 100 % under Approval Route.

•     Further, existing compounding regulations provide that compounding
  proceedings can be undertaken only when same offence is not under investigation
  by ED. Hence, if any applicant is under investigation by ED for specific
  offence being committed under FEMA regulations, compounding application cannot
  be filed for same offence but it can be filed for a different offence.

•     This case demonstrates need for ESOPs plans to be in compliant
  with extant FEMA regulations.

C.   Rajasthan Hospitals
Limited

Date of Order: 19^th July
2018

Regulation: FEMA 4 /2000-RB Foreign
Exchange Management (Borrowing or Lending in Rupees) Regulations, 2000

Issue:

Availing of loan from NRI without
issue of Non-Convertible Debentures (NCDs) made by public offer.

Facts:

•    Applicant borrowed Rs.
  49.80 lakh from NRI, Dr. Jawahar Lal Taunk, a US resident through wire transfer
  from USA in March 2017.

•    This transaction was
  reversed on 4^th April, 2018 when the above amount was refunded to
  the lender.

Regulatory Provisions:

•    Regulation 5 (i) of
  Notification No. FEMA 4/2000-RB permits Indian Company to borrow in rupees on
  repatriation or non- repatriation basis from an NRI only by way of issue of
  NCDs through public offer.

Contravention:

•    Borrowing from NRI was not
  through issuance of NCDs made by public offer.

•    Period of Contravention is
  approx. one year. 

•    Amount of Contravention is
  Rs.49.80 lakh

Compounding penalty:

Compounding penalty of Rs.77,400
was levied.

Comments:

Raising debt by Indian Companies
from NRIs is highly truncated under extant FEMA regulations.

NCD Route: Indian
companies may avail loan by way of issuing NCD through a public offer.

ECB Route: Indian Company may borrow from NRI, who are its shareholders
subject to compliance of ECB regulations viz Indian Company being eligible borrower,
end-use restrictions, all-in-cost ceilings etc., and NRI lender being eligible
lender.

D.      Vigno Prasath

Date of Order: 10^th July
2018

Regulation: 

•    Notification No. FEMA
  20/2000-RB FEMA (Transfer or Issue of Security by a Person Resident Outside
  India) Regulations, 2000.

Issue:

•    Transfer of shares of an Indian company to
  a person resident outside India without filing form FC-TRS.

•    Receipt of sale
  consideration for transfer of shares on deferred payment basis.

•    Receipt of sale consideration
  through third parties.

Facts:

•    Applicant is a resident
  individual being one of the shareholders holding equity shares of Sathya Auto
  Private Limited (SAPL) an unlisted private Indian company;

•    Applicant transferred
  shares held by it in SAPL to a non-resident Indian (NRI);

•    Sale consideration was
  paid by NRI as follows

•    As can be seen from above,
  whilst shares of SAPL were sold to NRI consideration was received through the
  third parties namely, AHPL and SAPL.

•    Also, part of sale
  consideration was received by the Applicant on a deferred payment basis over a
  period of one year without obtaining RBI approval.

•    Form FC-TRS relating to
  transfer of shares was filed with delay of around 4 years.

Regulatory Provisions:

•    Para 8 of schedule 1 to
  FEMA 20 – Lays down 2 permitted modes of payment of sale consideration: (1)
  inward remittance through normal banking channels or (2) debit to NRE / FCNR
  account of the person concerned;

•    Regulation 10A(b)(iii) of
  FEMA 20 – Requires submission of declaration in Form FC-TRS at the time of
  transfer of shares.

•    Regulation 10A(b)(iii) of
  FEMA 20 (as it stood at the time of transfer) – Requires prior approval of RBI
  for receipt of deferred consideration.

Contravention:

Compounding penalty:

Compounding penalty of Rs. 1,59,175
was levied.

Comments:

Share transfer by a resident buyer
to a non-resident seller on a deferred payment basis was not allowed under the
extant FDI Regulations and therefore required prior RBI approval.

However, RBI vide Notification No.
FEMA 386/2016 dated 20^th May, 2016 FEMA (Transfer or Issue of
Security by a Person Resident Outside India) (Seventh Amendment) Regulations,
2016, permitted transfer of shares between resident buyer and non-resident
seller on deferred payment basis subject to the following conditions:

i.    Not
more than 25% of the total consideration can be paid by the buyer on a deferred
basis

ii.   Consideration
can be deferred for not more than 18 months from the date of the transfer
agreement

iii.  Consideration can be settled through an Escrow Arrangement between
the Buyer and Seller for a period not exceeding 18 months from the date of
transfer agreement

If total consideration has been
paid by the buyer to the seller, sale consideration can be indemnified by the
seller for a period not exceeding eighteen months from the date of payment of
full consideration.

Further, apart from Applicant, i.e.
Mr. Vigno Parsath, there were three other shareholders of SAPL who had also
sold their shares to non-resident and wherein all above contraventions had
taken place.

As facts were similar, RBI levied
similar penalty of Rs. 1.59 lakh in all other cases.

Overseas Direct Investment (ODI)
compounding orders

E.   PC Jeweller Limited

Date of Order: 12^th
July, 2018

Regulation:

FEMA 120/2004-RB Foreign Exchange
Management (Transfer or Issue of any Foreign Security) Regulations, 2004 (FEMA
120)

Issue:  

•    Making outward
  remittances to the overseas entity without submission of Form ODI.

•     Making outward
  remittances to the overseas entity under the automatic route when the same was
  permitted only with prior approval.

Facts:

•     The applicant set up a
  wholly-owned subsidiary (WOS) viz. P. C. Jeweller Global DMCC in UAE in June,
  2016 and made remittances amounting to USD 2,00,00,500 to the overseas WOS.

•     The remittances were
  reported in form ODI-Part-I within the prescribed time except in one instance
  of USD 500 wherein applicant reported the remittance with delay beyond the
  prescribed time.

•     Applicant had to remit
  USD 500 to compensate for shortfall in first remittance on account of deduction
  of bank charges.

•     Applicant was under
  investigation by Directorate of Revenue Intelligence (DRI) which was concluded
  in July 2014 and a show cause notice (SCN) dated 8^th July, 2014 was
  issued to the applicant. Applicant had filed an appeal against the SCN to
  Commissioner (customs) Imports in January 2015 which is pending till date.

•     Accordingly, as DRI’s
  investigations were pending, Applicant was not eligible to undertake overseas
  direct investment (ODI), under automatic route pending disposal of the appeal.
  Hence, prior approval of RBI was required before making ODI.

•     Further, RBI had asked ED
  to submit whether contravention sought to be compounded was under ED’s
  investigation or not. However, as ED did not reply, RBI proceeded with the
  compounding process

Regulatory Provisions:

•     Regulation 6(2)(vi) of
  FEMA 120 requires an Indian Party making direct investment in a JV)/WOS outside
  India to submit Form ODI Part-I, the Authorised Dealer within 30 days of making
  such investment

•     Regulation 6(2)(iii) of
  FEMA 120 – Indian Party may make direct investment in a JV/WOS outside India
  subject to the condition that the Indian Party is not on the Reserve Bank’s
  exporters’ caution list / list of defaulters to the banking system circulated
  by the Reserve Bank and/or is not under investigation by any investigation /
  enforcement agency or regulatory body.

Contravention:

•     Delay in filing of Form
  ODI beyond the prescribed period of 30 days from the date of making investment.
  

•     Period of contravention
  is 1.4 years and amount of contravention is INR 33,745.

•     Making ODI investment
  pending investigation by Directorate of Revenue Intelligence.

•     Period of contravention
  is approx. 1.6 years and amount of contravention is approx Rs.133.86 crore.

Compounding penalty

Compounding penalty of Rs.
74,13,478 was levied.

Comments:

Indian Entities to be careful
during pending any investigation by any regulatory body and refrain from making
any ODI Investments without prior approval during the pendency of such
investigation

F.  Endurance Technologies
Limited

Date of Order: 21^st June
2018

Regulation:

•    FEMA 120/2004-RB – Foreign
  Exchange Management (Transfer or Issue of any Foreign Security) Regulations,
  2004

Issue:

•    Delay in filing Form
  ODI beyond the stipulated time period.

•    Funding of overseas
  investment through a mode other than the permitted modes.

•    Non-submission of
  Annual Performance Reports (APR) within stipulated time period.

Facts:

•    Applicant is engaged in
  the manufacturing of the automotive components, suspension products,
  transmission products and brake systems.

•    Overseas investment was
  made by Applicant under the automatic route in an Italian SPV in May 2007.

•    Form ODI in relation to the
  said investment was filed with a delay.

•    Initial share capital
  amounting to Euro 10,000 and the incorporation expenses amounting to Euro 500
  were paid by Applicant’s German subsidiary namely, Endurance Amann GmbH which
  were reimbursed by the Applicant in 2017

•    Applicant had extended
  loans to its Italian SPV and the interest accrued on the loans was capitalised.
  There was a delay in reporting such capitalisation of interest

•    The APRs for two years
  i.e. from the year ended 31^st March, 2015 to the year ended 31^st
  March, 2016 were submitted with delay.

Regulatory provisions:

•    Regulation 6(2)(vi) of
  FEMA 120 – requires filing of Form ODI in case of overseas investment by Indian
  Entities

•    Regulation 6(3) of FEMA
  120, provides the list of permitted methods of funding of overseas investment.

•    Regulation15 (iii) of FEMA
  120, requires annual filing of an Annual performance Report (APR) on or before
  a specified date in respect of each JV or WOS outside India.

Contravention:

•    The overseas investment
  made by Applicant in the Italy SPV was reported with delay in Form ODI-Part-1.

•    Period of contravention is approx. 9 years
  and 9 months and amount of contravention is approx. Rs 3.35 lakh.

•    Funding of the overseas
  investment was done through a mode other than that permitted under regulation
  6(3) of FEMA 120. Period of contravention is approx. 10 years and amount of
  contravention is approx. Rs 8 lakh.

•    APRs for two years i.e.
  year ended 31^st March, 2015 and 31^st March, 2016 were
  submitted with delay.

Compounding penalty:

Compounding penalty of Rs. 6,74,942
was levied.

Comments:

Indian
entities to ensure that funding of overseas investments is done only via
permitted modes under FEMA. Further, in case of conversion of loan into equity
it is necessary that due process prescribed by law is followed. This involves
intimation to AD banker by filing prescribed form, obtaining share certificate
within prescribed time lines, etc.

In a similar case of CI Global
Technologies Pvt Limited², Indian Company made payment for ODI
Investment by way of Travellers Cheque, which is not a permitted mode of
funding. Compounding Penalty was levied in this case as well. ____________________________________

2          CA
No 4634 / 2018 dated 8th June 2018

G.   Anand Rathi Wealth
Services Limited

Date of Order: 24^th
April, 2018

Regulation: FEMA 120 / RB-2004 Foreign
Exchange Management (Transfer or Issue of any Foreign Security) Regulations,
2004

Issue:

•    Non-submission of Annual
  Performance Reports (APRs) for the period 2006 to 2009.

•    Write off of entire amount
  of ODI under automatic route without obtaining fair valuation certificate and
  without submitting APRs.

Facts:

•    Applicant is engaged in
  the business of funds management and venture capital, financial advisor, wealth
  management etc., in India.

•    Applicant invested USD
  30,000 in October, 2005 in an overseas WOS viz. Anand Rathi India Realty Fund
  in Mauritius. The overseas WOS was unable to commence operations and therefore
  Applicant decided to close the overseas WOS in May, 2008.

•    The name of the Overseas
  WOS company was removed from the Registrar of Companies in Mauritius w.e.f. 6^th
  August, 2009.

•   Applicant did not submit
  annual performance reports (APRs) for the period 2006 to 2009.

•    The applicant had written
  off entire amount of ODI under automatic route without obtaining fair valuation
  certificate and without submitting APRs.

Regulatory Provisions:

•    Regulation 16(1)(iii) of
  FEMA 120 – Shares of an unlisted company held by any Indian Party in a JV or
  WOS outside India may be transferred, by way of sale to another Indian Party
  only after obtaining a Valuation Certificate from Chartered Accountant /
  Certified Public Accountant determining the fair value of such shares.

•    Regulation 16(1)(v) of
  FEMA 120 – Shares of an Overseas entity may be sold only if such overseas
  concern has been in operation for at least one full year and APR together with
  the audited accounts for that year has been submitted to RBI.

•    Regulation 15(iii) of FEMA
  120 – Indian Party making ODI Investments to submit to RBI, every year on or
  before a specified date, an Annual Performance Report (APR) in respect of each
  JV or WOS outside India.

Contravention:

Compounding penalty

Compounding penalty of Rs. 2,10,510
was levied.

Comments:

Indian entities need to take care of various
FEMA compliances before closing down or disinvesting stake in their overseas
WOS as non-compliance of the same would invite compounding penalty.