Here
is an analysis of some interesting compounding orders passed by the Reserve
Bank of India in the month of December, 2019 and uploaded on the website1.
This article refers mainly to the regulatory provisions as existing at the time
of offence. Changes in regulatory provisions are noted in the comments section.
FOREIGN
DIRECT INVESTMENT (FDI)
A.
Utkarsh CoreInvest Ltd.
Date
of order: 18th November, 2019
Regulation:
FEMA 20/2000-RB [Foreign Exchange Management (Transfer or Issue of Security by
a Person Resident Outside India) Regulations, 2000] and FEMA 20(R)/2017 (dated
7th November, 2017)
ISSUE
FDI
in Indian company engaged in business of investing in other companies and
taking on record transfer of shares of an Indian company between two
non-residents.
FACTS
Issue
1
(i) The applicant company was engaged in the business of micro finance.
(ii) Subsequently, it was issued license to set up a small finance bank
wherein one of the conditions stipulated that the applicant company should be
registered as an NBFC-CIC after transfer of its micro-finance business to the
bank.
(iii) Accordingly, the applicant company applied to RBI for
registering itself as an NBFC-CIC in December, 2016 and incorporated a
subsidiary company to which it transferred the micro-finance business in
January, 2017.
(iv) At the time of filing its application for license to set up a
small finance bank, the applicant company had foreign shareholding of around
84.1%. In order to bring the foreign shareholding below 50%, the applicant
company raised equity capital (by way of rights issue) which was offered to
both resident and non-resident shareholders in November, 2017. The applicant company
received FDI amounting to Rs. 28,68,95,310 at the same time which was not
permissible under the extant FEMA 20(R).
(v) Subsequently, in March, 2018, FDI up to 100% under automatic route
was allowed in investing companies registered as NBFCs with RBI.
Issue 2
(a) In August, 2017, International Finance Corporation (IFC), a
non-resident entity, had transferred 42,69,726 shares of the applicant company
amounting to Rs. 55,50,64,380, to another non-resident entity which was
recorded in the books of the applicant company without obtaining prior approval
of the Government.
(b) The Government of India, MoF, DEA, while according its approval for
another transaction in October, 2018 which involved share transfer between two
non-resident entities had, vide its letter dated 22nd October, 2018,
advised the applicant company to approach RBI for compounding for ‘past foreign
investments made in UMFL, including share transfers among non-residents,
without GoI approval’.
Regulatory
provisions
- Regulation 16(B)(5) of FEMA 20(R) in
November, 2017 states that ‘Foreign investment into an Indian company,
engaged only in the activity of investing in the capital of other Indian
company/ies, will require prior approval of the Government. A core investment
company (CIC) will have to additionally follow the Reserve Bank’s regulatory
framework for CICs’.
- The above regulation was amended in March,
2018 which allowed foreign investment up to 100% under automatic route in
investing companies registered as NBFCs with RBI.
- Regulation 4 of the erstwhile FEMA 20, which
stated that ‘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.’
CONTRAVENTION
|
Nature
of default
|
Amount
involved
(in INR)
|
Time
period of default
|
|
Receiving
FDI in Indian company which is engaged in investing in capital of other
companies
|
Rs.
28,68,95,310
|
Seven
months approx.
|
|
Taking
on record share transfer between two non-residents when foreign investment
itself was not permitted
|
Rs.
55,50,64,380
|
|
Total
|
Rs.
84,19,59,690
|
|
Compounding
penalty
A compounding penalty of Rs.
43,09,797 was levied.
Comments
It is interesting to note that
generally transfer of shares between two non-residents is not subject to any
reporting requirement by the Indian company. Form FC-TRS regarding reporting
transfer of shares of an Indian company is required to be filed only when
either the transferor or the transferee is an Indian resident. Thus, any
transfer of shares between resident to non-resident or vice versa is required
to be reported in Form FC-TRS but not any transfer of shares between two
non-residents.
However, where FDI itself is not
permitted under the 100% automatic route and is subject to prior approval of
the Government, any transfer of shares between two non-residents would also be
subject to prior approval. Hence, Indian companies engaged in sectors where
prior approval of Government is required should be cautious and ensure that any
transfer of shares between two non-residents is undertaken only after obtaining
prior approval of Government.
B. M/s Star
Health and Allied Insurance Co. Ltd.
Date of order:
29th November, 2019
Regulation: FEMA
20(R)/2017 [Foreign Exchange Management (Transfer or Issue of Security by a
Person Resident Outside India) Regulations, 2017]
ISSUE
Delay in allotment of shares
within 60 days of receipt of share capital.
FACTS
(i) Applicant company is engaged in the business of non-life insurance.
(ii) It received FDI from two Mauritian companies amounting to Rs.
30,50,00,079 in December, 2018.
(iii) Shares were allotted by the applicant company to the above
shareholders after a delay of three months and ten days (approximately) beyond
the stipulated time of 60 days from the date of receipt of the consideration.
Regulatory
provision
Paragraph 2(2) of Schedule I to
Notification No. FEMA 20(R)/2017-RB, states that capital instruments shall be
issued to the person resident outside India making such investment within 60
days from the date of receipt of the consideration.
Contravention
The amount of contravention is Rs
30,50,00,079 and the period of contravention three months and ten days.
Compounding
penalty
A compounding penalty of Rs.
15,75,000 was levied.
Comments
The above order highlights the
fact that RBI is taking a serious view of contraventions relating to delay in
allotment of shares to foreign investors. Hence, it is absolutely critical that
in respect of foreign investment, shares should be allotted within the
prescribed period of 60 days as per erstwhile FEMA-20(R) and even under the new
Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019
effective from 17th October, 2019.
EXPORT
OF GOODS AND SERVICES
C. H.F. Metal
Art Private Limited and Azoy Bansal
Date of order: 5th
November, 2019
Regulation: FEMA
23/2000-RB [Foreign Exchange Management (Export of Goods and Services)
Regulations, 2000] and FEMA 23R/2015-RB [Foreign Exchange Management (Export of
Goods and Services) Regulations, 2015]
ISSUE
(i) Failure to export goods within the prescribed
period of one year from the date of receipt of advance.
(ii) Failure to realise export proceeds within the
stipulated time period.
(iii) Contravention deemed to have been
committed by director who was in charge of the company at the time of
contravention.
FACTS
- The applicant company is engaged in the
business of minting and supply of precious metal coins and bars, as well as
high quality medals, gifts and promotional items in non-precious metals.
- The company received certain export advances
between January, 2008 and July, 2011 amounting to Rs. 6,30,79,984 but was
unable to make exports within the prescribed time limit. However, the company
has adjusted the export advances against subsequent exports made during the
period from August, 2013 to June, 2014.
- The company could not realise export proceeds
against certain exports amounting to Rs 10,58,50,346 within the prescribed time
period 2014-2018.
Regulatory provisions
- Regulation 16 of Notification No. FEMA
23/2000- RB, where an exporter receives advance payment (with or without
interest) from a buyer outside India, the exporter shall be under an obligation
to ensure that the shipment of goods is made within one year from the date of
receipt of advance payment.
- Regulation 9 of Notification No. FEMA 23/2000-
RB and FEMA 23(R), the amount representing the full export value of goods or
software exported shall be realised and repatriated to India within nine months
from the date of export.
- Section 42(1) of FEMA states that, ‘Where a
person committing a contravention of any of the provisions of this Act or of
any rule, direction or order made thereunder is a company, every person who, at
the time the contravention was committed, was in charge of, and was responsible
to, the company for the conduct of the business of the company as well as the
company, shall be deemed to be guilty of the contravention and shall be liable
to be proceeded against and punished accordingly’.
CONTRAVENTION
|
Relevant
Provision
|
Nature
of default
|
Amount
involved
(in INR)
|
Time
period of default
|
|
Regulation
16 of FEMA 23/2000-RB
|
Failure
to export the goods within a period of one year from the date of receipt of
advance
|
Rs.
6,30,79,984
|
11
months to 4.6 years
|
|
Regulation
9 of FEMA 23/2000-RB & FEMA 23(R)
|
Failure
to realise export proceeds within stipulated time period
|
Rs.
10,58,50,346
|
One
day to seven months
|
|
Section
42(1) of FEMA
|
Being
director of company which committed above contravention of FEMA
|
Rs.
16,89,30,330
|
11
months to 4.6 years and one day to seven months
|
Compounding
penalty
Compounding penalty of Rs.
10,32,998 was levied on the company and Rs. 1,03,300 on the director
personally.
Comments
In the instant case, the company
had committed contravention by not exporting goods against advance received
within the prescribed time frame and also by not receiving payment for exports
within the prescribed time. However, the director who was in charge of the
company was also deemed to be guilty u/s 42(1) of FEMA and hence compounding
penalties were levied both on the company as well as the director in respect of
the contraventions. Accordingly, going forward, especially in cases of export
of goods, it is advisable that directors of companies are extremely vigilant
and ensure that their company adheres to the prescribed time lines failing
which both the company as well as the directors would be personally liable for
any contravention.
BORROWING
OR LENDING IN FOREIGN EXCHANGE
D. M/s Tulsea
Pictures Private Limited
Date of order:
28th November, 2019
Regulation: FEMA
4/2000-RB [Foreign Exchange Management (Borrowing or Lending in Foreign
Exchange) Regulations, 2000]
ISSUE
(i) Borrowings from NRI without issuance of NCDs through public offer.
(ii) Utilising borrowed funds for other than business purposes.
FACTS
- The applicant company appointed an NRI as one
of the directors on its board.
- The company raised a loan of Rs. 32,96,432
from the NRI director to meet its day-to-day expenses and other liabilities.
- The loan in INR had been availed from the NRI
without issuing non-convertible debentures (NCD) through public offer.
- Out of the aforesaid amount, the applicant
company had utilised Rs. 5,98,670 for paying the lease rentals for a
residential premise taken for the NRI director and for meeting day-to-day
expenses.
- The company was granted permission to convert
the loan amount into equity, subject to lender’s consent and adherence to FDI /
pricing norms for such conversion and reporting requirements.
- The company allotted 55,056 equity shares to
the director on 5th July, 2018 against the outstanding loan amount
of Rs. 26,97,762.
Regulatory
provisions
- Regulation 5(1)(i) of Notification No. FEMA
4/2000-RB inter alia states as under:
‘Subject to the
provisions of sub-regulations (2) and (3), a company incorporated in India may
borrow in rupees on repatriation or non- repatriation basis, from a
non-resident Indian or a person of Indian origin resident outside India or an
overseas corporate body (OCB), by way of investment in non-convertible
debentures (NCDs) subject to the following conditions:
i. the issue of Non-convertible Debentures
(NCDs) is made by public offer;…’
- Regulation 6 of
Notification No. FEMA 4/2000-RB states that no person resident in India who
has borrowed in rupees from a person resident outside India shall use such
borrowed funds for any purpose except in his own business.
CONTRAVENTION
|
Relevant
Para of FEMA 4 Regulation
|
Nature
of default
|
Amount
involved
(in
INR)
|
Time
period of default
|
|
Regulation
5(1)(i) of Notification No. FEMA 4/2000-RB
|
Issue
1:
Borrowings from NRI without issuance of NCDs through public offer
|
Issue
1:
Rs.
32,96,432
|
Approximately
7 years
|
|
Regulation
6 of Notification No. FEMA 4/2000-RB
|
Issue
2:
Utilising borrowed funds for purpose other than business
|
Issue
2:
Rs.
5,98,670
|
Approximately
7 years
|
Compounding
penalty
A compounding penalty of Rs.
1,29,213 was levied.
Comments
It is important to note that
borrowings in INR by an Indian company from its NRI director, even though
permissible under the Companies Act, 2013, is not permissible under FEMA
regulations. Under FEMA, INR borrowings from NRIs are permitted only through
issuance of NCDs made by public offer under both repatriation as well as
non-repatriation route.
OVERSEAS
DIRECT INVESTMENT (ODI)
E. Ms Pratibha
Agrawal
Date of order:
11th November, 2019
Regulation: FEMA
120/2004 [Foreign Exchange Management (Transfer or Issue of any Foreign
Security) Regulations, 2004]
ISSUE
Acquisition of foreign securities
by way of gift from a person resident in India.
FACTS
- The applicant was a resident individual and
the spouse of a senior management employee of Sterlite Industries India Limited
from 2001 to 2008.
- The senior employee was offered 8,000 shares
of Vedanta Resources Plc, London, in March, 2004 to be issued in two tranches.
The first tranche of 4,000 shares was allotted in March, 2004 and second in
February, 2005.
- The consideration paid for the shares allotted
in the second tranche was equivalent to face value, i.e., USD 400 (INR 17,532).
- Out of the 4,000 shares of the second
tranche, the senior employee gifted 3,000 to the applicant (Ms. Pratibha
Agrawal) and, accordingly, share certificates for these 3,000 shares were
issued in the name of the applicant.
Regulatory
provisions
As per Regulation 22(1)(i), read
with Regulation 3, a person resident in India being an individual may acquire
foreign securities by way of gift only from a person resident outside India and
not from another Indian resident.
CONTRAVENTION
|
Relevant
Para of FEMA 120 Regulation
|
Nature
of default
|
Amount
involved
(in INR)
|
Time
period of default
|
|
Regulation
22(1)(i)
|
Acquisition
of foreign securities by way of gift from a person resident in India
|
Rs.
22,49,232
|
Approximately
13 years
|
Compounding
penalty
Compounding penalty of Rs. 66,869
was levied.
Comments
In view of the peculiar language
of FEMA 120, it is advisable that appropriate care is taken in respect of gifts
of shares of foreign companies between residents and non-residents. Under the
existing provisions, an Indian resident can acquire shares by way of gift from
only a non-resident and not from a resident.
F. Masibus
Automation and Instrumentation Pvt. Ltd.
Date of order:
26th November, 2019
Regulation: FEMA
120/2004 [Foreign Exchange Management (Transfer or Issue of any Foreign
Security) Regulations, 2004]
ISSUES
(i) Sending remittances to overseas company without submitting Annual
Performance Report (APR);
(ii) Delay in submission of duly completed Part I of the Form ODI;
(iii) Overseas investment undertaken by a method of funding not
prescribed;
(iv) Delayed receipt of proof of investment;
(v) Delayed submission of APRs;
(vi) Disinvestment from the overseas entity without obtaining fair
valuation certificate prior to its divestment;
(vii) Disinvestment undertaken from the overseas entity when it had
outstanding loans;
(viii) Disinvestment without
prior approval of RBI when it was not eligible under the automatic route.
FACTS
- The applicant is engaged in the business of
manufacturing of electrical equipment, wiring devices, fittings, etc.
- The applicant remitted SGD 990 on 4th
July, 2008 towards 99% stake in the overseas JV, viz., Masibus Automation and
Instrumentation (Singapore) Pte. Ltd. in Singapore.
- Subsequently, the applicant undertook ODI of
SGD 5,000 on 4th July, 2008 by way of payment by the director of the
applicant company in cash during his visit abroad.
- The applicant had sent seven remittances
aggregating SGD 52,000 in 2010-11 without submitting APR.
- Further, the applicant submitted Part I of
Form ODI with delay on 11th January, 2018 in respect of remittance
of SGD 5,000 made through the director on 4th July, 2008.
- Share certificate for the aforesaid
remittance of SGD 990 made in July, 2008 was received with delay (i.e. beyond
the prescribed period of six months under FEMA 120) on 8th
September, 2014.
- The applicant submitted APRs for the years
ending 2009 to 2012 with delay on 12th January, 2018.
- Disinvestment from the overseas entity was
undertaken on 11th April, 2012 without obtaining fair valuation
certificate and when it had outstanding loans.
- Accordingly, as the applicant had outstanding
loans, it was not eligible to undertake the disinvestment under the automatic
route and should have sought prior approval of RBI before disinvestment.
Regulatory
provisions
- Regulations 6(2)(iv), 6(2)(vi), 6(3), 15(i),
15(iii), 16(1)(iii), 16(1)(iv), 16(3) of FEMA 120.
CONTRAVENTION
|
Relevant
Para of FEMA 120 Regulation
|
Nature
of default
|
Amount
involved (in INR)
|
Time
period of default
|
|
Regulation
6(2)(iv)
|
Making
overseas remittances towards share capital without submitting APR of the
overseas entity
|
Rs. 18,46,500
|
Five
years
|
|
Regulation
6(2)(vi)
|
Overseas
investment made through director in cash was treated as investment of Indian
company, hence Indian company ought to have filed Part I of Form ODI for
making remittance. There was delay in submission of Part I of the Form ODI in
respect of the
above investment
|
Rs.
1,60,600
|
4th
July, 2008 to
11th January, 2018
|
|
Regulation
6(3)
|
Overseas
investment undertaken through cash payment made by director is not a
prescribed method of funding
|
Rs.
1,60,600
|
4th
July, 2008 to
13th May, 2019
|
|
Regulation
15(i)
|
Proof of
investment made in overseas entity should be received and filed with RBI
within six months of making remittance. There was delay in providing share
certificate to RBI in respect of overseas remittances made
|
Rs.
31,799
|
4th
July, 2008
to 8th September, 2014
|
|
Regulation15(iii)
|
APR of
the overseas entity based on its audited accounts has to be filed annually on
or before 31st December. Applicant delayed submission of APR in
respect of its
overseas entity
|
Not
applicable
|
1st
July, 2013 to
21st September, 2018
|
|
Regulation
16(1)(iii)
|
Any
divestment of overseas entity has to be undertaken at a price which is not
less than its fair value as certified by CA / CPA based on last audited
financials of overseas entity. In the instant case, applicant divested its
overseas entity without obtaining its fair valuation certificate from CA /
CPA
|
Rs.
31,799
|
11th
April, 2012 to
13th May, 2019
|
|
Regulation
16(1)(iv)
|
An
Indian party can undertake divestment of its overseas entity only when the
overseas entity does not have any amount payable to Indian entity. In the
instant case, the applicant had undertaken disinvestment of the overseas
entity when it still had outstanding loans payable to it
|
Rs.
23,56,703
|
11th
April, 2012 to
13th May, 2019
|
|
Regulation
16(3)
|
Indian
entity wanting to divest its overseas entity which has any amount payable to
it would need prior approval of RBI before undertaking divestment. In the
instant case, the applicant undertook disinvestment without prior approval of
RBI when not eligible under automatic route
|
Rs.
23,91,521
|
11th
April, 2012 to
13th May, 2019
|
Compounding
penalty
Compounding penalty of Rs.
3,61,126 was levied.
Comments
In view of numerous compliances
prescribed under FEMA 120 in respect of overseas investments, it is essential
that adequate care is taken by every Indian entity in respect of its overseas
investment. Specific care should be taken to ensure that overseas investment by
any Indian entity is routed only through Indian banking channels and not made
in cash by any person visiting overseas.
Further, Regulation 16(1)(iv) of
FEMA 120 states that at the time of divestment, the Indian party should not
have any outstanding dues by way of dividend, technical know-how fees, royalty,
consultancy, commission or other entitlements and / or export proceeds from the
overseas JV or WOS. This includes any amount due, including loan payable by the
overseas entity to an Indian entity. Hence, appropriate care should be taken to
ensure that the overseas entity does not have any amount payable to an Indian
entity at the time of its disinvestment.
G. Essar Steel
India Ltd.
Date of order:
22nd November, 2019
Regulation: FEMA
120/2004 [Foreign Exchange Management (Transfer or Issue of any Foreign Security)
Regulations, 2004]
ISSUES
(i) Effecting remittance without prior approval of RBI when the Indian
party (IP) was under investigation by the Department of Revenue Intelligence
(DRI);
(ii) Delayed submission of APRs;
(iii) Disinvestment without obtaining valuation.
FACTS
- The applicant company set up a wholly-owned
subsidiary (WOS), Essar Steel Overseas Ltd., in Mauritius by remitting USD 1
(INR 47) on 7th August, 2010.
- Since the applicant company was under
investigation by the DRI at the time of effecting the remittance, it was not
eligible to make ODI under the automatic route.
- The WOS was later liquidated on 9th
March, 2012 and no valuation was done as required. The transactions were taken
on record on 14th August, 2019.
- Further, the applicant had reported Annual
Performance Reports (APRs) for the accounting years 2011 and 2012 with a delay
on 15th June, 2013 and 17th December, 2013.
Regulatory
provisions
- Regulation 6(2)(iii) of FEMA 120 provides
that Overseas Direct Investment under automatic route is permitted in certain
cases provided ‘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, or under investigation by any investigation / enforcement agency
or regulatory body.’
- Regulation 15(iii) of FEMA 120 states that, ‘An
Indian Party which has acquired foreign security in terms of the Regulation in
Part I shall submit to the Reserve Bank, through the designated Authorised
Dealer, every year on or before a specified date, an Annual Performance Report
(APR) in Part III of Form ODI in respect of each JV or WOS outside India…’. The specified date for filing APR currently
is on or before 31st December every year.
- Regulation 16(1) provides that an Indian
party may disinvest to a person resident outside India subject to the following
conditions:
• (iii)
if the shares are not listed on the stock exchange and the shares are
disinvested by a private arrangement, the share price is not less than the
value certified by a Chartered Accountant / Certified Public Accountant as the
fair value of the shares based on the latest audited financial statements of
the JV / WOS.
CONTRAVENTION
|
Relevant
Para of FEMA 120 Regulation
|
Nature
of default
|
Amount
involved (in INR)
|
Time
period of default
|
|
Regulation
6(2)(iii)
|
Effecting
remittance and incorporating overseas entity under the automatic route
without obtaining prior approval of RBI when the Indian Party (IP) was under
investigation by DRI
|
Rs.
47
|
Seven
years five months, to nine years and one month, approximately
|
|
Regulation
15(iii)
|
Delayed
submission of APRs
|
|
Regulation
16(1)
|
Disinvestment
of the overseas entity without obtaining fair valuation certificate from CA /
CPA at the time of disinvestment
|
Compounding
penalty
A compounding penalty of Rs. 83
was levied.
Comments
In the instant case, as the
applicant was under investigation by DRI and the Enforcement Directorate (DoE)
in Mumbai and Ahmedabad, the RBI had sought a No-Objection Certificate from the
DoE before proceeding with the compounding application. However, as no reply
was received from the DoE, RBI proceeded for the compounding without prejudice
to any other action which may be taken by the authority under any other laws.
Thus, RBI compounded the above contravention even though it did not receive any
NOC from the DoE.
Besides, Indian entities wishing
to make overseas investments should understand that if there is any
investigation pending against them by any regulatory body or investigation
agency, they cannot make an overseas investment under the automatic route and
need to obtain prior approval of RBI before making such investment.
