ANALYSIS OF RECENT COMPOUNDING ORDERS
An analysis of some interesting
compounding orders passed by the Reserve Bank of India in the months from
November, 2018 to March, 2019 and uploaded on the website are given below. The article refers to
regulatory provisions as existing at the time of offence. Changes in regulatory
provisions are noted in the comments section.
BORROWING OR LENDING IN FOREIGN EXCHANGE
A. Respoint Shoes Private Limited
Date of Order: 11th
October, 2018
Regulation: FEMA 3/2000-RB
Foreign Exchange Management (Borrowing or Lending in Foreign Exchange)
Regulations, 2000
ISSUE
1) Loan proceeds were used to meet company
formation and related expenses, which were not permitted end-uses;
2) Drawdown
of proceeds before obtaining Loan Registration Number (LRN);
3) Reporting
guidelines not met.
FACTS
- The applicant company received Euros 5,000
(Rs. 2,88,600) from Hollre B.V., its parent company situated in the
Netherlands.
- Out of the said amount of Rs. 2,88,600, the
applicant accounted for Rs. 1,00,000 towards issuance of 10,000 equity shares
of Rs. 10 each and treated the remaining Rs. 1,88,600 as external commercial
borrowing (ECB) from its parent company.
- The said amount was utilised towards company
formation and related expenses.
Regulatory provisions
- As per Regulation 6 of Notification No. FEMA
3/2000-RB, a person resident in India may raise in accordance with the
provisions of the Automatic Route Scheme specified in Schedule I, foreign
currency loans of the nature and for the purposes as specified in that
Schedule.
- Paragraph 1(iv) of Schedule I to FEMA
Notification No. FEMA 3/2000-RB provides the end-uses for which ECB is
permitted. However, loan towards ‘company formation and related expenses’ is
not a permitted end-use route.
- Paragraph 1(xi) of Schedule I to FEMA
Notification No. FEMA 3/2000-RB states that drawdowns of borrowing in foreign
exchange shall be made strictly in accordance with the terms of the loan
agreement only after obtaining the loan registration number from the Reserve
Bank.
- Paragraph 1(xii) of Schedule I to FEMA
Notification No. FEMA 3/2000-RB states that the borrower shall adhere to the
reporting procedure as specified by the Reserve Bank from time to time.
Contravention
|
Relevant
Para of FEMA 3 Regulation
|
Nature
of default
|
Amount
involved
(in Rs.)
|
Time
period of default
|
|
Regulation
6 of Notification No. FEMA 3/2000-RB read with Paragraphs 1(iv), (xi) and
(xii) of Schedule I to this Regulation
|
Issue
1:
Loan proceeds were used to meet company
formation and related expenses, which were not permitted end-uses
Issue
2: Drawdown of proceeds before obtaining
Loan Registration Number (LRN)
Issue
3: Reporting guidelines not being met
|
Rs.
1,88,600
|
April,
2007 to July, 2018
|
Compounding penalty
Compounding penalty of Rs. 51,415
was levied.
Comments
Under provisions of Notification No.
FEMA 20(R)/2017-RB, if capital instruments are not allotted by the Indian
company within 60 days of receipt of consideration, the amount can be refunded
to the foreign company within 15 days of completion of the 60 days’ limit and
subject to satisfaction of the AD Bank.
Alternatively, equity shares can
also be allotted against pre-incorporation expenses incurred by the holding company
subject to fulfilment of certain conditions.
It
is relevant to note that under the new ECB Regulations notified vide
Notification No. FEMA 3R/2018-RB dated 17.12.2018 there is a negative list of
end-uses for which ECB cannot be utilised. The said negative end-use list
specifies that ECB cannot be utilised for general corporate purposes except if
it’s raised from foreign equity holder. However, this would not cover cases
where ECB is raised along with or prior to the issue of equity to the foreign investor.
B. Glenmark Life Sciences Limited
Date of Order: 7th
December, 2018
Regulation: FEMA 4/2000-RB
Foreign Exchange Management (Borrowing and Lending in Rupees) Regulations, 2000
ISSUE
Borrowing by Indian company without
issuance of Non-Convertible Debentures (NCDs) and non-compliance with reporting
requirements.
FACTS
- The applicant company’s NRI Director and
shareholder remitted Rs. 38,00,000 out of his NRE account. Out of the above
amount, Rs. 33,330 was utilised towards allotment of shares and the balance
amount of Rs. 37,66,670 was treated as loan in the books of the applicant
company.
- The applicant neither issued any NCDs to the
NRI lender nor complied with the reporting requirements. However, the applicant
reversed the transaction and remitted the amount of Rs. 37,66,670 to the NRI.
Regulatory provisions
- In terms of Regulation 5(1) of Notification
No. FEMA 4/2000-RB 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 by way of investment in non-convertible
debentures (NCDs) subject to the conditions specified therein.
Contravention
|
Relevant Para of FEMA 4 Regulation
|
Nature of default
|
Amount involved (in Rs.)
|
Time period of default
|
|
Regulation 5(1)
|
Borrowing undertaken by the applicant company without
issuance of NCD
|
Rs. 37,66,670
|
Two years five months to six years ten months, approximately.
|
Compounding penalty
A compounding penalty of Rs. 75,300
was levied.
Comments
This case reflects one common
violation wherein an Indian company obtains loan from an NRI director to meet
short-term funds. Such loan is permissible under the Indian Companies Act but
is in violation of FEMA provisions. Schedule 4 of FEMA 20(R) which deems
investment by an NRI to be domestic investment at par with the investment made
by residents, is restricted to capital instrument or convertible notes.
Borrowing and lending regulations are yet to be liberalised resulting in
limited avenues for an Indian company to raise finance from outside India. The
conclusion would have been similar even if the loan was lent from an NRO
account, subject to the provisions of Schedule 7 as contained in Notification
No. FEMA 5(R)/2016-RB.
RETENTION OF ASSETS ABROAD
C. Pradeep Khemka
Date of Order: 1st
October, 2018
Regulation: FEMA 348/2015-RB of
Foreign Exchange Management (Regularisation of assets held abroad by a person
resident in India) Regulations, 2015
ISSUE
Retention
of assets abroad that were declared under the Black Money Act (BMA) beyond 180
days from the date of declaration without prior approval of Reserve Bank.
FACTS
- The applicant, a resident Indian, declared
foreign assets (Seaworld Foundation, Liechtenstein, of which he was the settlor
and first beneficiary) to the extent of US $ 30,46,861 on 26.09.2015 under the
Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act,
2015 (BMA) and paid a tax of Rs. 11,57,19,780 on 28.12.2015 on the same.
- The applicant received an amount of $
29,71,165.38 on 13.10.2015 after liquidation of his foreign assets. However,
the balance amount of $ 89,369.04 was not remitted to India within the
specified period of 180 days, as prescribed under Regulation 4 of FEMA 348.
- No approval was sought from RBI by the
applicant for retaining the amount beyond the period of 180 days as required in
terms of Regulation 4 of FEMA 348 read with para 3(c) of A.P. (DIR Series),
Circular No. 18 dated 30.09.2015.
Regulatory provisions
- FEMA 348
provided immunity from FEMA violation in respect of declaration made by the
resident person under amnesty scheme of BMA.
- Proviso
to Regulation 4 of FEMA 348 permitted the resident person to hold declared asset
outside India beyond 180 days from date of declaration after obtaining specific
permission from RBI.
- If
aforesaid permission is denied, regulation mandates bringing back of proceeds
within 180 days from date of refusal of permission.
Contravention
|
Relevant Para of FEMA 348 Regulation
|
Nature of default
|
Amount involved
(in Rs.)
|
Time period of default
|
|
Regulation 4
|
Retention of assets abroad that were declared under the BMA
beyond 180 days without prior approval of Reserve Bank
|
Rs. 58,08,988
|
2 years approximately
|
Compounding penalty
Compounding penalty of Rs. 81,949
was levied.
Comments
Regulation 348 is applicable only to
person making declaration under amnesty scheme of BMA. It was a one-time
relaxation provided by the government to encourage people to declare
undisclosed assets held abroad and absolve themselves from draconian consequences
of BMA.
ACQUISITION AND TRANSFER OF IMMOVABLE PROPERTY
D. Mrs. Rajini Kodeswaran
Date of Order: 28th
August, 2018
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 a Sri Lankan citizen without RBI permission.
FACTS
- The applicant, a Sri Lankan citizen, had
acquired an immovable property in the year 2008 without obtaining prior
permission from the Reserve Bank of India. Subsequently, she constructed a flat
on the same property.
- The immovable property was acquired for
total consideration of Rs. 6,84,000; the cost of construction of the flat is
Rs. 32,97,085, aggregating to Rs. 39,81,085.
- Regulation 7 of FEMA 21/2000 prohibits Sri
Lankan citizens from acquiring immovable property without prior permission of
RBI. Since no prior permission was obtained, the applicant was asked to
immediately sell the property to a person resident in India.
- Pursuant to the aforesaid direction, the
property was sold by the applicant for Rs. 44,00,000.
Regulatory provision
As per Regulation 7 of Notification
No. FEMA-21/2000, no person being a citizen of Pakistan, Bangladesh, Sri Lanka,
Afghanistan, China, Iran, Nepal, Bhutan, Macau or Hong Kong shall acquire or
transfer immovable property in India, other than lease, not exceeding five
years without prior permission of the Reserve Bank.
Contravention
|
Relevant Para of FEMA 21/2000 Regulation
|
Nature of default
|
Amount involved (in Rs.)
|
Approx. Time period of default
|
|
Regulation 7
|
Purchase of immovable property by Sri Lankan citizen without
RBI permission
|
Rs. 39,81,085
|
9 years
2 months
25 days
|
Compounding penalty
Compounding penalty of Rs. 18,78,208
was levied.
Comments
It was represented based on a
valuation report that the value of land appreciated to Rs. 24,82,350.
Accordingly, undue gain was computed at Rs. 17,98,350 (difference between cost
of land Rs. 6,84,000 and value appreciation of property). Period of default was
computed from date of acquisition of immovable property till date of disposal,
i.e., regularisation. 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 holders.
FOREIGN DIRECT INVESTMENT (FDI)
E. ND Callus Info Services Pvt. Ltd.
Date of
Order: 13th December, 2018
Regulation:
FEMA 20/2000-RB Foreign Exchange Management (Transfer or Issue of Security by a
Person Resident Outside India) Regulations, 2000
ISSUE
Downstream investment by a
foreign-owned and controlled company in an Indian company engaged in core
investment activity without seeking FIPB approval.
FACTS
- The applicant company is engaged in investment
activities as a core investment company. Shareholding structure of applicant
pre- and post-acquisition is as under:
- The Mau
Co acquired the remaining 51% stake from Indian shareholders and accordingly
ICO1, ICO2 and the applicant became directly and indirectly foreign-owned and
controlled companies.
- The
applicant did not take government / erstwhile FIPB approval as was required
since the applicant was engaged in core investment activities.
- The
applicant became part of Vodafone group which acquired control over Hutchison
group through indirect transfer.
Regulatory provision
Regulation 14(6)(ii) of Notification
No. FEMA 20/2000-RB states that foreign investment in an Indian company,
engaged only in the activity of investing in the capital of other Indian
company/ies, will require prior government / FIPB approval, regardless of the
amount or extent of foreign investment.
Contravention
The amount of contravention is Rs.
508,31,13,300 and the period of contravention is 4 years and 3 months
approximately.
Compounding penalty
Compounding penalty of Rs.
3,56,31,793 was levied.
Comments
This case reveals the care and
precaution to be taken at the time of increase in stake by a foreign investor
in an Indian company. Not only FEMA compliance needs to be undertaken by Target
company but also by downstream investment held by the Target company.
Regulations are not only applicable at the time of making downstream
investment, but also on account of subsequent change in holding company
shareholding making regulations applicable to investment already made by the
Indian company.
Under revised FEMA 20(R)/2017-RB as
amended from time to time, a core investment company is covered under other
financial services under which 100% foreign investment is permitted under the
automatic route subject to compliance of applicable RBI regulations.
