BCAJ | Bombay Chartered Accountant Journal

FEMA FOCUS

(A) Standard Operating Procedure for processing FDI Proposals notified by Department of Industrial Policy and Promotion dated 9^th November, 2020.

(I) Application

The government has notified the Standard Operating Procedure (SOP) to be followed for obtaining approvals for foreign investment in sectors / activities requiring government approval. All applications for approval would need to be filed online through the Foreign Investment Facilitation Portal (FIFP) on www.fifp.gov.in in the specified format and containing documents mentioned in Annexure 1 to the SOP.

Further, once an application is received, the Department of Promotion of Industrial and Internal Trade (DPIIT) will identify the Administrative Ministry / Department (Competent Authority) concerned which will process the case. Detailed guidelines have been provided in respect of timelines to be followed for processing the applications with an outer limit of ten weeks or 12 weeks (for companies requiring security clearance from the Ministry of Home Affairs) from the date of filing of the application. Once the application is approved, an Approval letter as per Annexure 2 to the SOP will be issued to the applicant.

(II) Name of Competent Authority for approving the application

As per the SOP, the Competent Authority (CA) for approving / rejecting foreign investment for different sectors has been specified below:

S. No.	Activity / sector	Administrative Ministry / Department
(i)	Mining	Ministry of Mines
(ii)	Defence
	a) Items requiring Industrial Licence under the Industries (Development & Regulation) Act, 1951 and / or Arms Act, 1959 for which the powers have been delegated by the Ministry of Home Affairs to the DPIIT	Department of Defence Production, Ministry of Defence
	b) Manufacturing of small arms and ammunition covered under the Arms Act, 1959	Ministry of Home Affairs
(iii)	Broadcasting	Ministry of Information & Broadcasting
(iv)	Print Media and Digital Media	Ministry of Information & Broadcasting
(v)	Civil Aviation	Ministry of Civil Aviation
(vi)	Satellites	Department of Space
(vii)	Telecommunication	Department of Telecommunications
(viii)	Private Security Agencies	Ministry of Home Affairs
(ix) (a)	Applications arising out of Press Note 3 of 2020 dated 17^th April, 2020 read with Foreign Exchange Management (Non-Debt Instruments) Amendment Rules, 2020 dated 22^nd April, 2020 as under: (A) investments from an entity of a country which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country; and / or (B) transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction / purview of Para 3.1.1(a) of the FDI Policy (i.e., investment from country with which India shares land border)	The Administrative Ministry / Department concerned as identified by the DPIIT
(ix)(b)	Cases pertaining to Government approval route sectors / activities, requiring security clearance as per extant FEMA Regulations, FDI Policy and security guidelines, as amended from time to time	Nodal Administrative Ministries / Departments
(x)	Trading (single, multi-brand and food product retail trading)	Department for Promotion of Industry and Internal Trade
(xi)	FDI proposals by Non-Resident Indians (NRIs) / Export-Oriented Units (EOUs) requiring approval of the Government	Administrative Ministry / Department concerned as identified by the DPIIT
(xii)	Application relating to issue of equity shares under the FDI Policy under the Government route for import of capital goods / machinery / equipment (excluding second-hand machinery)
(xiii)	Applications relating to issue of equity shares for pre-operative / pre-incorporation expenses (including payments of rent, etc.)
(xiv)	Financial services which are not regulated by any Financial Sector Regulator or where only part of the financial services activity is or where there is doubt regarding the regulatory oversight	Department of Economic Affairs
(xv)	Applications for foreign investment into a core investment company or an Indian company engaged only in the activity of investing in the capital of other Indian company/ies	Department of Economic Affairs
(xvi)	Banking (public and private)	Department of Financial services
(xvii)	Pharmaceuticals	Department of Pharmaceuticals

Further, it has been clarified that the administrative Ministry / Department concerned as identified above by the DPIIT would continue to be the Competent Authority for post facto approval for foreign investment.

(III) Detailed flowchart for processing the application

The detailed process laid down in the SOP for processing the application is explained by way of the flow chart as under:

Following proposals will require security clearance from the MHA:

i) Investments in Broadcasting, Telecommunication, Satellites – establishment and operation, Private Security Agencies, Defence, Civil Aviation and Mining & Mineral, separation of titanium-bearing minerals and ores, its value addition and integrated activities;

ii) Applications arising out of Press Note 3 of 2020 dated 17^thApril, 2020 read with Foreign Exchange Management (Non-Debt Instruments) Amendment Rules, 2020 dated 22^ndApril, 2020 as under:

a) investments from an entity of a country which shares land border with India or where the beneficial owner of an investment in India is situated in or is a citizen of any such country. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors / activities other than defence, space, atomic energy and sectors / activities prohibited for foreign investment; and / or
b) transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction / purview of paragraph 3.1.1(a) of the FDI Policy.

** In case application is not digitally signed, then applicant to submit physical copy to CA within seven days of receipt of email from DPIIT. If not submitted, then additional timeline of seven days can be given, failing which application will be treated as closed.

^ If no clarifications are received from the applicant, additional time of seven days should be given. Thereafter, if no additional details are provided, final reminder for submitting application in seven days to be given to the applicant, failing which application should be treated as closed.

(IV) Specific clarifications

Further, the SOP has also clarified the following points:

(a) Where FDI applications are incomplete – CA is not required to obtain concurrence from DPIIT for closure of the application. However, where applicant has submitted all details and CA proposes to reject the application, concurrence from DPIIT is required. The CA for closure of FDI application due to incomplete information / document would be the Secretary of the respective Ministry / Department;

(b) Where the FDI application seeks an amendment to an earlier approval granted by Government / FIPB and concurrence of DPIIT is sought for rejecting such an amendment and ask to file a fresh application – The applicant should not be asked to file a fresh application;

(c) NCLT has not yet approved the scheme of merger / demerger and concurrence of DPIIT is sought for rejecting the application – Approval of NCLT / competent authority as applicable under the Companies Act, 2013 is required before grant of FDI approval. Hence, where such approval is not received, the applicant should be advised to resubmit it upon receipt of requisite approval; and

(d) CA seeks DPIIT’s concurrence for conditions requiring compounding under FEMA / compliance of other laws / orders of courts – No concurrence from DPIIT required in such cases.

(V) Approving authority in DPIIT – The Secretary, DPIIT, is the competent authority for a decision on cases referred by other Ministry / CA seeking concurrence of the DPIIT.

(VI) Database – DPIIT and each CA to maintain a database on proposals received with details like name of investor, investee, date of receipt, company details, amount of foreign investment, date of grant of approval / rejection letter.

(VII) Surrender of approval – CA may accept withdrawal of approval letter from the applicant after receiving declaration clearly explaining reasons for withdrawal / surrender.

(VIII) Compounding of contraventions – Any contravention of FEMA would be subject to compounding as per Foreign Exchange (Compounding Proceedings) Rules, 2000 as amended from time to time.

Thus, the laying down of the detailed SOP in relation to obtaining approval under the Government route along with timelines for respective Ministries / Departments would definitely help in streamlining the process of approvals.

(B) Amendments to FDI Regulations governed by Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 by issuance of Notification dated 8^th December, 2020.

The Government had amended the above regulations in April, 2020 by placing restrictions on investments from countries with which India shares land border and taking such investments under the prior approval route. The Amendment has now clarified that investment made by a multilateral bank or fund of which India is a member shall not be treated as an entity of particular country and, hence, the beneficial ownership condition is not required to be examined in relation to investments from such multilateral bank or fund.

Further, FDI limit in the defence sector has been increased to 74% under the automatic route from the existing limit of 49%. Any FDI above 74% will be under the Government route. Additionally, certain additional conditions have also been specified for FDI in the defence sector both for existing as well as new companies.

(C) Amendments to Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 by issuance of Notification dated 15^th June, 2020.

(I) Schedule II – Investment by Foreign Portfolio Investors (FPI) & Schedule VIII – Investment by person resident outside India in an Investment Vehicle

Schedule II of FEMA (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 provided for the mode of payment and remittance of sale proceeds in case of investments by FPIs. There was a specific prohibition in Schedule II under which balances held in Special Non-Resident Rupee (SNRR) Accounts could not be utilised for investment in units of Investment Vehicles other than units of domestic mutual funds. The said prohibition has now been deleted by issuance of Notification dated 15^th June, 2020.

Accordingly, with effect from 15^th June, 2020, investment in REITS, InVits apart from domestic mutual funds can be made by FPIs from balances held in SNRR Accounts.

Similarly, amendments have been made in Schedule VIII which provides for the mode of payment in case of investment by a non-resident in an Indian Investment Vehicle. The Amendment now permits FPIs and FVCIs to invest out of their balance held in their SNRR Accounts for trading in units of an Indian Investment Vehicle listed or to be listed (primary issuance) on Indian stock exchanges.

(D) Amendment in Foreign Exchange Management (Export and Import of Currency) Regulations, 2015 – FEMA 6(R) / 2015.

The above Regulation has now been amended to provide that on a specific application, RBI may allow a person to export or import Indian currency notes subject to such terms and conditions as specified by RBI.

(E) Prohibition for opening any Branch office / Liaison office / Project office or any other business place by foreign law firms.

RBI had earlier issued AP DIR Circular No. 23 dated 29^th October, 2015 wherein it was instructed that no fresh permissions / renewal of permissions shall be granted by RBI / AD Bank to any foreign bank for opening their liaison office in India as the matter was pending for disposal with the Supreme Court.

RBI has now issued AP DIR Circular No. 7 dated 23^rd November, 2020 wherein it has directed that foreign lawyers / foreign law firms / companies or any other person resident outside India will not be permitted to establish any branch office / project office / liaison office / any other place of business in India for the purpose of practising legal profession.

(F) Delegation of compounding powers to Regional offices / sub-offices of RBI.

RBI has issued AP DIR Circular No. 06 dated 17^th November, 2020 clarifying that post the Notification of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 and Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 in October, 2019 which superseded the earlier FDI Notification FEMA 20(R) / 2017-RB, compounding powers in relation to the following contraventions have been delegated to the Regional offices of the RBI.

FEM (Non–Debt Instruments) Rules, 2019 dated 17^th October, 2019
Relevant paragraph	Nature of contravention
Rule 2(k) read with Rule 5	Investment made by person resident outside India shall be subject to entry routes, sectoral caps or the investment limits
Rule 21	Price of equity instrument of an Indian company issued to person resident outside India or transferred from person resident in India to person resident outside India or vice versa shall be subject to pricing guidelines
Paragraph 3 (b) of Schedule I (Issue of shares without approval of RBI or Government, wherever required)	The total foreign investment shall not exceed the sectoral or statutory cap
Rule 4 (Receiving investment in India from non-resident or taking on record transfer of shares by investee company)	An Indian entity or an investment vehicle or a venture capital fund or a firm or an association of persons or a proprietary concern may receive investment in India from a person resident outside India or record such investment in its books subject to approval of RBI
Rule 9(4) and Rule 13(3)	Person resident in India may, by way of gift, transfer equity instrument or units of an Indian company to person resident outside India with the prior approval of RBI and subject to certain conditions; NRI or an OCI or an eligible investor under Schedule IV of these rules may, by way of gift, transfer equity instrument or units of an Indian company on a non-repatriation basis with the prior approval of RBI and subject to certain conditions

FEM (Mode of Payment and Reporting of Non-Debt Instruments) Regulations dated 17^th October, 2019
Relevant Paragraph	Nature of contravention
Regulation 3.1(I)(A)	Issuance of equity instrument to person resident outside India within 60 days from the date of receipt of the consideration
Regulation 4(1)	Filling of Form FC-GPR within 30 days from the date of issue of equity instrument
Regulation 4(2)	Filling of Form FLA on or before 15^th July of each year
Regulation 4(3)	Filling of Form FC-TRS within 60 days of transfer of equity instrument or receipt / remittance of funds, whichever is earlier
Regulation 4(6)	Filling of Form LLP(I) within 30 days from the date of receipt of the amount of consideration
Regulation 4(7)	Filling of Form LLP(II) within 60 days from the date of receipt of funds
Regulation 4(11)	Filling of Form DI within 30 days from the date of allotment of equity instrument

BCAJ Admin

FEMA FOCUS

(I) Dispensation
with requirement to file Form ARF within 30 days of receipt of funds pertaining
to share capital from foreign investor

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:

Scenario

Investor entity making
downstream investment

Investee entity

Applicability of Form DI
under old FDI regulations

Applicability of Form DI
under New FDI regulations

Scenario 1

Indian LLP / Any Indian
entity (excluding Indian company)

Indian company

Not applicable

Applicable

Scenario 2

Indian company

Indian LLP / Any Indian
entity (excluding Indian company)

Not applicable

Applicable

Scenario 3

Indian company

Applicable

Scenario 4

Indian investment vehicle

Indian company / Any other
Indian entity

Not applicable

Applicable

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^ndFebruary, 2017, requires filing of FLA return on or
before the 15^th day of July each year.

Contravention:

Relevant Para of FEMA 20 Regulation

Nature of default

Amount involved
(in INR)

Time period of default

Paragraph 8 of Schedule 1

Allotment of shares to Non-Resident investors prior to receipt
of consideration

10,06,069

1 year 6 months to 3 years 10 months

Paragraph 9(1)(A) of Schedule 1

Delay in reporting of inward remittances for share capital to
RBI

10,06,069

3 months to 2 years & 8 months

Paragraph 9(1)(B) of Schedule 1

Delay in filing of Form FC-GPR

10,00,000

4 years & 6 months

Paragraph 9(2) of Schedule 1

Non-filing / delayed filing of FLA return.

–

5 financial years

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^thApril, 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

Sr No

Date of payment

Mode of payment

Amount (INR)

17^th March 2007

NRI transferred funds from his NRE A/c to its Indian company,
AHPL which in turn made payment to Applicant

12,50,000

4^th April 2007

12,50,000

16^th October 2007

33,50,000

23^rd April 2008

Funds transferred from AHPL to SAPL, which in turn made the
payment to applicant

182,329

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:

Relevant Para of FEMA 20
Regulation

Nature of default

Amount involved (in INR)

Time period of default

Regulation 10A(b)(iii) read
with Paragraph 8 of Schedule 1

Receipt of sale
consideration by the applicant through third parties, not being a permitted
method of payment under FEMA Regulations

59,50,000

8 years & 7 months to 9
years & 8 months

Regulation 10A(b)(iii)

Receipt of sale
consideration by the applicant on deferred payment basis

34,50,000

9 years & 8 months

Regulation 10A(b)(iii)

Transfer of shares by the
applicant without filing Form FC-TRS

59,50,000

Approx. 4 years

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^stMarch, 2015 to the year ended 31^stMarch, 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^stMarch, 2015 and 31^stMarch, 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^thAugust, 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:

Relevant Para of FEMA 120 Regulation

Nature of default

Amount involved (in INR)

Time period of default

Regulation 16(1)(iii)

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

Rs. 13.67 lakh

8 years &
7 months

Regulation 16(1)(v)

Disinvestment of stake in
overseas WOS even though the same was not in operation during the previous
year.

Rs. 13.67 lakh

8 years &
7 months

Regulation 15(iii)

Non-submission of APR
annually

Rs. 13.67 lakh

8 years &
7 months

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.

BCAJ Admin

FEMA FOCUS

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: 1^st 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 28^th 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

15^th April, 2015 to 26^th 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: 15^th 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: 13^th 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 14^th 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: 12^th 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 31^stMarch, 2016 without obtaining prior RBI
approval.

Post-facto approval was granted by RBI
on 12^th 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 7^th November,
2017.

E. Ramasubramanian Balasubramanian

Date of order: 12^th 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 9^th
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: 15^th 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: 8^thMarch, 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 3^rd 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 13^th
July, 2012 to 17^th 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: 18^thMarch, 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 1^stApril, 2013 to 4^th
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 4^th
January 2013 to 10^th 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.

BCAJ Admin

FEMA FOCUS

(i) LIBERALISATION OF THE FDI REGIME

On 28^th August,
2019 the Union Cabinet chaired by the Prime Minister approved several proposals
for review of Foreign Direct Investment in the coal mining, contract
manufacturing and single brand retail trade sectors. A press release stated
that the Cabinet had approved major proposals for relaxation of the existing
Foreign Direct Investment Policy (FDI Policy) in these sectors:

COAL MINING

Proposal

Permit 100% FDI under
automatic route for sale of coal, for coal mining activities, including
associated processing infrastructure, subject to provisions of the Coal Mines
(Special Provisions) Act, 2015 and the Mines and Minerals (Development and
Regulation) Act, 1957 as amended from time to time, and other relevant acts on
the subject. ‘Associated Processing Infrastructure’ would include coal washery,
crushing, coal handling, and separation (magnetic and non-magnetic).

CONTRACT MANUFACTURING

Proposal

The present FDI policy
provides for 100% FDI under automatic route in the manufacturing sector. There
is no specific provision for contract manufacturing in the policy. In order to
provide clarity on contract manufacturing, it has been decided to allow 100% FDI
under automatic route in contract manufacturing in India as well.

Foreign
investment in ‘manufacturing’ sector is under automatic route. Manufacturing
activities may be conducted either by the investee entity or through contract
manufacturing in India under a legally tenable contract, whether on
principal-to-principal or principal-to-agent basis.

Comments

The law proposes to clarify
that manufacturing need not be done by the FDI entity but can also be done by
any other entity. This proposal will set to rest concerns expressed by some
quarters that contract manufacturing is a trading activity because a company
only sells a product after getting it manufactured.

The contract manufacturer
need not be a group company or working exclusively for an FDI entity. Further,
the arrangement can be on principal-to-principal or principal-to-agent basis.
Thus, the policy includes the typical contract manufacturer as also the toll
manufacturer.

A manufacturer is permitted
to sell products manufactured in India through wholesale and / or retail,
including through e-commerce, without government approval.

Thus,
this proposal is likely to open up a number of opportunities for retail trading
and promote label products without inviting extant restrictions applicable to
retail trading.

SINGLE BRAND RETAIL TRADE (SBRT)

Proposal

As per the existing FDI
policy, 100% FDI is allowed under automatic route for SBRT activity. However,
there are various conditions that need to be fulfilled. The government has
relaxed some of these conditions to attract more FDI for SBRT activities in
India.

Local
sourcing norms

The existing FDI policy
provides that in respect of the SBRT entity having more than 51% FDI, the
sourcing of 30% of value of goods purchased must be done from India only. In this
regard, the SBRT entity is permitted to set off its incremental sourcing of
goods (by non-residents undertaking SBRT in India either directly or through
their group companies) from India for global operations against the mandatory
30% local sourcing requirement during the initial five years only. After five
years, the SBRT entity is required to meet the 30% sourcing norms directly
towards its India operations on an annual basis.

With regard to the above,
the government has now proposed to relax these conditions as under:

Local
sourcing for domestic as well as export sales by SBRT entity:
All the procurements made from India by the SBRT entity for the single brand
shall be counted towards local sourcing, irrespective of whether the goods
procured are sold in India or exported, and the same would apply even beyond
the initial five years.

Incremental
sourcing vs. year-on-year sourcing: As per
the extant policy, only that part of the global sourcing is considered for
abovementioned set-off towards local sourcing requirement which is over and
above the previous year’s value, i.e., only incremental sourcing is considered
for set-off against local sourcing requirements. The government has now decided
the entire (and not the incremental) sourcing from India for global operations
shall be considered towards local sourcing requirement.

Direct and indirect sourcing: It has also been decided that the global sourcing would cover sourcing
of goods from India for global operations not only by non-residents undertaking
SBRT in India either directly or through their group companies (resident or
non-resident), but also by an unrelated third party, done at the behest of the
SBRT entity or its group companies under a legally tenable agreement.

E-commerce

As per the existing policy,
an SBRT entity must operate through brick-and-mortar stores before starting
retail trading of that brand through e-commerce. However, the government has
now decided to allow retail trading through online trade prior to opening of
brick-and-mortar stores, subject to the condition that the SBRT entity opens
brick-and-mortar stores within two years from the date of start of online
retail.

DIGITAL MEDIA

Proposal

The
extant FDI policy provides for 49% FDI under approval route in up-linking of
‘News and Current Affairs’ TV channels. It has been decided to permit 26% FDI
under government route for uploading / streaming of news and current affairs
through digital media on the lines of print media.

Comments

(i) This
proposal has given rise to more questions than answers. FDI policy in print
media and broadcasting content service provides for uplinking news and current
affairs TV channels and were defined;

(ii) There
was no clarity in law for FDI in digital media. As per one view, since
uploading / streaming of news and current affairs through digital media is not
covered by sectors or activities listed in Regulation 16 of FEMA 20(R)/2017,
FDI up to 100% was permitted under automatic route;

(iii)
Thus, considering the exponential growth, internet penetration, reducing prices
of smart phones and so on, Indian companies engaged in digital media invited FDI
investments, such as Quint, Dailyhunt, Huffpost, VC Circle, etc. A question
arises on FDI investments made in such companies. Will the law require such
companies to reduce FDI holding?

(iv) In
case of startups engaged in said activities, cap on foreign investment may
hamper future funding as such startups will have to rely on domestic investors
to raise capital;

(v) It is a popular practice for media companies to stream news live on
their apps and websites (e.g., Republic TV, NDTV News, Aaj Tak Live TV, etc.).
Extant FDI policy provides for 49% FDI under approval route in up-linking of
news and current affairs TV channels. Now, the proposal provides 26% limit for
streaming news through digital media. Thus, the issue arises whether differing
FDI threshold will mandate media companies to house digital media in a separate
company and comply with FDI norms. Even if the division is spun off, the
company will be required to give exit to FDI investors which may be a
complicated affair;

(vi)
Further, the proposal brings uploading / streaming of news and current affairs
through digital media under government route. This may result in delays and
mandatory compliance with conditions imposed by ministries concerned;

(vii)
Impact of the above proposal on streaming services offered on social media
platforms such as Facebook and Google is also not clear, or whether foreign
digital news websites that can be accessed in India will continue to be
available or not;

(viii) It
is not clear whether OTT platforms such as Zee5, Hotstar, Voot and others that
have both entertainment and news content would be covered under the 26% or the
49% FDI regime.

Since the
policy announcement is yet to be legislated, one expects that the fears
expressed by the media industry will be adequately clarified.

(ii) ANALYSIS OF RECENT COMPOUNDING
ORDERS

An analysis of some interesting compounding orders passed by the Reserve
Bank of India in the month of August, 2019 and uploaded on the website¹
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.

_________________________________

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

FOREIGN DIRECT INVESTMENT (FDI)
COMPOUNDING ORDERS

A. Dharmpal
Agarwal (for self and on behalf of Vineet Agarwal, Chander Agarwal, Urmila
Agarwal, Priyanka Agarwal & Chandrima Agarwal)

Date of order: 19^thJuly, 2019

Regulation: FEMA 3/2000-RB Foreign Exchange Management (borrowing and
lending in foreign exchange)

ISSUE

Availing
of foreign currency loan overseas, for the purpose of purchasing property
abroad

FACTS

(a) The
applicant and the others, resident individuals, jointly acquired a residential
property in Singapore at a total cost of SG$ 3,032,320;

(b) SG$
606,464 was met through remittances under LRS; the remaining amount of SG$
2,425,856 (Rs. 6,78,26,933) was paid by availing a loan from OCBC Bank,
Singapore;

(c) During personal hearing it was submitted that instalments for
repayment of loan and payment of interest (EMIs) with respect to the loan were
met out of the proceeds of lease rental received on the lease of the property;

(d) In the
initial years of loan repayment, reduction in principal amount of loan was
small and the interest component made up a large part of the EMI. Therefore,
considering the total amount paid under EMIs on the loan over the years, the
applicant ended up effectively re-paying more than the amount of loan;

(e) The
applicant and the others have sold the property and repaid the loan. The
applicant submitted that he had not made any gains through availing loans
overseas for acquisition of the property abroad.

Regulatory provisions

Regulation
3 of Notification No. FEMA 3/2000-RB states that, ‘Save as otherwise provided
in the Act, Rules or Regulations made thereunder, no person resident in India
shall borrow or lend in foreign exchange from or to a person resident in or
outside India’.

Contravention

Nature of default

Amount involved
(in Rs.)

Time period of default

Availing of foreign currency
loan overseas, for the purpose of purchasing property abroad

Rs. 6,78,26,933

Nine years and six months
approximately

Compounding
penalty

Compounding
penalty of Rs. 5,58,702 was levied.

Comments

While
remitting money under LRS for purchase of property is permitted, availing of
foreign currency loan overseas for the purposes was not permitted and was in
contravention of Regulation 3 of FEMA 3(R)/2000-R.

Interestingly,
in this case immovable property was leased to earn rental income. In the past,
RBI has taken a view that under LRS route only purchase of immovable property
was permitted and leasing activity was not permitted. However, no such
observations have been made in the instant case. Additionally, it is
interesting to note that under FDI provisions real estate business has been
defined to specifically include earning of rental income from leasing of
property. However, real estate business as defined under ODI regulations does
not include earning of rental income from leasing of property resulting in
dichotomy between real estate business as defined under FDI regulations and the
ODI regulations.

B. Mindtree Limited

Date of
order: 11^th July, 2019

Regulation:
FEMA 20/2000-RB Foreign Exchange Management (transfer or issue of security by a
person resident outside India)

ISSUE

Delay in reporting the issuance of shares under the Employee Stock
Options Plans (ESOP) beyond the stipulated time period; as also delay in
reporting the issuance of bonus shares beyond the stipulated time period.

FACTS

(i) The
applicant is an international information technology consulting and
implementation company that delivers business solutions through global software
development;

(ii) The
applicant company issued shares under ESOP (value – Rs. 1,96,00,000) to foreign
nationals / non-resident Indians (NRIs), but delayed the reporting of the same
beyond the stipulated time period;

(iii)
Besides, the applicant also delayed reporting the issuance of bonus shares
(total value – Rs. 40,12,500) beyond the stipulated time period;

(iv)
During personal hearing it was submitted that the applicant was under inquiry
by the Directorate of Enforcement (DoE) in connection with trade-related
transactions of the company;

(v) RBI,
vide its letter reference No. FED.CO.CEFA/4994/15.20.67/2018-19 dated 21^st
February, 2019, had sought a No-Objection Certificate (NOC) from the DoE to
proceed with the compounding process;

(vi) DoE, vide its letter reference No. RBI/SDE/WR/B-223/2019/335
dated 30^th April, 2019, conveyed
their no objection to compounding of the abovementioned contraventions.

Regulatory Provisions

(a) Regulation 8(3) of Notification No.
FEMA.20/2000-RB, which dealt with ‘Issue of shares under Employees’ Stock Options
Scheme to persons resident outside India’, as then applicable, says, ‘The
issuing company shall furnish to the Reserve Bank, within thirty days from the
date of issue of shares under the scheme, a report…’;

(b) Regulation 6B of the above-mentioned Notification
states ‘A company issuing rights shares or bonus shares or warrants in terms of
these regulations shall report to the Reserve Bank in Form FC-GPR as stipulated
in Paragraph 9(1)(B) of Schedule 1 to these Regulations’.

Contravention

Regulations of FEMA
20/2000-RB

Nature of default

Amount involved
(in rupees)

Time period of default

Regulation 8(3)

Delay in reporting the
issuance of shares under the Employee Stock Options Plans (ESOP)

Rs. 1,96,00,000

7 days

Regulation 6B

Delay in reporting the
issuance of bonus shares

Rs. 40,12,500

8 days

Compounding penalty

Compounding
penalty of Rs. 24,750 was levied.

Comments

(I) The applicant is required to give an
undertaking at the time of filing compounding application that it is not under
any inquiry / investigation / adjudication by any agency such as Directorate of
Enforcement, CBI, etc., as on the date of the application;

(II) This condition results in difficulty in
making compounding application by the applicant who is before ED for any other
violation (e.g., non-receipt of export proceeds within permissible time) or
replies to notice issued by ED, but there is no further correspondence from ED.
Issue arises whether existence of on-going ED proceeding shuts the door for
compounding;

(III) In this order, as also in the case of
Satyanarayan Goel², RBI has taken a practical view by taking an NOC
from the ED and thereafter compounding the offence. Thus, it is advisable for
an applicant to approach the RBI for compounding by disclosing all pending
proceedings before the ED.

OVERSEAS DIRECT INVESTMENT (ODI)
COMPOUNDING ORDERS

C. Tata Chemicals Limited

Date of
order: 10^th July, 2019

Regulation:
FEMA 120/2004-RB – Foreign Exchange Management (transfer or issue of any
foreign security) Regulations, 2004

ISSUE

Extending
loan without any equity contribution to overseas Joint Venture (JV), without
prior approval of the Reserve Bank of India.

FACTS

(i) The applicant is engaged in the business of
manufacturing chemicals and fertilizers;

(ii) The applicant set up an overseas JV, namely,
Grown Energy Zambeze Limitada (GEZ), Mozambique, under overseas direct
investment (ODI) on 22^nd April, 2008;

(iii) The applicant company remitted an amount of
USD 275,000 (Rs. 1,19,15,500) in three tranches between 26^th
February and 26^th September, 2008 as project advance. No shares were
issued against the remittances sent and these remittances were treated as loans
/ advances by the applicant;

(iv) In June, 2009, the applicant decided to quit
the project due to uncertainty around allotment of land. The money has now been
brought back to India and the UIN has been closed on 7^th May, 2019.

Regulatory provisions

Regulation
6(4) of Notification No. FEMA.120/2004-RB, as then applicable, states ‘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.’

_________________________

2 CA
No 4910 / 2019

Contravention

The applicant has contravened the provisions of Regulation 6(4) of
Notification No. FEMA 120/2004-RB. The amount of contravention is Rs.
1,19,15,500 and the period of contravention is approximately eleven years.

Compounding penalty

Compounding penalty of Rs. 1,39,366 was levied.

Comments

This order
reflects that conditions prescribed in FEMA 120 of 2004 need to be complied
with strictly. In fact, the amount was disclosed as loans / advances and thus
it resulted in violation of Regulation 6(4) of FEMA 120 of 2004. The provision
does not specify the threshold for investment in equity capital. Thus,
theoretically, a loan based on infusion of nominal equity capital would have
been permissible. Regulation 15(i) obligates an Indian party which has acquired
foreign security to receive a share certificate or other document as evidence
of investment in the foreign entity to the satisfaction of RBI within six
months or such further period as RBI may permit. Flexibility of extended time
limit by RBI is available provided investment is for acquisition of foreign
security. In this case, the amount was stated as loans / advances and, accordingly,
Regulation 15(i) would not apply.

BCAJ Admin

FEMA FOCUS

Analysis of Recent Compounding Orders

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: 6^th 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

Applicant[2]
is engaged in Banking Business, i.e., to accept deposits from individuals,
small businesses, other entities and public, as permitted by the Reserve Bank
of India from time to time.

Idea Mobile Commerce Services Limited (IMCSL)
merged with Applicant and accordingly Applicant is successor entity of IMCSPL
for violation committed by IMCSPL .

Until March 2014, IMCSL (wholly owned
subsidiary of Idea) was a business correspondent for a private sector bank in
India. Pursuant to authorisation dated 25^th November 2013, granted
by RBI, IMCSL was engaged in the business of issuing prepaid payment
instruments (PPIs).

As per the extant guidelines, activity of
issuing PPIs is covered under the 18 permitted NBFC activities where foreign
investment is permitted under 100% automatic route subject to complying with
minimum capitalisation norms.

On 10^th January 2007, Idea had
obtained an approval of the erstwhile Foreign Investment Promotion Board (FIPB)
for foreign equity participation of up to 74% in its paid-up capital, by virtue
of which it was now a foreign owned and controlled company, and thus, its WOS,
IMCSL also became foreign owned and controlled. IMCSL was thus required to
comply with the minimum capitalisation norms of USD 5 million.

However, there was a delay in meeting these
norms. The norms were finally met on 26^th April 2016, when the
applicant completed bringing in the deficit amount of Rs. 26,79,00,000/-
thereby fulfilling the shortfall amount in meeting the capitalisation
requirement of Rs. 31,29,00,000 (USD 5 million).

Regulatory
provisions:

Regulation
5(1) of Notification No. FEMA 20/2000-RB permits purchase of shares by certain
persons resident outside India under Foreign Direct Investment Scheme, subject
to terms and conditions specified in Schedule I.

Further,
Paragraph 24.2(1) (ii), later renamed as Paragraph F.8.2 (1) (iii) of Annexure
B of Schedule I of Notification No. FEMA 20/2000-RB specifies the minimum
capitalisation norms subject to which foreign investment in NBFC is allowed
under the automatic route. It specifies the same as “US $5 million for foreign
capital more than 51% and up to 74% to be brought up front.”

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 25^th 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 16^th 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: 23^rd 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:

Applicant is engaged in the business of import
of software for further resale in India and export of management services, software
consultancy and training services, and is the wholly owned subsidiary (WOS) of
M/s Aircom International Limited, UK.

Applicant raised foreign currency loan of GBP
75,000 (equivalent to INR 51,15,398) on 7^thFebruary 2001 from its
holding company for general corporate expenses. The lender was not a recognised
lender at the time of giving loan and became eligible only from June 2001.

The applicant company also raised foreign
currency loans of GBP 3,93,000 and USD 5,33,477 (in totality equivalent to INR
5,56,75,886) in 7 tranches from July 15, 2004 to May 15, 2006 from the parent
company, for working capital purposes and without obtaining LRN. ECB was
allowed for working capital purposes only from 4^th September 2013.

Reporting requirements were also not adhered
to.

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
Para of FEMA 20 Regulation

Nature
of default

Paragraph 1(iii) of
Schedule I

Availing ECB from a
non-recognised lender.

Paragraph 1(iv) of
Schedule I

Availing ECB for an
end-use that was not permitted.

Paragraph 1(xi) of
Schedule I

Drawdown of ECB
before obtaining LRN from RBI

Paragraph 1 (xii)
of Schedule I

Delay in meeting
the reporting requirements.

Period of default is approximately 4 months to
17 years and total amount of default is Rs. 6,07,91,284/-.

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 4^th 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 16^th 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: 6^th 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:

Neither equity instruments were issued nor
money was refunded to foreign investor within 180 days of receipt of inward
remittance.

Delay in reporting receipt of foreign inward
remittance towards subscription to equity.

Delay in submission of Form FC-GPR to RBI
after issue of shares to foreign investor.

Failure to obtain, specific and prior
Government approval for issue of shares to person resident outside India against
pre-operative / pre-incorporation expenses.

Facts:

Applicant is engaged in the business of
designing, assembling, manufacturing, selling, distributing, importing,
exporting etc., of cylinder head gaskets, cover modules and shielding parts and
related and allied products.

Applicant received foreign inward remittance
from Elringklinger AG, Germany, towards equity / preference share capital and
reported the same to RBI with delay.

In respect of remittances amounting to Rs
8.31 crore, applicant allotted shares after 180 days of receipt of such
investment.

Applicant is Wholly Owned Subsidiary (WOS)
of Elringklinger AG, Germany. In November, 2006 Applicant’s WOS directly made a
payment of Rs.1.95 crore to Maharashtra Industrial Development Corporation (‘MIDC’)
on behalf of the Applicant to acquire land for setting up its manufacturing
plant in Pune, Maharashtra as pre-operative/pre-incorporation expenses.

In February 2007, Applicant allotted
19,50,505 equity shares to Elringklinger AG, Germany against pre-incorporation
expenses without obtaining prior approval of Foreign Investment Promotion Board
(FIPB). Later on Company made application to FIPB for approval. However, same
was denied vide FIPB letter dated 31^st March 2017 and Applicant was
also directed to unwind the said transaction by way of repatriation of
investment proceeds to the parent entity. In order to implement the said order,
Applicant unwounded the transaction on 29^th December 2017.

Contravention:

Relevant
Para of FEMA 20 Regulation

Nature
of default

Amount
involved (in INR)

Approx.
Time period of default

Paragraph
8 of Schedule 1

Shares
were not issued to person resident outside India within 180 days from date of
receipt of inward remittance / share application money not refunded to person
resident outside India within 180 days from date of receipt of inward
remittance.

Rs.8,31,25,640

5
days

Paragraph
9(1) (A) of Schedule 1

Delay
in reporting of receipt of foreign inward remittance towards subscription to
shares.

Rs.37,10,75,095

3
to 5 years

Paragraph
9(1) (B) of Schedule 1

Delay
in submission of Form FC-GPR to RBI

Rs.62,14,24,090

12
days to 5 years

Para
3 (e) of schedule 1

Issue
of shares against pre-incorporation expenses without prior FIPB Approval

Rs.
1,95,05,050

11
Years

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: 3^rd 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:

Expedition Voyages (Applicant)
is a Partnership Firm formed vide a Deed of Partnership made on 23^rd
March 2015 between a New York Resident Individual and individual resident of
India with a profit sharing ratio of 70:30. Main business of partnership firm
is to carry on travel and tourism business from India by undertaking cruise
travel which include ultra-luxury cruises also, marketing expeditions and all
allied services.

The foreign resident
remitted approx. Rs.38.51 lakh in five tranches in India.

Applicant subsequently
reversed the transaction and remitted the above amount back to the foreign resident
on 28^th May 2018.

Applicant has not taken
RBI approval for investment by a person resident outside India by way of
contribution to capital of the Applicant partnership firm thereby contravening
Regulation 3 of FEMA 24/2000-RB.

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: 9^th 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:

Applicant, Invesco Asset Management (India)
Private Limited is an Asset Management Company (AMC). On 30^th June
2014, MF Utilities India Private Limited (MFU) issued 5,00,000 equity shares of
Rs. 1 each amounting to Rs.5,00,000 to the applicant.

At the time of this investment, 51%
shareholding of the applicant was held by resident entities [Religare
Securities Ltd. (RSL) 46.5% and RGAM Investment Advisors Pvt. Ltd.(RGAM) –
4.5%]. Subsequently in April 2016, RSL and RGAM transferred their shareholding
of 51% to Invesco Hong Kong Ltd., and Invesco Asset Management Pacific Ltd.
Applicant thus became a foreign owned and controlled company and accordingly,
investment in MFU by the applicant became an indirect foreign investment in
MFU.

In September 2017 FIPB (Foreign Investment
Promotion Board) granted post facto approval for the indirect investment in MFU
subject to the applicant applying for compounding to the Reserve Bank. At the
time of investment, activity of MFU was under other financial activities
requiring Government approval. Pursuant to FEMA Notification No.375 dated 9^th
September 2016, the activity was brought under automatic route. As post facto
approval from FIPB has been received the administrative action is complete in
this regard.

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
25^th 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: 28^th 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:

Applicant company, owned and controlled by
non-resident entities, is engaged in the business of acting as travel and
tourist agents for every mode of travel by sea, air or land, and arranging for
tourists and travellers, the provision of conveniences, reserve places, hotel
and lodging accommodation etc.

In May 2015, Applicant made downstream
investment in India to the extent of Rs. 4.81 crore into Jetair Tours Private
Limited (Investee Indian Company).

This downstream investment made by applicant
company, on account of the aforesaid indirect FDI, was required to be reported
to the (then) Secretariat of Industrial Assistance (SIA), Department of
Industrial Policy and Promotion (DIPP) and the then Foreign Investment
Promotion Board (FIPB) within 30 days of such investment.

However, there was a delay in meeting the
above-mentioned reporting requirements beyond the stipulated period of 30 days.

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: 8^th 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:

In March 2007, Applicant made outward
remittance amounting to USD 21 million to an overseas entity in USA viz Navitas
Inc (formerly Take Solutions Inc). Such outward remittance was reported in Form
ODI with delay. There was also a delay in receipt of share certificate in
relation to the said outward remittance

In March, 2012, Applicant disinvested its
stake in Navitas Inc with write-off and transferred its stake to another
overseas entity viz Take Solutions Global Holdings Pte Ltd, Singapore without
obtaining RBI Approval. Also, disinvestment was made without filing of APRs

As the applicant was an unlisted company and
the amount of the overseas direct investment in the overseas entity was in
excess of USD 10 million, the applicant was not permitted to undertake
disinvestment with write-off under the automatic route.

Contravention:

Relevant Para of FEMA 20 Regulation

Nature of default

Amount involved
(in INR)

Approx time period of default

Regulation 6(2)(vi)

Applicant
did not report investments made in overseas entity within prescribed time
period of 30 days

USD 21 million
(Rs.92.82 crore)

10 years

Regulation 15(i)

Delay
in receipt of the share certificate towards the outward remittance made to
the overseas entity.

USD 21 million
(Rs.92.82 crore)

10 years

Regulation 16(1)(v)

Applicant
disinvested its stake in overseas JV without submission of APRs

USD 184,68,121 (Rs.
94.72 crore)

5 years

Regulation 16(1A)

Applicant
disinvested its stake in overseas entity with write off without obtaining

prior RBI approval

USD 184,68,121 (Rs.
94.72 crore)

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: 10^th 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 1^st level
subsidiary, without prior RBI approval

Facts:

Applicant is engaged in the business of
providing software and IT services.

Applicant incorporated multiple wholly owned
subsidiaries (WOSs) in Mauritius and Cyprus.

Applicant issued corporate guarantees in
favor of step-down subsidiaries (SDSs) of these WOSs, beyond the 1^st
level, without prior approval of RBI.

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

BCAJ Admin

FEMA FOCUS

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[1] 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: 11^th
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: 7^th
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: 1^st
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[2] 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: 28^th
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[3].

FOREIGN DIRECT INVESTMENT (FDI)

E. ND Callus Info Services Pvt. Ltd.

Date of
Order: 13^th 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.

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

[2] Initially balance amount was
declared as $ 75,695.62 but this increased to $ 89,369.04 due to increase in
market value as per submissions of the applicant

[3] FAQ No. 4 on purchase of immovable
property in India by non-resident individuals https://m.rbi.org.in/Scripts/FAQView.aspx?Id=117]

BCAJ Admin

FEMA FOCUS

REVISED ECB REGULATIONS

(I) Background

RBI has completely
revamped existing regulations relating to External Commercial Borrowings, Trade
credits & Borrowing and lending in INR (‘ECB’) by issuing a revised
Notification No. 3(R) /2018-RB – Foreign Exchange Management (Borrowing and
Lending) Regulations, 2018 dated 17^th December 2018 (‘New ECB
Regulations’). Further, RBI has also issued A.P. (DIR Series) Circular No. 17
dated 16^th January 2019 (‘Circular 17’) providing for new ECB
framework.

Earlier there were
following three regulations governing borrowing/lending by person resident in
India with persons resident outside India:

Sr. No.

Name of regulation

Relevant Notification No.

Scope of regulation

Foreign
Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations,
2000 ( ‘Old ECB Regulations’)

FEMA 3 /2000-RB dated
3^rd May, 2000

i) Borrowing in foreign currency by
persons other than AD

ii) Borrowing in foreign currency by AD

iii) Borrowing in Indian currency by
Company

iv) Trade credits

Foreign
Exchange Management (Borrowing and Lending in Rupees) Regulations, 2000 (‘INR
Borrowing Regulations’)

FEMA 4 /2000-RB dated
3^rd May, 2000

i)
Borrowing in Indian currency by Indian Company through issuance of NCDs;

ii)
Borrowing in Indian currency by persons other than company

Para
21 of Foreign Exchange Management (Transfer or Issue of Any Foreign Security)
(Amendment) Regulations, 2004 (‘ODI Regulations’)

FEMA 120/ RB-2004 dated
7^thJuly, 2004

i)
Lending in foreign currency by Indian company to its overseas subsidiary/ JV

RBI has now
consolidated all above Regulations relating to borrowing and lending in foreign
currency and Indian currency and issued Revised FEMA 3/2019 (‘New ECB
Regulations’) dealing with foreign currency and Indian currency borrowing /
lending by Indian residents. Further, certain aspects of ECB have also been
clarified by RBI through issuing Circular 17. Earlier there four-tier structure
of ECB which have now been rationalised as under:
i) Track I & Track II have been merged as Foreign Currency denominated ECB;
and

ii) Track III &
Rupee denominated bonds have been merged as Rupee denominated ECB.

Key aspects of new
ECB framework are given below:

(II) New definitions

New ECB Regulations
has inserted following new definitions for the purpose of clarity:

? External Commercial lending
– It means lending by person resident in India to borrower outside India in
accordance with policy decided by RBI

? Real estate activity –
means any activity involving

• own or leased property for buying, selling
and renting of commercial and residential properties or land

• activities either on a fee or contract basis
assigning real estate agents for intermediating in buying, selling, letting or
managing real estate.

However, this would
not include

• development of integrated township; or

• purchase/long term leasing of industrial
land as part of new project/modernisation or expansion of existing units or;

• any activity under ‘infrastructure
subsectors’ as given in the Harmonised Master List of Infrastructure
sub-sectors approved by the Government of India vide Notification F. No.
13/06/2009-INF, as amended/updated from time to time.

? Restricted End Use: It
means end uses where borrowed funds cannot be deployed and shall include the
following:

• In the business of chit fund or Nidhi
Company;

• Investment in capital market including
margin trading and derivatives;

• Agricultural or plantation activities;

• Real estate activity or construction of farm
houses; and

• Trading in Transferrable Development Rights
(TDR),

? It has been specifically
clarified that use of credit cards in India by person resident outside India
and outside India by person resident in India shall not be subject to ECB
regulations.

? Also, it has been
clarified that any borrowing permitted under erstwhile regulations can be
continued up to the due date of repayment.

(III) Key changes in ECB Policy

Key changes between
old ECB regulations relating to borrowings in INR/foreign currency by Indian
resident entity from person resident outside India are highlighted below:

Eligible borrower

Old ECB Regulation read with Master Direction on
ECB updated as on 22^ndNovember, 2018

New ECB regulation read with Circular No. 17
dated 16 ^thJan 2019

Comments

The list of entities eligible to raise ECB were
classified under the three tracks is set out in the following table.

All entities eligible to receive FDI are eligible borrowers and
there is no more Track 1, Track 2 and Track 3. Further, following entities
are also eligible to raise ECB:

a) Port Trusts;

b) Units in SEZ;

c) SIDBI;

d) EXIM Bank; and

e) Registered entities engaged in micro-finance activities,
viz., registered Not for Profit companies, registered
societies/trusts/cooperatives and Non-Government Organisations (permitted
only to raise INR ECB).

Under new ECB regulations, all entities, including companies and
LLP would be eligible to receive FDI under FEMA 20 can raise ECB irrespective
of the sector in which they operate. New regulations now paves way for
service sector enterprise, companies engaged in ITES activities etc to raise
finance via ECB route. Further ECB route is open even for sectors which are
subject to sectorial cap or FDI is permitted subject to performance linked
conditions.

Track :1

i. Companies in mfg & software development sectors.

ii. Shipping and airlines companies.

iii. SIDBI.

iv. Units in SEZs

v. Exim Bank (only under the approval route).

vi. Companies in infra sector, NBFC-IFCs, NBFC-AFCs, Holding
Companies and CICs. Also, Housing Finance Companies, regulated by the
National Housing Bank, Port Trusts constituted under the Major Port Trusts
Act, 1963 or Indian Ports Act, 1908.

Track :2

i. . All entities listed under Track I.

ii. REITs & INVITs (governed by SEBI)

Track
:3

i. All entities listed under Track II.

ii. NBFCs coming under the regulatory purview of RBI.

iii. NBFCs-MFIs, Not for Profit companies registered under the
Companies Act, 1956/2013, Societies, trusts and cooperatives (registered
under the Societies Registration Act, 1860, Indian Trust Act, 1882 and
State-level Cooperative Acts/Multi-level Cooperative Act/State-level mutually
aided Cooperative Acts respectively), NGOs which are engaged in micro finance
activities.

iv. Companies engaged in miscellaneous services viz.
R&D, training (other than educational institutes), companies supporting
infrastructure, companies providing logistics services. Also, companies
engaged in maintenance, repair and overhaul and freight forwarding.

v. Developers of SEZs/ National Manufacturing and Investment
Zones (NMIZs).

Borrowing by IBC Cos

Old ECB Regulation read with Master Direction on
ECB updated as on 22^ndNovember, 2018

New ECB regulation read with Circular No. 17
dated 16 ^thJan 2019

Comments

No specific exemption / relaxation for companies
in IBC

An entity which is under restructuring scheme/
corporate insolvency resolution process can raise ECB only if specifically
permitted under the resolution plan.

Likely to boast restructuring of companies under
IBC. Resolution plan can now substitute high interest debt with low interest
bearing ECB

Eligible lenders

The list of recognised lenders/investors for the
three tracks will be as follows:

The lender should be resident of FATF or IOSCO compliant
country, including on transfer of ECBs. However,

a) Multilateral and Regional Financial Institutions where India
is a member country will also be considered as recognised lenders;

b) Individuals as lenders can only be permitted if they are
foreign equity holders or for subscription to bonds/debentures listed abroad;
and

c) Foreign branches/subsidiaries of Indian banks are permitted
as recognised lenders only for FCY ECB (except FCCBs and FCEBs).

Foreign branches/subsidiaries of Indian banks, subject to
applicable prudential norms, can participate as arrangers/
underwriters/market-makers/traders for Rupee denominated Bonds issued
overseas. However, underwriting by foreign branches/subsidiaries of Indian
banks for issuances by Indian banks will not be allowed.

Under the new ECB regulations, any person can be eligible lender
provided they are resident of FATF or IOSCO compliant country. However,
individuals as lenders can only be permitted if they are foreign equity
holders or for subscription to bonds/ debentures listed abroad. Further,
Financial institutions located in International Financial Services Centres in
India are not specifically included in definition of recognised lender which
were included in the old ECB regulations.

Track :1

i. International banks.

ii. International capital markets.

iii. Multilateral financial institutions (such as, IFC, ADB,
etc.) /regional financial institutions and Government owned (either wholly or
partially) financial institutions.

iv. Export credit agencies.

v. Suppliers of equipment.

vi. Foreign equity holders.

vii. Overseas long term investors such as:

a. Prudentially regulated financial entities;

b. Pension funds;

c. Insurance companies;

d. Sovereign Wealth Funds;

e. Financial institutions located in International Financial
Services Centres in India

viii. Overseas branches/ subsidiaries of Indian banks

Track :2

All entities listed under Track I (excluding
overseas branches /subsidiaries of Indian banks)

Track :3

All entities listed under Track I (excluding overseas branches/
subsidiaries of Indian banks.

In case of NBFCs-MFIs, other eligible MFIs, not for profit
companies and NGOs, ECB can also be availed from overseas organisations and
individuals.

Minimum Average Maturity Period

The minimum average maturities for the three
tracks are set out as under:

Minimum average maturity period (MAMP) will be 3 years. However,
manufacturing sector companies may raise ECBs with MAMP of 1 year for ECB up
to USD 50 million or its equivalent per financial year. Further, if the ECB
is raised from foreign equity holder and utilised for working capital
purposes, general corporate purposes or repayment of Rupee loans, MAMP will
be 5 years. The call and put option, if any, shall not be exercisable prior
to completion of minimum average maturity.

For ECB exceeding USD 50 million, no MAMP is specified and
hence, could be considered as 3 years

Old ECB Regulation read with Master Direction on
ECB updated as on 22^ndNovember, 2018

New ECB regulation read with Circular No. 17
dated 16 ^thJan 2019

Comments

Track:1

i. For ECB up to USD 50 million or its equivalent for Cos in Mfg
sector only – 1 year;

ii. For ECB upto USD 50 million or its equivalent – 3 years;

iii. For ECB beyond USD 50 million or its equivalent – 5 years

iv. 5 years for ECB taken from equity holder for working capital
purposes

v. 5 years for FCCBs/ FCEBs irrespective of the amount of
borrowing. The call and put option, if any, for FCCBs shall not be exercisable
prior to 5 years.

Track :2

10 years irrespective of the amount.

Track: 3

Same as under Track I.

All-in-cost ceiling per annum and other cost

The all-in-cost requirements for the three tracks
will be as under:

i) No change in all in cost ceilings

No change

Track :1

i. The all-in-cost ceiling is prescribed through a spread over
the benchmark, i.e., 450 basis points per annum over 6 month LIBOR or
applicable benchmark for the respective currency.

ii. Penal interest, if any, for default or breach of covenants
should not be more than 2 per cent over and above the contracted rate of
interest.

Track :2

i All-in-cost ceiling – Same as Track I

ii Penal interest – same as Track I

Track :3

i. All-in-cost ceiling – 450 basis points per annum over the
prevailing yield of the Government of India securities of same maturity.

ii. Penal interest – Same as Track I

End-uses (Negative list)

Old ECB Regulation read with Master Direction on
ECB updated as on 22^ndNovember, 2018

New ECB regulation read with Circular No. 17
dated 16 ^thJan 2019

Comments

The end-use prescriptions for ECB raised under the three tracks
are as under:

The negative list for all Tracks would include the following:

a. Investment in real estate or purchase of land except when
used for affordable housing as defined in Harmonised Master List of
Infrastructure Sub-sectors notified by Government of India, construction and
development of SEZ and industrial parks/integrated townships.

b. Investment in capital market.

c. Equity investment.

Additionally, for Tracks I and III, the following negative end
uses will also apply except when raised from Direct and Indirect equity
holders or from a Group company, and provided the loan is for a minimum
average maturity of five years:

d. Working capital purposes.

e. General corporate purposes.

f. Repayment of Rupee loans.

Finally, for all Tracks, the following negative end use will
also apply:

g. On-lending to entities for the above activities from (a) to
(f)

The negative list for which ECB proceeds cannot
be utilised is largely similar as erstwhile ECB regulations. However, earlier
negative list used the phrase investment in real estate or purchase of land.
In the new ECB regulations, above phrase has been replaced by real estate
activities which has been defined above. Further, proceeds of ECB cannot be
used for payment of interest / charges for ECB.

Real estate activity specifically excludes
purchase / long term leasing of industrial land as part of new project /
modernisation or expansion of existing unit. Hence, going forward ECB can be
utilised towards purchase of industrial land for expansion of existing unit
or setting up of new unit.

Change of currency of borrowing

Designated AD Category I banks may allow changes
in the currency of borrowing of the ECB to any other freely convertible currency
or to INR subject to compliance with other prescribed parameters. Change of
currency of INR denominated ECB is not permitted.

No change

Individual limits of borrowing

Old ECB Regulation read with Master Direction on
ECB updated as on 22^ndNovember, 2018

New ECB regulation read with Circular No. 17
dated 16 ^thJan 2019

Comments

The individual limits of ECB that can be raised
by eligible entities under the automatic route per financial year for all the
three tracks are set out as under:

a. Up to USD 750 million or equivalent for the
companies in infrastructure and manufacturing sectors, Non-Banking Financial
Companies -Infrastructure Finance Companies (NBFC-IFCs), NBFCs-Asset Finance
Companies (NBFC-AFCs), Holding Companies and Core Investment Companies;

b. Up to USD 200 million or equivalent for
companies in software development sector;

c. Up to USD 100 million or equivalent for
entities engaged in micro finance activities;

d. Up to USD 500 million or equivalent for
remaining entities; and

e. Up to USD 3 million or equivalent for
startups;

ii. ECB proposals beyond aforesaid limits will
come under the approval route. For computation of individual limits under
Track III, exchange rate prevailing on the date of agreement should be taken
into account.

iii. In case the ECB is raised from direct equity
holder, aforesaid individual ECB limits will also subject to ECB liability:
equity ratio requirement. The ECB liability of the borrower (including all
outstanding ECBs and the proposed one) towards the foreign equity holder
should not be more than seven times of the equity contributed by the latter.
This ratio will not be applicable if total of all ECBs raised by an entity is
up to USD 5 million or equivalent.

All eligible borrowers (excluding startups) can
now raise ECB up to USD 750 million or equivalent per financial year under
auto route. Rest of the conditions, including ECB equity ratio in case of
borrowings from foreign equity holder would remain the same.

Expansion of individual limits

Parking of ECB proceeds

ECB proceeds are permitted to be parked abroad as
well as domestically in the manner given below:

Parking of ECB proceeds abroad: ECB proceeds meant only for
foreign currency expenditure can be parked abroad pending utilisation. Till
utilisation, these funds can be invested in the following liquid assets (a)
deposits or Certificate of Deposit or other products offered by banks rated
not less than AA (-) by Standard and Poor/Fitch IBCA or Aa3 by Moody’s; (b)
Treasury bills and other monetary instruments of one year maturity having
minimum rating as indicated above and (c) deposits with overseas branches/
subsidiaries of Indian banks abroad.

Parking of ECB proceeds domestically: ECB proceeds meant for
Rupee expenditure should be repatriated immediately for credit to their Rupee
accounts with AD Category I banks in India. ECB borrowers are also allowed to
park ECB proceeds in term deposits with AD Category I banks in India for a maximum
period of 12 months. These term deposits should be kept in unencumbered
position.

No change

Reporting

Loan Registration Number (LRN): Any draw-down in respect
of an ECB as well as payment of any fees / charges for raising an ECB should
happen only after obtaining the LRN from RBI. To obtain the LRN, borrowers
are required to submit duly certified Form 83, which also contains terms and
conditions of the ECB, in duplicate to the designated AD Category I bank. In
turn, the AD Category I bank will forward one copy to the Director, Balance
of Payments Statistics Division, Department of Statistics and Information
Management (DSIM), Reserve Bank of India, Bandra-Kurla Complex, Mumbai – 400
051, Contact numbers 022-26572513 and 022-26573612. Copies of loan agreement
for raising ECB are not required to be submitted to the Reserve Bank.

Changes in terms and conditions of ECB: Permitted changes in ECB
parameters should be reported to the DSIM through revised Form 83 at the
earliest, in any case not later than 7 days from the changes effected. While
submitting revised Form 83 the changes should be specifically mentioned in
the communication.

Reporting of actual transactions: The borrowers are required
to report actual ECB transactions through ECB 2 Return through the AD
Category I bank on monthly basis so as to reach DSIM within seven working
days from the close of month to which it relates. Changes, if any, in ECB
parameters should also be incorporated in ECB 2 Return. Format of ECB 2
Return is available at Annex III of Part V of Master Directions – Reporting
under Foreign Exchange Management Act.

Reporting on account of conversion of ECB into
equity: In case of partial or full
conversion of ECB into equity, the reporting to the RBI will be as under:

i. For partial conversion, the converted portion
is to be reported to the concerned Regional Office of the Foreign Exchange
Department of RBI in Form FC-GPR prescribed for reporting of FDI flows, while
monthly reporting to DSIM in ECB 2 Return will be with suitable remarks
“ECB partially converted to equity”. ii. For full conversion, the
entire portion is to be reported in Form FC-GPR, while reporting to DSIM in
ECB 2 Return should be done with remarks “ECB fully converted to equity”.
Subsequent filing of ECB 2 Return is not required.

iii. For conversion of ECB into equity in phases,
reporting through ECB 2 Return will also be in phases.

Name of form for obtaining LRN from RBI has
changed from old Form 83 to new Form ECB. Hence, wherever Form 83 was
required to be filed, going forward Form ECB would be required to be filed.
However, contents of the form are same. Further, ECB 2 filing continues to
remain as before. Additionally, in part D of Form ECB 2 details with respect
to proceeds of ECB parked domestically is also required to be stated.

Change in name of Form 83 to Form ECB and details
of ECB parked domestically to be provided in Form ECB 2

Late submission fees

Old ECB Regulation read with Master Direction on
ECB updated as on 22^ndNovember, 2018

New ECB regulation read with Circular No. 17
dated 16 ^thJan 2019

Comments

No such provision existed earlier. Any late
filing of forms was subject to compounding proceedings

Late Submission Fee (LSF) for delay in reporting:

Any borrower, who is otherwise in compliance of ECB guidelines,
can regularise the delay in reporting of drawdown of ECB proceeds before
obtaining LRN or delay in submission of Form ECB 2 returns, by payment of
late submission fees as given in Annexure 1

Going forward, process of regularising ECB non compliances
relating to late filing of forms or drawdown of ECB before obtaining LRN
would be much simpler and would not be subject to compounding proceedings.
However, with respect to past non-compliances, compounding proceedings would
still need to be undertaken

Exchange rate

The exchange rate for foreign currency – Rupee
conversion shall be the market rate on the date of settlement for the purpose
of transactions undertaken for issue and servicing of the bonds

No change

Hedging Requirements

Borrowers eligible shall have a board approved
risk management policy and shall keep their ECB exposure hedged 70 per cent
at all times in case the average maturity is less than 5 years. Further, the
designated AD Category-I bank shall verify that 70 per cent hedging
requirement is complied with during the currency of ECB and report the
position to RBI through ECB 2 returns. Also, the entities raising ECB under
the provisions of tracks I and II are required to follow the guidelines for
hedging issued, if any, by the concerned sectoral or prudential regulator in
respect of foreign currency exposure.

Operational aspects on hedging: Wherever hedging has been
mandated by the RBI, the following should be ensured:

i. Coverage: The ECB borrower will be
required to cover principal as well as coupon through financial hedges. The
financial hedge for all exposures on account of ECB should start from the
time of each such exposure (i.e. the day liability is created in the books of
the borrower).

ii. Tenor and rollover: A minimum tenor of
one year of financial hedge would be required with periodic rollover duly
ensuring that the exposure on account of ECB is not unhedged at any point
during the currency of ECB.

iii. Natural Hedge: Natural hedge, in lieu
of financial hedge, will be considered only to the extent of offsetting
projected cash flows / revenues in matching currency, net of all other
projected outflows. For this purpose, an ECB may be considered naturally
hedged if the offsetting exposure has the maturity/cash flow within the same
accounting year. Any other arrangements/ structures, where revenues are
indexed to foreign currency will not be considered as natural hedge.

No change

Available routes for raising ECB

Old ECB Regulation read with Master Direction on
ECB updated as on 22^ndNovember, 2018

New ECB regulation read with Circular No. 17
dated 16 ^thJan 2019

Comments

Under the ECB framework, ECBs can be raised
either under the automatic route or under the approval route. For the
automatic route, the cases are examined by the Authorised Dealer Category-I
(AD Category-I) banks. Under the approval route, the prospective borrowers
are required to send their requests to the RBI through their ADs for
examination. While the regulatory provisions are mostly similar, there are
some differences in the form of amount of borrowing, eligibility of
borrowers, permissible end-uses, etc. under the two routes. While the first
six forms of borrowing can be raised both under the automatic and approval
routes, FCEBs can be issued only under the approval route.

No change

ECB for untraceable entities

No specific regulation earlier

Specific Standard Operating Procedure (SOP) laid
down which has to be followed by designated AD banks in case of untraceable
entities who are found to be in contravention of reporting provisions for
ECBs by failing to submit prescribed return(s) under the ECB framework,
either physically or electronically, for past eight quarters or more.

i. Definition: Any borrower who has raised
ECB will be treated as ‘untraceable entity’, if
entity/auditor(s)/director(s)/ promoter(s) of entity are not
reachable/responsive/reply in negative over email/letters/phone for a period
of not less than two quarters with documented communication/reminders
numbering 6 or more and it fulfills both of the following conditions:

a) Entity not found to be operative at the
registered office address as per records available with the AD Bank or not
found to be operative during the visit by the officials of the AD Bank or any
other agencies authorized by the AD bank for the purpose; AND

b) Entities have not submitted Statutory
Auditor’s Certificate for last two years or more;

ii. Action: The followings actions are to be
undertaken in respect of ‘untraceable entities’:

a) File Revised Form ECB, if required, and last
Form ECB 2 Return without certification from company with ‘UNTRACEABLE
ENTITY’ written in bold on top. The outstanding amount will be treated as
written-off from external debt liability of the country but may be retained
by the lender in its books for recovery through judicial/ non-judicial means;

b) No fresh ECB application by the entity should
be examined/processed by the AD bank;

c) Directorate of Enforcement should be informed
whenever any entity is designated ‘UNTRACEABLE ENTITY’; and

d) No inward remittance or debt servicing will be
permitted under auto route.

Entire new process has been laid down to find
untraceable entities who have taken ECB

(IV) Key changes in Regulations governing
Trade Credits

Key changes between
old ECB regulations and new ECB regulations relating to trade credits are
highlighted as under:

Particulars

Old ECB Regulations

New ECB Regulations

Comments

Amount of borrowing

USD 20 million per import transaction

USD 50 million per import transaction

Increase in limit of trade credit

Period

Import of capital goods – 5 years from date of
shipment

Import of non-capital goods – 1 year from date of
shipment or operating cycle, whichever is less

Import of capital goods – 3 years from date of
shipment

Import of non-capital goods – 1 year from date of
shipment or operating cycle, whichever is less

Trade credit period for import of capital goods
has been reduced from 5 years to 3 years

Trade credit beyond permitted period

No specific provision in respect of trade credit
extending beyond above specified period

Specifically provides trade credit beyond 3 years
period to be ECB

There have been several instances wherein RBI has
compounded non compliances relating to trade credit extending beyond
specified period by viewing it as ECB. The same has now been specifically
included in new ECB regulations.

Recognised lenders

Overseas suppliers, banks, financial
institutions,

Lenders to also include foreign equity holders
and financial institutions in IFC

Recognised lenders list expanded to include
foreign equity holders and financial institutions in IFC. Hence, they can
also give trade credits

Cost

All-in-cost ceiling for raising trade credit was
350 basis points over 6 month LIBOR

All-in-cost ceiling for raising trade credit
reduced to 250 basis points over 6 month LIBOR

Reduction in all in cost ceiling for raising
trade credits

(V) Key changes in Regulations governing
borrowings in INR by Indian residents

Borrowing by
Indian companies

Under the erstwhile
ECB regulations, investment in Non convertible debentures (NCD) issued by
Indian companies to Registered Foreign Portfolio Investors was not covered
under the ECB framework. The said position continues even under the new ECB
regulations.

Further, under INR
Borrowing Regulations, Indian companies could borrow in rupees from NRIs/PIOs
by issuing NCDs and subject to fulfilment of conditions laid down therein.
However, under New ECB regulations, there is no specific regulations governing
issuance of NCDs by Indian companies to NRI/PIOs. Accordingly, we would need to
wait for further clarity on this issue.

Borrowing by
Indian individuals

Under the erstwhile
INR Borrowing regulations, person resident in India (other than an Indian
company) could borrow in rupees from NRI/PIO on non-repatriation basis subject
to fulfilment of certain conditions. Under the New ECB Regulations, person
resident in India (other than an Indian company) can borrow in Indian Rupees
from NRI/ Relatives who are holding OCI Card subject to terms and conditions as
would be specified by RBI in this behalf.

Thus, as against
borrowings from any NRI/PIO permissible earlier, under New ECB Regulations, INR
borrowings can be taken only from NRI or Relatives who are holding OCI Card.

Deposits by
person resident in India

Any person resident in India can accept deposits from person resident
outside India in accordance with Foreign Exchange Management (Deposit)
Regulations, 2016. Hence, there is no change with regards to acceptance of
deposits.

(VI) Key changes in Regulations governing
borrowings by financial institutions, students studying abroad and from
relatives

Borrowing by
financial institutions

Under the new ECB
regulations, financial institutions set up under an act of Parliament have been
given permission to raise ECB under the approval route for the purpose of
onward lending and subject to provisions contained in ECB regulations.

Borrowing by
students studying abroad

Under the new ECB
regulations, individual resident in India but studying abroad can raise loan
not exceeding USD 250,000 for payment of education fees and maintenance abroad
subject to terms and conditions specified by RBI. However, it is interesting to
note that as per A.P.(DIR Series) Circular No. 45 dated 8 December 2003, Indian
students studying abroad would be treated as Non-residents, i.e. person
resident outside India. In such a scenario, applicability of FEMA on the such
students would need to be evaluated.

Borrowing in
foreign currency by Indian individuals

Under the old ECB regulations, individual resident in India could borrow
a sum not exceeding USD 250,000 from his relative subject to fulfilment of
certain conditions. The same position continues even under new ECB regulations.

(VII) Regulations governing lending in foreign currency by Indian entities

New ECB regulations
provide that an entity resident in India can provide external commercial
lending in foreign exchange to foreign entity in accordance with provisions of
ODI Regulations. Hence, there is no change with respect to the said
regulations.

(VIII) Regulations governing issuance of
Foreign Currency Convertible Bonds & Foreign Currency Exchangeable Bonds by
Indian companies

Regulation 21 of
ODI Regulations which dealt with issuance of Foreign Currency Convertible Bonds
and Foreign Currency Exchangeable Bonds has now been omitted and it would be
governed under the process specified in New ECB Regulations read with Circular
17.

Way forward

Going forward, it
is expected that RBI would issue Circulars clarifying various aspects of New
ECB Regulations as well as issue Regulations governing hybrid instruments in
the nature of optionally convertible debentures which are at present covered
under ECB Regulations.

Annexure 1 – Matrix for computing late
submission fee for delay in reporting

No.

Type of Return/Form

Period of delay

Applicable LSF

Form ECB 2

Up to 30 calendar days from due date of submission

Rs. 5,000

Form ECB 2/Form ECB

Up to 3 years from due date of submission/date of drawdown

Rs. 50,000 per year

Form ECB 2/Form ECB

Beyond 3 years from due date of submission/date of drawdown

Rs. 100,000 per year

BCAJ Admin

FEMA FOCUS

(A) Amendment in Foreign Direct Investment Limits
The Government of India has liberalised its extant FDI policy and made a few changes in the sectoral caps for FDI in the insurance, petroleum and telecom sectors. These changes are explained as under:

*Sr. No.*	*Sector / Activity*	*% of Equity / FDI Cap*	*Entry route*
1	Insurance¹ (Refer Note 1)	49%	74%	Automatic
2	Petroleum refining by the Public Sector Undertakings (PSUs), without any disinvestment or dilution of domestic equity in the existing PSUs²	49%	49% (100% allowed under automatic route where in-principle approval for strategic disinvestment of a PSU has been granted by the Government)	Automatic
3	Telecom³	Automatic route up to 49% and beyond that under approval route	100% under Automatic route	Automatic

Sr. No.

Sector / Activity

% of Equity / FDI Cap

Entry route

Erstwhile limit

New limit

Insurance¹ (Refer Note 1)

49%

74%

Automatic

Petroleum
refining by the Public Sector Undertakings (PSUs), without any disinvestment
or dilution of domestic equity in the existing PSUs²

49%

49%
(100% allowed under automatic route where in-principle approval for strategic
disinvestment of a PSU has been granted by the Government)

Automatic

Telecom³

Automatic route up to 49% and beyond that under approval route

100% under Automatic route

Automatic

Note 1: The increase in the sectoral cap for insurance companies from 49% to 74% under the automatic route is subject to several conditions mentioned in the Press Note No. 2 (2021 Series) dated 14th June, 2021. Most of the conditions are the same as mentioned in the FDI Policy, 2020; one major change is with respect to constitution of the Board of Directors for insurance companies due to increase in their limit to 74%. Under the new condition, the Indian insurance company that has received foreign direct investment would need to ensure that the following persons are resident Indian citizens:
• Majority of Directors of such insurance companies;
• Majority of its Key Management Persons; and
• at least one among the Chairperson of the Board, the Managing Director and the Chief Executive Officer

______________________________________________________________________________________________

1 Press Note No. 2 (2021
Series), dated 14-6-2021

2 Press Note No. 3 (2021
Series), dated 29-7-2021

3 Press Note No. 4 (2021
Series), dated 06-10-2021

Further, the definition of Key Management Persons is the same as that defined in the guidelines issued by the Insurance Regulatory and Development Authority of India (‘IRDAI’) on corporate governance for insurers in India.

(B) Amendment in Foreign Exchange Management (Export of Goods & Services) Regulations4
Under the existing Foreign Exchange Management (Export of Goods & Services) Regulations, 2015 (‘Export Regulations’), the rate of interest payable on advance payment received by the exporter from the buyer was capped at 100 basis points over the LIBOR rate. However, due to impending cessation of LIBOR as a benchmark rate, RBI has now permitted the use of any other applicable benchmark as directed by the RBI instead of the earlier specified only LIBOR rate.

(C) Review of FDI policy on downstream investment made by NRIs on non-repatriation basis5
The Government has now clarified that investments made by NRIs on non-repatriation basis would be deemed to be domestic investments at par with investments made by residents. Accordingly, investments made by an Indian entity which is owned and controlled by an NRI on non-repatriation basis shall not be considered for calculation of indirect foreign investment.

(D) ECB – Relaxation in period for parking of unutilised ECB proceeds in term deposits6
Under the existing ECB Regulations, ECB borrowers are permitted to park unutilised ECB proceeds in term deposits with AD Banks for a maximum period of 12 months cumulatively. However, in view of the Covid situation, RBI has now relaxed this provision and accordingly unutilised ECB proceeds drawn on or before 1st March, 2020 can be parked in term deposits with AD Banks prospectively for an additional period up to 1st March, 2022.

______________________________________________________________________________________________

4 A.P. (Dir. Series 2021-22)
Circular No.13, Dated 28-9-2021

5 Press Note No. 1 (2021
Series), Dated 19-03-2021

6 A.P. (Dir Series) Circular No.
01, Dated 17-6-2021

(E) Appointment of Special Director (Appeals) and his jurisdiction7
The Central Government has changed the jurisdiction of the Regional Special Director (Appeals) for hearing appeals filed against the order passed by the adjudicating authority under FEMA. The Table below prescribes the authority and its jurisdiction for hearing appeals:

Sr. No.

Special Director
(Appeals)

Station

Zone

Sub-zone

Jurisdiction

Commissioner of Income-tax (Appeals)-23, Delhi

Delhi

Delhi, Chandigarh Jaipur, Jalandhar and Srinagar

Dehradun and Shimla

States of Rajasthan, Uttarakhand, Haryana, Punjab, Himachal
Pradesh and Union Territory of Chandigarh, Union Territory of Jammu and
Kashmir and Union Territory of Ladakh, National Capital Territory of Delhi

Commissioner of Income-tax (Appeals)-20, Kolkata

Kolkata

Kolkata, Guwahati Lucknow and Patna

Bhubaneswar, Allahabad and Ranchi

States of West Bengal, Assam, Meghalaya, Arunachal Pradesh,
Sikkim, Nagaland, Manipur, Mizoram, Tripura, Odisha, Bihar, Jharkhand, Uttar
Pradesh and Union Territory of Andaman and Nicobar

Commissioner of Income-tax (Appeals)-47, Mumbai

Mumbai

Mumbai, Ahmedabad and Panaji

Surat, Nagpur, Indore and Raipur

States of Maharashtra, Goa, Madhya Pradesh, Chhattisgarh,
Gujarat, Union Territory of Dadra and Nagar Haveli and Daman and Diu

Commissioner of Income-tax (Appeals)-18, Chennai

Chennai

Chennai, Kochi Bengaluru and Hyderabad

Madurai and Kozhikode

States of Tamil Nadu, Kerala, Karnataka, Andhra Pradesh and
Telangana, Union Territory of Puducherry and Union Territory of Lakshadweep

(F) Amendment in Master Direction on Direct Investment by Residents in Joint Venture (JV) / Wholly-Owned Subsidiary (WOS) Abroad8
RBI has clarified that sponsor contribution by an Indian Party (‘IP’) to an Alternative Investment Fund (‘AIF’) set up in Overseas Jurisdictions, including International Financial Services Centres (‘IFSCs’) as per the laws of the host jurisdiction, will be treated as Overseas Direct Investment (ODI). Accordingly, an IP can set up an AIF in overseas jurisdictions, including IFSCs, under the automatic route, provided it complies with relevant regulations of FEMA 120/2004-RB (‘FEMA 120’).

Further, RBI, in consultation with SEBI, has enhanced the limit of overseas investment by Domestic Venture Capital Funds / Alternative Investment Funds registered with SEBI in equity and equity-linked instruments of off-shore Venture Capital Undertakings from the existing USD 750 million to USD 1,500 million.

Also, for investment by way of swap of shares, it is clarified that an Indian company can issue capital instruments to a person resident outside India under the automatic route if the Indian investee company is engaged in a sector which is under automatic route or with prior Government approval, if the Indian investee company is engaged in a sector under Government route as per Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 dated 17th October, 2019, as amended from time to time.

Additionally, RBI has also issued a clarification in para B.22 of the Master Direction on ODI which pertains to opening of a foreign currency account abroad by an Indian Party. RBI has now clarified that in addition to existing conditions, such account can be opened only if the Indian Party is eligible to make ODI under the provisions of FEMA, 120.

______________________________________________________________________________________________
7 Notification S.O. 3958(E) [F. No. K-11022/15/2021-AD.ED], Dated 24-9-2021
8 A.P.(DIR Series) Circular No. 04 dated 12th May, 2021 and SEBI/HO/IMD/DF6

(G) Clarification for the purpose of computation of late submission fee (‘LSF’)
Under the existing FDI provisions, if there is any delay in filing of any specified reports, such delay can be regularised by payment of LSF instead of going through the compounding process. For the purpose of computing LSF, the earlier Master Direction on Reporting specified that the period of delay would be counted from the day after the 30th day from receipt of funds / allotment or transfer of shares and end on the day preceding the day on which the transaction report is received by the RBI. RBI has now made an amendment in the Master Direction on Reporting and clarified that
the period of delay will now be counted beginning from the day after completion of the prescribed time period and end on the day preceding the day on which the transaction report is received by the RBI. The prescribed time period means the time period mentioned in the relevant regulations from the date of receipt of funds / allotment or transfer of shares, as the case may be.

Accordingly, where FDI regulations provide for a period of 60 days for filing of specified forms, such as filing of Form FC-TRS and Form FDI-LLP(II), the delay period for computing LSF will now start from the end of the stipulated time period, i.e., the 60th day.

(H) Liberalised remittance scheme (‘LRS’) for resident individuals – Change in reporting requirement for AD Banks9
AD Banks are required to submit yearly details of applications received and remittances made by resident individual account holders under the LRS route to RBI. This reporting was required to be made on the Online Return Filing System (ORFS) but now the same is required to be made through the XBRL system by accessing the URL https://xbrl.rbi.org.in/orfsxbrl. Further, in case no data is required to be furnished, AD Banks are required to file Nil figures.

(I) Introduction of Foreign Exchange Transactions Electronic Reporting System (FETERS)10
RBI, in order to collect more information on international transactions using credit card / debit card / unified payment interface (UPI), has introduced FETERS with effect from 1st April, 2021. AD Banks are required to submit details of transactions through credit card / debit card / UPI (including sale and purchase of Forex towards international transactions) along with their economic classification (merchant category code – MCC). The reporting needs to be done through a new
return, namely, ‘FETERS-Cards’ on https://bop.rbi.org.in. The frequency of submission is monthly and the same needs to be done within seven working days from the last date of the month for which reporting is to be made.

______________________________________________________________________________________________
9 A.P. (Dir Series 2021-22) Circular No. 7, Dated 7-4-2021
10 A.P. (Dir Series) Circular No.13, dated 25-3-2021

shailesh.kwebmaker

AMENDMENT IN FOREIGN DIRECT INVESTMENT RULES

(A) BACKGROUND

Under the erstwhile
FEMA regulations governing Foreign Direct Investment into India (‘FDI’), i.e.
FEM 20(R), Foreign Exchange Management (Transfer of Issue of Security by a
Person Resident outside India) Regulations, 2017 (‘FDI Regulations’) dated 7^thNovember, 2017, the RBI had powers to govern FDI which included equity
investments into India.

However, the above
position governing FDI has been overhauled since then. The Government of India,
with effect from 15^th October, 2019, assumed power from RBI to
regulate non-debt capital account transactions which would include equity
instruments, capital participation in LLP, etc. by issuing the Foreign Exchange
Management (Non-Debt Instruments) Rules, 2019 (‘Non-Debt Rules’) for governing
non-debt transactions.

Therefore, upon
issuance of the above Non-Debt Rules, the power to regulate FDI into India was
taken over by the Central Government from RBI.

(B) AMENDMENTS TO NON-DEBT RULES BY NOTIFICATION
DATED 27^TH APRIL, 2020

(I) Acquisition of equity shares by purchasing
rights entitlement from person resident in India

The Government of
India issued the above notification for amending Rule 7 of the Non-Debt Rules
which deals with investment by a person resident outside India in equity shares
(other than share warrants) issued by an Indian company on rights issue which
are renounced by the person to whom it is offered.

The amendment now
inserts Rule 7A which provides that whenever a person resident outside India
purchases rights for investing in equity shares (other than warrants) from a
person resident in India who has renounced it, investment by the person
resident outside India has to follow the applicable pricing guidelines laid
down in Rule 21 of the Non-Debt Rules. The pricing guidelines are given as
under:

(i) In case of listed companies – As per SEBI
guidelines;

(ii) In case of unlisted companies – As per
internationally accepted pricing methodology.

The earlier
Non-Debt Rules did not provide for any different pricing guidelines in case of
investment by person resident outside India in rights shares by purchase of
rights renounced by person resident in India. The earlier Non-Debt Rules
provided for following conditions in case of investment by person resident
outside India through either subscription to rights shares or purchase of
rights renounced by person resident in India:

Sr.
No.

Rights
issued by

Pricing
guidelines for rights issue and subscription pursuant to purchase of rights
renounced

Listed Indian company

Price determined by Indian company

Unlisted Indian company

Price not less than price offered to
person resident in India

Implications
of above amendment to Non-Debt Rules

Under the erstwhile
Non-Debt Rules which were similar to the FEMA 20(R) provisions governing FDI,
where a person resident outside India purchased rights entitlement to equity
shares which were renounced by a person resident in India, such non-resident
could invest at the same price at which they were offered to the person
resident in India. However, there are no pricing guidelines which are
applicable on issuance of shares on rights basis under the Companies Act, 2013.

Hence, whether a
non-resident purchased rights entitlement which was renounced by a person
resident in India or participated in rights issue as it was holding equity
shares, there was no change in pricing guidelines related to issuance of rights
shares.

However, post amendment to the Non-Debt Rules, a new criterion has been
drawn for a person resident outside India who purchases rights entitlements
from a person resident in India wherein pricing guidelines will be different as
compared to a person resident outside India who invests in rights issue. The
same is summarised as under:

Sr.
No.

Investment
by person resident outside India

Rights
issued by

Pricing
guidelines for rights issue

Participation in rights issue

Listed Indian company

Price determined by Indian company

Unlisted Indian company

Price not less than price offered to
person resident in India

Participation in rights issue through
purchase of rights entitlement

Listed Indian company

As per SEBI guidelines

Unlisted Indian company

As per internationally accepted
valuation methodology

The above amendment
will result in a peculiar situation which can be explained by way of the
following example:

Mr. NRI is a person
resident outside India who is holding 1,000 equity shares in an existing
unlisted Indian company, X Ltd. which has undertaken rights issue wherein Mr.
NRI will be eligible for 100 equity shares on rights basis. Equity shares are
issued on rights basis at the same price of Rs. 20 per equity share to both
resident as well as non-resident shareholders. Accordingly, Mr. NRI will
purchase his entitlement, i.e. 100 rights equity shares at the rights price of
Rs. 20 per share.

Further, Mr. NRI
also purchases rights entitlements for 50 equity shares from a person resident
in India. In such a scenario, the investment by Mr. NRI for purchasing 50
equity shares by way of rights entitlement would be at a price based on an
internationally accepted valuation methodology which can be different from the
price at which X Ltd. has issued the rights shares.

Hence, in a rights issue by an Indian company to the same non-resident
investor, there would be two different prices, one price for the purchase of
rights shares and another price for the purchase of rights shares acquired
through acquiring rights entitlement from a person resident in India.

Further, the new
Rule 7A does not cover situations where a person resident outside India has
purchased rights entitlement from persons resident outside India. In such a
situation the amendment does not apply.

Additionally, as per section 62(1) of the Companies Act, 2013, where a
shareholder to whom rights offer is made declines to exercises his right, the
Board can dispose them in a manner which is not disadvantageous to the company.
In such a situation, if the Board allocates those rights to an existing foreign
investor, the same cannot be considered to be purchase of rights renounced by
Indian investor and hence the amendment will not apply. Thus, a foreign
investor can acquire shares in the Indian company at the rights issue price
even if it is below fair market value.

(II) Amendment in sourcing
norms for single brand product retailing

Earlier regulations
provided that sourcing norms shall not be applicable up to three years from
commencement of the business, i.e., opening of the first store for entities
undertaking single brand retail trading of products having ‘state-of-art’ and
‘cutting-edge’ technology and where local sourcing is not possible.

The amendment now
clarifies that exemption from sourcing would be applicable for three years
starting from the opening of the first store or the start of online retail,
whichever is earlier.

(III) Amendment in FDI limit
for insurance intermediaries

FDI in insurance
intermediaries, including insurance brokers, re-insurance brokers, insurance
consultants, corporate agents, third-party administrators, surveyors and loss
assessors and such other entities, as may be notified by the Insurance
Regulatory and Development Authority of India from time to time, is now
permitted up to 100% under the Automatic Route.

(IV) Amendment for FPIs

The amendment has
now provided that where FPI’s investment breaches the prescribed limit,
divestment of holdings by the FPI and its reclassification into FDI shall be
subject to further conditions, if any, specified by SEBI and RBI in this
regard.

SUMMARY OF
RECENT COMPOUNDING ORDERS

An analysis of some
interesting compounding orders passed by RBI in the months of January and
February, 2020 and uploaded on the website¹ are given below. Article refers to regulatory
provisions as existing at the time of offence. Changes in regulatory
provisions, if any, are noted in the comments section.

_________________________________________

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

FOREIGN DIRECT INVESTMENT (FDI)

A. M/s Congruent Info-tech Pvt. Ltd.

Date of order:
19^th December, 2019

Regulation: FEMA
20/2000-RB [Foreign Exchange Management (Transfer or Issue of Security by a
Person Resident Outside India) Regulations, 2000]

ISSUE

(1) Violation of pricing guidelines in issue of
shares,

(2) Delay in refund of consideration,

(3) Transfer of shares from resident to
non-resident by way of gift without RBI’s approval,

(4) Taking on record transfer of shares in the
books of the company without RBI’s approval.

FACTS

Applicant company was
engaged in the business of writing, modifying, testing of computer programmes
to meet the needs of a particular client excluding web-page designing.

The company received
foreign inward remittance of Rs. 13,32,900 from Mr. Mani Krishna Murthy, USA
towards subscription to shares which was duly reported to RBI.

The applicant company
allotted 10,000 equity shares at a face value of Rs.10 each amounting to Rs.
1,00,000 as against their Fair Value of Rs. 92.50 to a person resident outside
India on 9^th October, 2003. The shortfall of Rs. 8,25,000 was
brought in by way of inward remittance on 1^st July, 2019 after a
delay of approximately 15 years and 8 months.

Further, the company
refunded an amount of Rs. 10,30,900 without the permission of RBI on 5^th
April, 2011 (approximately three years from its deemed date of receipt, i.e. 29^th
November, 2007).

The resident shareholder,
Mr. V.S. Krishna Murthy, had transferred 20,000 equity shares of fair value Rs.
92.50 each, amounting to Rs. 18,50,000, to a non-resident Mr. Mani Krishna
Murthy on 9^th October, 2003 by way of gift without RBI’s approval.

The above transfer of
shares was also taken on record by the applicant company without obtaining
RBI’s approval.

Regulatory provision

Paragraph 5 of Schedule I
to Notification No. FEMA 20/2000-RB, ‘the price of shares issued to persons
resident outside India shall not be less than the fair value of shares.’

Paragraph 8 of Schedule I
to Notification No. FEMA 20/2000-RB read with A.P. (DIR Series) Circular No. 20
dated 14^th December, 2007, ‘the shares have to be issued / amount
refunded within 180 days from the date of receipt of the inward remittance.’

Regulation 10A(a) of
Notification No. FEMA 20/2000-RB, ‘a person resident in India who proposes
to transfer to a person resident outside India any security by way of gift
shall make an application to Reserve Bank.’

Regulation 4 read with
Regulation 10(A)(a) of Notification No. FEMA 20/ 2000-RB, ‘the company can
take the transfer of shares by way of gift, on record, after the approval of
Reserve Bank.’

CONTRAVENTION

Relevant
Paragraph of FEMA 20 Regulation

Nature
of default

Amount
involved
(in INR)

Time
period of default (approximately)

Paragraph 5 of Schedule I

Violation of pricing guidelines in issue
of shares to non-resident

Rs. 8,25,000

15 years, 8 months and 22 days

Paragraph 8 of Schedule I read with A.P.
(DIR Series) Circular No. 20

Delay in refund of receipt of
consideration

Rs. 10,32,900

2 years, 10 months and 9 days

Regulation 10(A)(a)

Transfer of shares by way of gift from
resident to non-resident without prior approval from RBI

Rs. 18,50,000

15 years, 10 months and 18 days

Regulation 4 read with Regulation
10(A)(a)

Taking on record transfer of shares by
way of gift without RBI approval

Rs. 18,50,000

15 years, 10 months and 17 days

Compounding
penalty

Compounding penalty
of Rs. 2,15,519 was levied.

Comments

Under the erstwhile FEMA 20 Regulations as well as under Non-Debt
Rules, transfer of shares from resident to non-resident by way of gift requires
prior approval of RBI. Hence, unless approval from RBI is obtained, the Indian
company whose shares are being transferred should also not record the transfer
from resident to non-resident by way of gift.

B. Atrenta (India) Private Limited

Date of order:
30^th January, 2020

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 the applicant from NRI to Non-Resident company without prior approval of
RBI.

FACTS

Applicant Company had
allotted 96,600 and 4,600 fully paid up equity shares to M/s Atrenta Inc. (NR)
and Mr. Ajoy Kumar Bose (NRI), respectively, as part of subscription to the
memorandum on 26^th May, 2001.

Further, the applicant
company allotted 2,35,620 and 80 fully paid equity shares to M/s Atrenta Inc.
and Mr. Ajoy Kumar Bose, respectively, on 10^th October, 2001.

Mr. Ajoy Kumar Bose (NRI)
transferred 4,598 and 80 equity shares on 26^th May, 2011 and 17^th
October, 2001 to M/s Atrenta Inc. (NR) without obtaining prior approval of RBI.

The applicant company also
took the transfer of shares from NRI to NR on record.

Regulatory
provision

• Regulation 4 of FEMA 20, ‘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. Provided that the Reserve Bank may, on an application made to it and
for sufficient reasons, permit an entity to issue any security to a person
resident outside India or to record in its books transfer of security from or
to such person, subject to such conditions as may be considered necessary.’

CONTRAVENTION

Relevant
paragraph of FEMA 20 Regulation

Nature
of default

Amount
involved
(in INR)

Time
period of default (approximately)

Regulation 4

Transfer of shares of the applicant from
NRI to Non-Resident Company without prior approval of the Reserve Bank of
India

Rs. 46,780

16 years and 5 months

Compounding
penalty

Compounding penalty
of Rs. 79,526 was levied on the applicant company.

Comments

It is interesting
to note that the above penalty was levied on the applicant company for taking
on record transfer of shares from NRI to non-resident without prior approval of
RBI. Additionally, the NRI²
was also levied penalty of similar amount for transferring its shares to
non-resident company without prior approval of RBI. Thus, penalty was levied
twice on the same transaction, one which was levied on the company, and the
second which was levied on the NRI.

It should also be
noted that under the earlier FEMA 20 Regulations (which were applicable till
November, 2017), an NRI could transfer equity shares by way of sale or gift to
another NRI only and not to any other non-resident. However, post November,
2017 under the erstwhile FEMA 20(R) as well as under the revised Non-Debt Rules
governing FDI from October, 2019 an NRI can transfer shares to any person
resident outside India by way of sale or gift without any approval from RBI.

ESTABLISHMENT
IN INDIA OF A BRANCH OFFICE OR A LIAISON OFFICE OR A PROJECT OFFICE OR ANY
OTHER PLACE OF BUSINESS

C. M/s Quanticate
International Limited, Branch Office

Date of order:
27^th June, 2019

Regulation: RBI
approval letter dated 24^th September, 2010 and Master Direction –
Establishment of Branch Office (BO) / Liaison Office (LO) / Project Office (PO)
or any other place of business in India by foreign entities, FED Master
Direction No. 10/2015-16

ISSUE

Payment of expenses
of the branch office directly by the parent company to the third party.

FACTS

The applicant company was
engaged in the business of statistical consultancy, statistical programming,
pharmaco-vigilance, analysing and data management services to its head office.

The applicant company
established a branch office in India with the permission of RBI vide
letter No. FE.CO.FID/7508/10.83.318/2010-11 dated 24^th September,
2010.

The branch office (BO) had
an account with RBS Bank to carry out its transactions. After the closure of
RBS operations in India, the branch office closed this account on 19^th
August, 2016 and opened a new account with Standard Chartered Bank on 19^th
September, 2016.

______________________________________________

2 Ajoy Kumar Bose – CA. No 5047 / 2019 dated 12^thFebruary, 2020

Although the BO had an
account with Standard Chartered Bank, the remittances of Rs. 5,40,42,300 were
made directly by the parent company of the BO to a third party account for
payment of expenses, particularly their staff, landlord and supplier in India
during the period 21^st September, 2016 to 23^rd March,
2017.

Regulatory
provisions

Paragraph 6 of the
permission letter states that the entire expenses of the office in India will
be met either out of the funds received from abroad through normal banking
channels or through income generated by it in India by undertaking permitted
activities.

Paragraph 11 of the
permission letter states that the office may approach AD Bank in India to open
an account for its operation in India. Credits to the account should represent
the funds received from the head office through normal banking channels for
meeting the expenses of the office and profit made by the BO. Debits of this
account shall be for the expenses incurred by the BO and towards remittance of
profit / winding up proceeds.

Paragraph 3(ii) of FED
Master Direction No. 10/2015-16 dated 1^st January, 2016 also
reiterates what was stated in paragraph 11 of the permission 11.

CONTRAVENTION

Relevant
provision

Nature
of default

Amount
involved
(in INR)

Time
period of default

Paragraph 6 and Paragraph 11 of RBI
approval letter read with Paragraph 3(ii) and 2(i) of FED Master Direction
No. 10/2015-16

Payment of expenses of the Branch Office
directly by the parent company to third party

Rs. 5,40,42,300

2 years, 3 months and 27 days

Compounding
penalty

Compounding penalty
of Rs. 2,46,169 was levied.

Comments

The companies which
have set up branch offices in India need to closely monitor their activities
and it needs to be ensured that all payments of branch offices should be
undertaken only through the branch’s Indian bank account and not directly from its parent company.

D. M/s ETF Gurgaon Project Office (MG-SE-17)

Date of order:
11^th October, 2019

Regulation: FEMA
22(R)/2016-RB [Foreign Exchange Management (Establishment in India of a branch
office or a liaison office or a project office or any other place of business)
Regulations, 2016]

ISSUE

Inter-project
transfer of funds and transfer of project assets from one project to another.

FACTS

The applicant, M/s ETF, a
company incorporated and registered under the laws of France, specialises in
construction and maintenance of railway networks, urban transport networks and
industrial siblings. It was involved in the development of railway
infrastructure, high-speed lines, concrete slab tracks, metal and rubber
wheeled tramway systems, etc.

The applicant had
established the following project offices in India for executing the following
contracts:

i. Contract MG-SE-17 with IL&FS Rail
Limited (referred to as MG-SE-17, Gurgaon);

ii. Railway Infrastructure contract awarded by
Rail Vikas Nigam Limited (RVNL) – Construction contract with SEW-ETF-AIL JV2
(referred to as RVNL Kanpur);

iii. Contract CT19A (referred as CT-19A Noida).

Project expenses relating
to a particular contract were met from the contract receipts relating to the
said contract, or from remittances obtained from the Head Office in France
depending upon the requirement of funds.

There were, however,
occasions where funds available in the bank account for a particular contract
were insufficient to meet the expenses of the said contract necessitating
inter-project transfer of funds.

During the F.Y. 2016-17, ETF has obtained approval from RBI for
inter-project transfer of funds up to Rs. 1,00,00,000 from the project office
of MG-SE-17 to CT-19A.

During the F.Ys. 2016-17
and 2017-18, the Gurgaon project office did inter-project utilisation of funds
and allocation of common expenditure amounting to Rs. 4,60,55,459.

The above activity
(inter-project utilisation of funds) of the Gurgaon project office did not
relate to the contract secured by the foreign entity for which the project office
was established.

In the Annual Activity
Certificates (AAC) for the years ended 31^st March, 2017 and 31^st
March, 2018, the auditor had qualified the AACs by observing that the
inter-project transfers were done without RBI approval.

Further, transfer of
project assets from the Gurgaon project office to another amounting to Rs.
1,06,44,273 was also done without RBI approval.

The applicant was granted post
facto approval subject to compounding of the contravention.

Regulatory
provisions

Regulation 4(k) of
Notification No. FEMA.22(R)/RB-2016 dated 31^st March, 2016 states
that a person resident outside India permitted under these Regulations to
establish a branch office or liaison office or project office may apply to the
Authorised Dealer Category-I bank concerned for transfer of its assets to a
joint venture / wholly owned subsidiary or any other entity in India.

Regulation 4(l) (Annex D)
of Notification No. FEMA.22(R)/RB-2016 dated 31^st March, 2016 states
that the branch office / liaison office may submit the Annual Activity
Certificate (Annex D) as at the end of 31^st March along with the
audited financial statements, including receipt and payment account on or
before 30^th September of that year.

CONTRAVENTION

Relevant
provision

Nature
of default

Amount
involved
(in INR)

Time
period of default

Regulation 4(k), Regulation 4(f) read
with Annex D of Regulation 4(l) of Notification No. FEMA.22(R)/RB-2016

Inter-project utilisation of funds and
transfer of project assets from one project to another

Rs. 5,66,99,732

2 years, 9 months and 9 days

Compounding
penalty

Compounding penalty
of Rs. 2,56,799 was levied.

Comments

Where foreign companies have set up more than one project office in
India, adequate care needs to be taken to ensure that funds of these project
offices are not transferred amongst themselves without prior approval of RBI.

EXPORT OF GOODS AND SERVICES

E. M/s Dalmia Cement (Bharat)
Limited (Legal Successor of OCL India Ltd.)

Date of order:
28^th January, 2020

Regulation: FEMA
23/2000-RB [Foreign Exchange Management (Export of Goods and Services)
Regulations, 2000]

ISSUE

Failure to realise
the export proceeds (by the erstwhile OCL India Ltd.) within the stipulated
time period.

FACTS

The applicant company, M/s
Dalmia Cement (Bharat) Limited (the legal successor of M/s OCL India Limited,
consequent upon a merger ordered by NCLT vide order dated 18^th
July, 2019) was engaged in the business of export of refractory materials,
cement, etc.

The erstwhile M/s OCL India
Limited, a ‘Star Export House’ engaged in the business of export of refractory
materials, cement, etc., had made exports under 13 different invoices between
February, 2008 and May, 2012.

M/s OCL India Limited was
not able to realise and repatriate the export proceeds pertaining to 13
invoices within the stipulated time.

Subsequently, M/s OCL India
Limited had written off the amount in its books.

However, as the company was
under investigation by the Directorate of Enforcement, the above bills could
not be written-off by the applicant on its own or by its AD bank.

The applicant filed a
petition in the Hon’ble High Court of Delhi for regularising the above
write-off.

The Hon’ble Court disposed
of the matter with directions to the applicant to apply for compounding again
to the RBI along with fresh fee for compounding.

Regulatory
provisions

Regulation 9 of
Notification No. FEMA.23/2000 which states that the amount representing the
full export value of goods or software exported shall be realised and
repatriated to India within six months (applicable up to 3^rdJune,
2008) and twelve months (as applicable subsequently) from the date of export.

CONTRAVENTION

Relevant
Provision

Nature
of default

Amount
involved (in INR)

Time
period of default

Regulation 9 of FEMA 23/2000-RB

Failure to realise export proceeds
within stipulated time period

Rs. 39,22,447

Approximately 11 years

Compounding
penalty

Compounding penalty
of Rs. 79,419 was levied.

Comments³

In the instant
case, the applicant company had initially filed a compounding application with
RBI for write-off of export proceeds. However, the said compounding application
was returned by RBI on the ground that compounding application can be filed
only after transactions are regularised by RBI. Further, RBI advised the
applicant company to approach the Trade Division of RBI for regularising its
export transactions. However, as the applicant company was under investigation
by ED, it could not write off its export receivables and hence had initially
filed compounding application before RBI. As RBI returned its compounding
application, it filed a writ petition with the Delhi High Court for writing off
export receivables.

_________________________________________________________________________

3 Based on Delhi High Court order in case of
OCL India Limited [W.P.(C) 8265/2018 & CM Nos. 31684/2018 dated 18^th
July, 2019]

During the
hearing before the Delhi High Court, counsel for RBI submitted that there is no
provision which precluded RBI from considering and processing compounding
application where investigation is pending. Accordingly, based on RBI’s
submission that the matter be remanded back to RBI for fresh consideration, the
Court dismissed the writ petition and directed RBI to consider the compounding
application of the applicant afresh and not reject it on the basis of
approaching another department of RBI. Interestingly, the Delhi High Court also
stayed proceedings initiated by ED till
the applicant’s compounding application was considered by RBI.

shailesh.kwebmaker

ANALYSIS OF RECENT COMPOUNDING ORDERS

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: 18^th 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
7^th 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 22^nd 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:
29^th 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 17^th October, 2019.

EXPORT
OF GOODS AND SERVICES

C. H.F. Metal
Art Private Limited and Azoy Bansal

Date of order: 5^th
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:
28^th 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 5^th 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:
11^thNovember, 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:
26^th 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 4^th
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 4^th 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 11^th January, 2018 in respect of remittance
of SGD 5,000 made through the director on 4^th 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 8^th
September, 2014.

The applicant submitted APRs for the years
ending 2009 to 2012 with delay on 12^th January, 2018.

Disinvestment from the overseas entity was
undertaken on 11^th 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

4^th
July, 2008 to
11^th 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

4^th
July, 2008 to
13^th 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

4^th
July, 2008
to 8^th September, 2014

Regulation15(iii)

APR of
the overseas entity based on its audited accounts has to be filed annually on
or before 31^st December. Applicant delayed submission of APR in
respect of its
overseas entity

Not
applicable

1^stJuly, 2013 to
21^st 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

11^th
April, 2012 to
13^th 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

11^th
April, 2012 to
13^th 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

11^th
April, 2012 to
13^th 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:
22^ndNovember, 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 7^th 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 9^th
March, 2012 and no valuation was done as required. The transactions were taken
on record on 14^th August, 2019.

Further, the applicant had reported Annual
Performance Reports (APRs) for the accounting years 2011 and 2012 with a delay
on 15^thJune, 2013 and 17^thDecember, 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 31^st 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.

shailesh.kwebmaker

REVIEW OF FOREIGN DIRECT INVESTMENT POLICY DUE TO COVID-19 PANDEMIC

(A) BACKGROUND – FDI Regulations pre-October, 2019

Under the erstwhile FEMA regulations
governing Foreign Direct Investment into India (‘FDI’), i.e., FEM 20(R),
Foreign Exchange Management (Transfer of Issue of Security by a Person Resident
outside India) Regulations, 2017 (‘FDI Regulations’) dated 7th November, 2017,
the RBI had powers to govern FDI which included equity investments into India.

The above regulations were issued
after superseding the earlier regulation dealing with FDI, i.e., the Foreign
Exchange Management (Transfer or issue of Security by a Person Resident outside
India) Regulations, 2000 which were issued by RBI on 3rd May, 2000 (‘Old FDI
Regulations’).

Thus, under the FDI regulations, RBI
had powers to regulate FDI into India. At the same time, the Government of
India used to issue a consolidated FDI Policy which contained a broad policy
framework governing FDI into India. The last such consolidated FDI Policy (‘FDI
Policy’) was issued on 28^th August, 2017 by the Department of
Industrial Policy and Promotion, Government of India. However, as only the RBI
had the powers to govern FDI, Para 1.1.2 of the FDI Policy stated that any
changes in it made by the Government of India will need to be notified by the
RBI as amendments to the FDI regulations. Further, it was specifically
clarified that if there was any conflict between changes made in the FDI Policy
through issuance of Press Notes / Press Releases and FDI Regulations, the FDI
Regulations issued by RBI will prevail. Further, the FDI Policy defined FDI in
Para 2.1.14 as under:

‘FDI’ means investment by
non-resident entity / person resident outside India in the capital of an Indian
company under Schedule I of Foreign Exchange Management (Transfer or Issue of
Security by a Person Resident Outside India) Regulations, 2000.

Schedule I of the Old FDI
Regulations dealt with investment by person resident outside India in the
equity / preference / convertible debentures / convertible preference shares of
an Indian company.

Hence, under the earlier FEMA regime
FDI was governed by the RBI through FDI Regulations and the policy framework
was given by the Government through issuance of an annual FDI Policy and
amendments by issuance of Press Notes / Press Circulars as and when required.

(B) BACKGROUND – FDI Regulations post-October, 2019

However, the above position
governing FDI was completely overhauled with effect from October, 2019. From 15^th
October, 2019 the Government of India assumed power from the RBI to regulate
non-debt capital account transactions. Subsequently, vide 16^th
October, 2019, the Central Government notified the following list of instruments
which would qualify as non-debt instruments:

List of instruments notified
as non-debt instruments

(a) all
investments in equity instruments in incorporated entities: public, private,
listed and unlisted;

(b) capital
participation in LLPs;

(d) investment
in units of Alternative Investment Funds (AIFs), Real Estate Investment Trusts
(REITs) and Infrastructure Investment Trusts (InvIts);

(e) investment
in units of mutual funds or Exchange-Traded Funds (ETFs) which invest more than
fifty per cent in equity;

(f) junior-most
layer (i.e. equity tranche) of the securitisation structure;

(g) acquisition,
sale or dealing directly in immovable property;

(h) contribution
to trusts; and

(i) depository
receipts issued against equity instruments.

Thus, all investments in equity
shares, preference shares and convertible debentures and preference shares were
classified as non-debt and came to be regulated by the Central Government
instead of by the RBI.

Thereafter, on 17^th
October, 2019 the Central Government issued the Foreign Exchange Management
(Non-Debt Instruments) Rules, 2019 (‘Non-Debt Rules’) for governing Non-Debt
transactions.

Hence, upon issuance of the above Non-Debt
Rules, the power to regulate FDI into India was taken over by the Central
Government from the RBI. Accordingly, the FDI Policy effectively became
redundant as it governed FDI as defined under the erstwhile FDI Regulations
which was superseded by the Non-Debt Regulations with effect from 17^th
October, 2019.

The existing FDI Policy, vide
Para 3.1.1, provided that a non-resident entity could invest in India under the
automatic route subject to the FDI Policy. However, investments by an entity or
an individual based in Bangladesh and Pakistan was allowed only under the
Government route.

In view of the Covid pandemic, the
Government of India has amended the FDI Policy by issuing the above Press Note
No. 3 (2020) dated 17^th April, 2020 under which the FDI Policy is
now amended to provide that if any investment is made by an entity, citizen or
beneficial owner who is a resident of a country with whom India shares its land
border, will be under the Government route. Further, any transfer of ownership
of existing or future FDI in an Indian entity to a person resident of the above
countries would also require Government approval.

Additionally, it has also been
provided that the above amendment in the FDI Policy will take effect from the
date of the FEMA notification.

Subsequently, the Government of
India has issued a notification dated 22^ndApril, 2020 (‘FEMA
Notification’) to amend Rule 6(a) of the Non-Debt Rules which deals with FDI
for giving effect to the above Press Note No. 3.

(D) Implication of above amendment to Non-Debt Rules

(i) Restrictions on investment from neighbouring countries

As on date, India shares its land
boundary with the following seven countries: Pakistan, Bangladesh, China,
Nepal, Myanmar, Bhutan and Afghanistan.

As per the pre-amended Rule 6(a) of
the Non-Debt Rules, a person resident outside India could make investment
subject to the terms and conditions specified in Schedule I which dealt with
FDI in Indian companies. However, there was a proviso which specified
that investment from the following persons / entities was under the Government
route:

An entity incorporated in Bangladesh or
Pakistan;

A person who is a citizen of Bangladesh or
Pakistan.

As per the amendment made on 22^nd
April, 2020, the above provision has been amended to provide that investment
from the following persons / entities will be under the Government route:

An entity incorporated in any of seven
neighbouring countries mentioned above;

If the beneficial owner is situated in any
of the above seven neighbouring countries;

The beneficial owner is a citizen of any of
the above seven neighbouring countries.

Further, transfer of ownership of
any existing or future FDI in an Indian entity to the above persons will also
be under the Government route.

Accordingly, for example, if earlier
a company based in China wanted to undertake FDI in any Indian company, the
same was allowed under the automatic route subject to sectoral caps, if any,
applicable to the industry in which the Indian company was operating. However,
post-22^nd April, 2020 a Chinese company which has made investment in
an Indian company which is engaged in a sector where FDI is permissible up to
100% without any restrictions, would neither be allowed to undertake any fresh
investment in such Indian company nor acquire shares in any existing Indian
company under the FDI route without Government approval.

The above restriction has come in
the wake of news reports that the People’s Bank of China has acquired more than
1% stake in HDFC. The Government’s intention is to ensure that when the
valuation of Indian companies is low due to the impact of Covid-19, Indian
companies are not taken over by Chinese companies. However, the above
restriction is not directed only at China but covers investment from all the
seven countries mentioned above.

(ii) Meaning of beneficial ownership

It is interesting to note that the
term ‘beneficial owner’ has not been defined under FEMA. Rule 2(s) of the
Non-Debt Rules, 2019 while defining the term ‘foreign investment’ clarifies
that where, in respect of investment made by a person resident in India, if a
declaration is made under the Companies Act, 2013 that the beneficial interest
in the said investment is to be held outside India, such investment even though
made by a person resident in India, will be considered as foreign investment.
Thus, the Non-Debt Rules, 2019 refer to the provisions of the Companies Act,
2013 (‘Cos Act’) for determining whether a beneficial interest exists or not.

Section 89(10) of the Cos Act
defines beneficial interest in a share to include directly or indirectly,
through any contract, arrangement or otherwise, the right or entitlement of a
person alone or together with any other person to –

(a) exercise
or cause to be exercised any or all of the rights attached to such share;

(b) receive
or participate in any dividend or other distribution in respect of such share.

Hence,
based on the above provision of the Cos Act, it can be concluded that ‘beneficial
interest’ means a person who has the right to exercise all the rights attached
to the shares and also receive dividend in respect of such shares.

Further, section 90 of the Cos Act
read with Rule 2(e) of the Companies (Significant Beneficial Owners) Rules,
2018 specifies that if an individual, either directly or indirectly, is holding
10% or more of shares or voting rights in a company, such individual will be
considered to be a significant beneficial owner of shares and will be required
to report the same in the prescribed format.

Additionally, Rule 9(3) of the
Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (‘PMLA Rule
9’) defines beneficial owner as a natural person holding in excess of the
following thresholds:

Nature of entity

Threshold limit

Company

25% of shares or capital or profits

Partnership firm

15% of capital or profits

Unincorporated body or body of individuals

15% of property or capital or profits

Trust

15% interest in trust

Further, the above-referred PMLA
Rule 9 also provides that in case any controlling interest in the form of
shares or interest in an Indian company is owned by any company listed in India
or overseas or through any subsidiaries of such listed company, it is not
necessary to identify the beneficial owner. Thus, in case of shares or
interest-held listed companies, beneficial ownership is not to be determined.

The above PMLA Rule 9 is followed by
SEBI for the purposes of determining beneficial ownership in any listed Indian
company.

Hence, we have a situation where the
Cos Act determines a significant beneficial owner as a natural person holding
10% or more directly or indirectly in the share capital, whereas SEBI, for the
purposes of a listed company, considers a threshold of shareholding exceeding
25% to determine beneficial ownership.

Additionally, the OECD Beneficial
Ownership Implementation Toolkit, March, 2019 states that beneficial owners are
always natural persons who ultimately own or control a legal entity or
arrangement, such as a company, a trust, a foundation, etc. Accordingly, where
an individual through one or more different companies controls the investment,
all intermediate controlling companies will be ignored and the individual would
be considered to be the beneficial owner of the ultimate investment.

However, in the absence of any
clarity given under the FEMA notification or by the Press Note regarding the
percentage beyond which an individual would be considered to be having
beneficial interest in the investment, one may take a conservative view of
considering shareholding of 10% or more as beneficial interest for the purposes
of FEMA. The same is explained by the example below:

Example

An Indian company is engaged in the
IT sector in which 100% FDI is permitted under the automatic route having the
following shareholding pattern:

In the above fact pattern, where the
Chinese Co. or a Chinese individual are holding 10% or more beneficial interest
either directly or indirectly through one or more entities in an Indian
company, the same will be covered under the restriction imposed by the FEMA
notification. Accordingly, any future investment of the Mauritius Co. into the
Indian Co. will be subject to Government approval.

Further, any change in shareholding
at any level which will transfer beneficial interest from a non-Chinese company
/ individual to a Chinese company or Chinese individual, will also be subject
to Government approval.

(iii) Meaning of FDI

Rule 6(a) of the Non-Debt Rules
provides that a person resident outside India can make investment subject to
the terms and conditions specified in Schedule I which deals with FDI in Indian
companies. FDI is defined to include the following investments:

Investment in capital instruments of an
unlisted Indian company; and

Investment amounting to 10% or more of
fully diluted paid-up capital of a listed Indian company.

Capital instruments means equity
shares, fully, compulsorily and mandatorily convertible debentures, fully,
compulsorily and mandatorily convertible preference shares and share warrants.

As per the amendment made on 22^ndApril, 2020 the above Rule 6(a) has been amended to provide that
investment from entities or a beneficial owner located in the above seven
neighbouring countries will be under the automatic route.

Any investment of less than 10% in a
listed Indian company is considered as Foreign Portfolio Investment and is
covered by Schedule II of the Non-Debt Rules.

Further, the following schedules of Non-Debt
Rules cover different types of investments into India:

Schedule reference

Nature of investment

Schedule II

Investment by Foreign Portfolio Investment

Schedule III

Investment by NRIs or OCIs on repatriation basis

Schedule IV

Investment by NRIs or OCIs on
non-repatriation basis

Schedule V

Investment by other non-resident investors like sovereign
wealth funds, pension funds, foreign central banks, etc.

Schedule VI

Investment in LLPs

Schedule VII

Investment by Foreign Venture Capital investors

Schedule VIII

Investment in an Indian investment vehicle

Schedule IX

Investment in depository receipts

Schedule X

Issue of Indian depository receipts

As the amendment is made only in
Rule 6(a) which deals with FDI in India covered under Schedule I, investment
covered by the above-mentioned Schedules II to X (excluding investment in LLP
covered by Schedule VI) will not be subject to the above restrictions placed on
investors from China and other neighbouring countries.

For example, any investment of less
than 10% in a listed Indian company will be considered to be Foreign Portfolio
Investment and, accordingly, will not be subject to the above restrictions
placed on investors from China and other neighbouring countries.

With regard to investment in LLPs,
the same is covered by Schedule VI of the Non-Debt Rules. Clause (a) of
Schedule VI provides that a person resident outside India, not being Foreign
Portfolio Investor (FPI) or Foreign Venture Capital Investor (FVCI), can
contribute to the capital of an LLP which is operating in sectors wherein FDI
up to 100% is permitted under the automatic route and there are no FDI-linked
performance conditions.

Accordingly, post-22^ndApril,
2020, as FDI by person / entities based in neighbouring countries will fall
under the approval route they will not be eligible to make investment in any
LLP, irrespective of the sector in which it operates. Thus, persons / entities
based in neighbouring countries will neither be able to undertake fresh
investment in an existing LLP where they are already holding partner’s share,
or incorporate new LLPs or buy stakes in any existing LLP even under the
Government route.

Thus, unlike investment in companies
which will be allowed with the prior approval of the Government, investment in
LLPs will no longer be permissible either under the automatic route or the
approval route irrespective of the business of the LLP. Similarly, a company
having FDI with investors who belong to the neighbouring countries will not be
allowed to be converted into an LLP.

Meaning of transfer of
existing or future FDI

The amended provision says
Government approval is required before transfer of existing or future FDI in an
Indian entity to persons / entities based in the neighbouring countries. Hence,
transfer of existing FDI in an Indian entity as well as transfer of any FDI
which is made in future to persons / entities based in the neighbouring
countries will require Government approval.

Restriction
on issuance of shares against pre-incorporation expenses

Under the existing provisions, a WOS
set up by a non-resident entity operating in a sector where 100% FDI is
permitted under the automatic route, is permitted to issue shares against
pre-incorporation expenses incurred by its parent entity subject to certain
limits.

Going forward, as investment by
neighbouring countries will now fall under the Government route, a WOS set up
by a parent entity which is based in the neighbouring countries will not be
permitted to issue shares against pre-incorporation expenses incurred by the
parent entity.

Convertible instruments

FDI includes equity shares, fully,
compulsorily and mandatorily convertible debentures, fully, compulsorily and
mandatorily convertible preference shares, and share warrants. Accordingly, any
issuance or transfer of convertible instruments to persons / entities of
neighbouring countries will now be subject to Government approval irrespective
of the fact that convertible instruments have not yet been converted into equity.

However, determining beneficial
ownership in case of convertible instruments will be challenging. The case may
be more complicated where overseas investors in an Indian company have issued
optionally convertible instruments.

In this regard, one may place
reliance on the definition of FDI under Rule 2(r) which requires FDI to be
computed based on the post-issue paid-up equity capital of an Indian company on
fully diluted basis. Hence, a similar analogy could also be applied for
computing beneficial ownership of residents / entities of neighbouring
countries on the assumption that the entire convertible instruments have been
converted into equity.

(iv) Indirect foreign investment – Downstream
investment

Indirect foreign investment is
defined to mean downstream investment received by an Indian entity from:

(a) another
Indian entity (IE) which has received foreign investment and (i) the IE is not
owned and not controlled by resident Indian citizens or (ii) is owned or
controlled by persons resident outside India; or

(b) an
investment vehicle whose sponsor or manager or investment manager (i) is not
owned and not controlled by resident Indian citizens or (ii) is owned or
controlled by persons resident outside India.

The above amendment will also affect
downstream investment made by an existing Indian company which is owned or
controlled by persons resident outside India. Hence, if persons / entities of
neighbouring countries have beneficial interest in such an Indian company which
is owned or controlled by persons resident outside India, any downstream
investment made by such a company would also be under Government route.

The above can be illustrated as
follows:

Thus, in the instant case, as Indian Co. is owned or
controlled by persons resident outside India, any investment made by Indian Co.
will be considered to be downstream investment and will be required to comply
with the applicable sectoral caps. Hence, if persons / entities of neighbouring
countries hold beneficial interest in Indian Co., any subsequent investment
made by Indian Co. will require Government approval. Further, any downstream
investment made by WOS would also need prior Government approval.

Additionally, downstream investment by an LLP which is owned
or controlled by persons resident outside India and having beneficial ownership
of persons / residents of neighbouring countries will not be allowed in any
Indian company, irrespective of the sector.

(v) Effective date of changes made in FDI Policy

It is interesting to note that the Government had decided to
make changes in the FDI Policy by issuing a Press Note. Further, the Press Note
has itself stated that the above changes will come into effect from the date of
issuance of the relevant notification under FEMA. The relevant FEMA
Notification has been issued on 22^nd April, 2020 and hence the above
changes will be effective from that date.

(vi) Status of FDI from Hong Kong

Hong Kong is one of the major contributors to FDI in India.
As per Government of India records, FDI from Hong Kong is almost double that
from China and hence it is essential to evaluate whether Hong Kong will be
considered separate from China to determine whether it will be covered under
the new restrictions imposed by Press Note No. 3. It is interesting to note
that Hong Kong is governed separately as Hong Kong Special Administrative
Region of China but it forms part of China. However, for the purpose of
reporting FDI, Hong Kong is classified as a separate country by the Government
of India. Similarly, the Indian Government has entered into a separate tax
treaty with Hong Kong in addition to China for avoidance of double taxation.
Additionally, Hong Kong has separately signed the Multilateral Convention in
addition to China as part of OECD’s BEPS Action Plans.

Based on the above, it appears that the Government is taking
the view that Hong Kong is separate from China; and if such is indeed the case,
then it is possible to take the view that the above restrictions imposed by Press
Note No. 3 will not affect FDI from Hong Kong and the same should be covered
under the automatic route as hitherto applicable. However, it is advisable that
the Government issue an appropriate clarification on the same.

SUMMARY

Based on the above discussions, the amendment in
the FDI regime by putting investment from neighbouring countries under the
Government route has given rise to several issues. It is expected that the
Government will quickly issue necessary clarifications in this regard.

shailesh.kwebmaker

FDI IN E-COMMERCE

Background

Retail sector in
India is considered to be a sensitive sector especially due to factors, such as
(i) the employment it generates; (ii) unorganised clusters of traders iii)
inability to compete with large players iv) concentration of vote bank.
Accordingly, Government over the years has traded consciously and opened up FDI
in retail sector in truncated manner.

The Department of
Industrial Policy and Promotion (DIPP) of the Ministry of Commerce and
Industry, Government of India has issued Press Note No 2 (2018 Series) on 26^th
December, 2018 (PN 2 of 2018). PN 2 of 2018 amends paragraph 5.2.15.2
(e-commerce activities) of the current ‘Consolidated FDI Policy’ of the DIPP
effective from 28^th August, 2017 (FDI Policy), effective from 1^st
February, 2019. Paragraph 5.2.15.2 (e-commerce activities) incorporates the
provisions of Press Note No 3 (2016 Series) dated 29^th March, 2016
(PN 3 of 2016), pursuant to which foreign direct investment (FDI) up to 100%
was allowed under the automatic route in entities engaged in the marketplace
model of e-commerce, subject to compliance with certain conditions. However,
FDI in entities engaged in the inventory-based model of e-commerce was
expressly prohibited, and this continues to be the case as on date. A
marketplace-based model of e-commerce is a model of providing an information
technology platform by an e-commerce entity on a digital and electronic network
to act as a facilitator between buyer and seller. An inventory-based model of
e-commerce, on the other hand, is a model where inventory of goods and services
is owned by an e-commerce entity and is sold to the consumers directly.

It has been a bone
of contention of trade association that FDI component is creating an uneven
playing field to the disadvantage of millions of small business enterprises. It
is alleged that the e-retailers are engaged in predatory pricing policy and
subsidizing the prices with a view to oust brick and mortar shops from retail
trade.

While the
conditions contained in PN 3 of 2016 were introduced to bring some comfort to
brick and mortar retailers (small traders) and to ostensibly create a level
playing field for such retailers with their e-commerce counterparts, it was
felt in some quarters that the wording of PN 3 of 2016 was not stringent enough
and that the intended goal of such PN 3 of 2016 was not being achieved.
Complains were made to regulator that certain marketplace platforms were
violating policy by influencing the price of products and indirectly engaging
in inventory-based model. In order to ensure that rules are not circumvented
DIPP came up with PN 2 of 2018[1].

Some of the
important changes made by PN 2 of 2018 are highlighted in this article.

Scope and
applicability

PN 2 of 2018
proposes to amend para 5.2.15.2 dealing with e-commerce activities.
Accordingly, PN 2 of 2018 has no impact on following:

Wholesale cash and carry
trading;

Single brand retail trading
operating through brick and mortar stores;

Multi brand retail trading;

Indian entity with no FDI
engaged in online e-commerce business;

Indian entity with FDI
engaged in manufacturing selling products in India through e-commerce.

Restrictions of PN
2 of 2018 are applicable to Indian e-commerce company having FDI. It does not
apply to home grown retail majors like Vijay Sales, Big Bazaar, Reliance Retail
etc. Thus, PN 2 of 2018 may assure level playing field against foreign capital but
does little to prevent small traders from predatory pricing and market
penetration policy adopted by Indian conglomerates.

PN 2 of 2018 is
applicable from 1^st February, 2019. There is no express
grandfathering of existing structures. Moreover, since amendments seek to
clarify legislative intent, it is advisable that e-commerce companies comply
with new regulations. Some of the stringent conditions will require e-commerce
companies to rejig their business model.

Ownership and control over inventory

Policy

E-commerce entity
providing a marketplace will not exercise ownership or control over the
inventory i.e. goods purported to be sold. Such an ownership or control over
the inventory will render the business into inventory based model. Inventory of
a vendor will be deemed to be controlled by e-commerce marketplace entity if
more than 25% of purchases of such vendor are from the marketplace entity or
its group companies.

Comments

Existing regulation i.e. PN
3 of 2016 provides that e-commerce entity providing a market place will not
exercise ownership over the inventory i.e. goods purported to be sold. Such an
ownership over inventory will render the business into inventory-based model.

PN 2 of 2018 imposes an
additional condition and deems inventory of vendor to be controlled by
e-commerce marketplace entity if more than 25% of purchases of such vendor are
from market place entity or its group companies.

Said condition seems to
plug in loophole in existing regulatory framework. Under existing regulatory
framework e-commerce entity can undertake B2B trading. Marketplace Entities
used one or more of their group entities to sell goods to sellers on a B2B
basis with such sellers in turn listing the goods on the Marketplace Entity’s
platforms for sale to retail customers.

Going forward, e-commerce
entity will have to develop mechanism to track purchases of vendor listed on
its portal. If 25% limit is breached by vendor it will tantamount to violation
of FDI conditions for e-commerce entity. This is likely to be cumbersome
compliance as vendors may be reluctant to share their financial details.

Regulation is not clear on
period for computing ‘25%’ threshold limit. Arguably, 25% of purchases should
be calculated for each financial year and reference to 25% should be in value
terms based on financial statement of vendor. Further, 25% of overall threshold
can be computed only after closure of financial year. This poses challenge on
e-commerce companies to test compliance before closure of financial year. Further,
regulation is not clear in case of computation of 25% threshold in case of
vendor engaged in trading of multiple goods. It is not clear whether 25%
threshold should be computed for that segment of goods traded on e-commerce
website or purchase on overall basis needs to be seen.

Regulation stresses on
purchase aspect of vendor from e-commerce companies or its group companies and
has nothing to do with the aspect of vendor selling goods on market platform of
e-commerce companies. Accordingly, on plain reading – say Vendor A purchasing
goods in bulk[2]
from group companies of Flipkart and selling on Amazon and offline in large
quantities and on Flipkart in small quantities, will render Flipkart to
violation of FDI norms.

Restriction may put
limitation on Indian vendors who are not
recipient of FDI to look out for alternatives sources to procure goods.
Thus, PN 2 of 2018 indirectly regulates procurement pattern of non FDI
companies trading on e-commerce platform.

Sellers may require to
broad base their procurement function and approach directly distributors or
manufacturer of products. This is likely to impact margins and supply chain
efficiency.

Interestingly, PN 2 of 2018
permits e-commerce companies to provide support services in respect of
warehousing, logistics, order fulfilment, call centre, payment collection and
other services. Accordingly, it may be open for e-commerce company or group
company to provide indenting services to sellers and facilitate them to
purchase goods from distributor or manufacturers. Said services can be validly
provided as long as it is provided in fair and non-discriminatory manner.

Regulation 2 of FEMA 20(R)
defines group company as follows:

“Group Company
means two or more enterprises which, directly or indirectly, are in a position
to

(a) Exercise 26 percent, or more of voting rights
in other enterprise; or

(b) Appoint more than 50 percent, of members of
board of directors in the other enterprise.”

Definition of Group Company
is based on 26% shareholder threshold and power to appoint more than 50%
members of Board. This definition is in contradiction to definition of control
under Ind AS 110[3].
Ind AS definition of control is expansive and requires Company to give
consideration to shareholders agreement and right flowing to investor to
determine control. As against that, definition of group company in FEMA 20(R)
is more legalistic. Further, analyst believes that stringent condition is
likely to pave way to franchisee models[4].

Restriction on group company sellers to
participate on e-commerce platform

Policy

An entity having
equity participation by e-commerce marketplace entity or its group companies,
or having control on its inventory by e-commerce marketplace entity or its
group companies, will not be permitted to sell its products on the platform run
by such marketplace entity.

Comments

Existing regulation i.e. PN
3 of 2016 provides that e-commerce entity will not permit more than 25% of the
sales value on financial year basis affected through its marketplace from one
vendor or group company.

PN 2 of 2018 prohibits i)
entity having equity participation by e-commerce marketplace entity or its
group companies or ii) vendor on which e-commerce marketplace entity or its
group companies has control over inventory.

On comparison of existing
and new regulation following are notable changes:

• Ban on entity in which e-commerce
marketplace entity or its group companies has equity participation to sell on
e-commerce platform.

• Ban on entity on which e-commerce
marketplace entity or its group companies has control over inventory to sell on
e-commerce platform.

• Other vendors (other than mentioned above)
can sell on e-commerce platform even if its sales amount to more than 25% of
sales value.

PN 2 of 2018 has used
ambiguous term ‘equity participation’. Extant FDI Policy defines ‘capital
instrument’ as referring to equity shares, CCPS, CCDs and warrants. It is
therefore unclear whether the term “equity participation” refers solely to
equity investments or whether it includes investments using other instruments
(such as CCPS, CCDs or warrants) as well and its impact on conversion. Further
no threshold for equity participation is prescribed. Accordingly, holding of 1%
by specified entities will debar investee entity from trading in e-commerce platform.

At times investing in
companies providing support services are driven by business and commercial
consideration. Since services are so interlinked, it may be a commercial
necessity to hold stake in service company to ensure quality of service and safeguard
reputation of e-commerce companies. Revised policy seems to give a total go-by
to business consideration and looks involvement of service company (with equity
participation of e-commerce company) as a sole driver.

• Many e-commerce entities operating in India
have made (or entities controlled by them have made) investments in entities
(First Level JV Entity) that are owned and controlled by an Indian resident.
The First Level JV Entities establish further subsidiaries (Second Level JV
Entity). In light of the current guidelines on downstream investments, these
Second Level JV Entities or group entities are not subjected to similar
obligations as applicable to foreign direct investment in First Level JV
Entity. Use of term ‘equity participation’ raises issue whether restriction
will apply to First Level JV entity or even Second Level JV Entity. In contrast
to other clauses in PN 2 of 2018, this clause does not use the words equity
participation ‘directly or indirectly’.

• Policy is likely to put a break on Amazon
from selling products from subsidiaries like Cloudtail and Appario, Flipkart
from selling products through its investee company WS Retail unless e-commerce
major restructures their business model.

No exclusivity

Policy

E-commerce
marketplace entity will not mandate any seller to sell any product exclusively
on its platform only.

Comments

Condition seems to be one
way in terms of requiring e-commerce entity to sell product exclusively on its
platform. Condition does not restrict seller to approach e-commerce company to
sell its product exclusively on its platform.

This condition will put
check on practices of selling mobile phones and white goods on exclusive basis.
Accordingly, it will no longer be open for Flipkart to have exclusive partnership
of selling smartphones like Xiaomi and Oppo. Exclusive sale was perceived to be
concentration of power in hands of few and detrimental to the interest of small
traders.

Said condition puts
practice of selling private label products say Amazon kindle, Amazon Echo, MarQ
range of electronic goods in doubt. Private label products are in-house brands
of e-commerce company. Reason for promoting private label products is to earn
high margin and seek repetitive customers as private label products are exclusively
sold by e-commerce companies. E-commerce
entities seek to sell private label products at discounted price vis-à-vis
compete and try to lure customers.

On plain reading, there is
no bar on sellers to sell products exclusively on e-commerce platform. DIPP in
its press release has clarified that present policy does not impose any
restriction on the nature of products which can be sold on the marketplace.

Level playing field

Policy

E-commerce entities
providing marketplace will not directly or indirectly influence the sale price
of goods or services and shall maintain level playing field. Services should be
provided by e-commerce marketplace entity or other entities in which e-commerce
marketplace entity has direct or indirect equity participation or common
control, to vendors on the platform at arm’s length and in a fair and
non-discriminatory manner. Such services will include but are not limited to
fulfilment, logistics, warehousing, advertisement/marketing, payments,
financing etc. Cash back provided by group companies of marketplace entity to
buyers shall be fair and non-discriminatory. For the purposes of this clause,
provision of services to any vendor on such terms which are not made available
to other vendors in similar circumstances will be deemed unfair and
discriminatory.

Comments

PN 3 of 2016 merely
stipulates that e-commerce entities providing marketplace will not directly or
indirectly influence the sale price of goods or services and shall maintain
level playing field. PN 2 of 2018 imposes additional conditions on e-commerce
companies and its investee company to provide services to vendors on platform
at arm’s length on fair and non-discriminatory manner. Policy deems that
provision of services to any vendor on such terms which are not made available
to other vendors in similar circumstances will be deemed unfair and
discriminatory.

Policy seems to plug
practices of predatory pricing policy and subsidising the prices. Going forward
it will be difficult to provide cash back, fast delivery, etc., to select set
of sellers. All the service providers will have to open up such services for
all the sellers on its platform.

Use of terms ‘arm’s
length’, ‘fair and non-discriminatory’ and ‘similar circumstance’ are
subjective and is likely to give rise to further frictions. It is equally true
in a market place; all sellers can’t be treated similarly. It is natural for
business to give preferential treatment to set of customers who are top
customers. Person selling miniscule quantity cannot be compared with customer
selling substantial quantity. Use of the word ‘similar circumstances’ should be
construed in right perspective.

Policy requires cash back
to be provided to buyers and services to be provided to sellers to be fair and
non-discriminatory. Policy does not seem to restrict buyer/seller to be
provided better services if they are paying a premium/price to avail
preferential service. Accordingly, services like prime membership are unlikely
to be affected by new regulation.

Report to RBI

Policy

E-commerce
marketplace entity will be required to furnish a certificate along with a
report of statutory auditor to Reserve Bank of India, confirming compliance of
above guidelines, by 30^th of September of every year for the
preceding financial year.

Comments

Regulation places
additional obligation on statutory auditor to certify compliance with new
guidelines. This will be an onerous task given subjectivity involved in
guidelines.

Concluding Remarks

Revised regulation
seeks to provide level playing field to small traders and protect them from
foreign capital. Changes come at a time when
investments in e-commerce are at record high. Acquisition of controlling
stake by Walmart in Flipkart at whopping USD 16 billion raised bar of
e-commerce industry in India. Research firm Crisil has estimated that nearly
35-40% of e-retail industry sales, amounting to Rs 35,000-40,000 crore, could
be impacted due to the tightened policy. It is further estimated that Brick and
Mortar business will gain 150-200 bps topline boost. Media⁵ has
reported that new regulations are draconian and a bigger retrograde move than
even Vodafone tax issues. It will not only impact e-commerce sector but also
FDI inflow in other sectors because regulations can change overnight. One
believes that DIPP will come out with clarification and allay all fears.

shailesh.kwebmaker

OVERHAUL OF REGULATIONS GOVERNING FOREIGN DIRECT INVESTMENT IN INDIA

(A) Background

Section 6 of the Foreign Exchange Management Act, 1999 (‘FEMA’) deals with regulating capital account transactions. The Finance Act, 2015 amended section 6 of FEMA to provide that the Central Government will have the power to regulate non-debt instruments, whereas RBI will have the power to regulate debt instruments. However, this provision of FEMA was to be given effect from a date to be notified by the Central Government.

On 15^th October, 2019, the Ministry of Finance notified the above provisions of the Finance Act, 2015 (the ‘Notified Sections’) which amended section 6 of FEMA. Accordingly, the Central Government assumed the power to regulate non-debt capital account transactions and RBI assumed the power to regulate debt capital account transactions from 15^thOctober, 2019.

Subsequently, on 16^th October 2019, the Central Government notified the following list of instruments which would qualify as debt instruments and non-debt instruments.

(1) List of instruments notified as Debt Instruments

(i) Government bonds;

(ii) Corporate bonds;

(iii) All tranches of securitisation structure which are not equity tranches;

(iv) Borrowings by Indian firms through loans;

(v) Depository securities where underlying securities are debt securities.

(2) List of instruments notified as Non-Debt Instruments

(a) all investments in equity instruments in incorporated entities: public, private, listed and unlisted;

(b) capital participation in LLP;

(d) investment in units of Alternative Investment Funds (AIFs), Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvIts);

(e) investment in units of mutual funds or Exchange-Traded Funds (ETFs) which invest more than fifty per cent in equity;

(f) junior-most layer (i.e., equity tranche) of securitisation structure;

(g) acquisition, sale or dealing directly in immovable property;

(h) contribution to trusts; and

(i) depository receipts issued against equity instruments.

Further, it has also been specified that all other instruments which have not been included in the above lists of Debt or Non-Debt Instruments will be deemed to be Debt Instruments.

Thereafter, on 17^th October, 2019 the Central Government issued the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (‘Non-Debt Rules’) for governing Non-Debt transactions and RBI notified the Foreign Exchange Management (Debt Instrument) Regulations, 2019 (‘Debt Regulations’) for governing Debt Instruments. Additionally, on the above date RBI also notified the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 (‘Payment Regulations’).

Issuance of the above Non-Debt Rules and Debt Regulations superseded FEMA regulations governing Foreign Direct Investment into India (‘FDI’), i.e., FEM 20(R), Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017 (‘TISPRO’) and FEM 21(R), Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018 (‘Immovable Property Regulations’).

Accordingly, after 17^th October, 2019 the erstwhile FDI provisions governed by TISPRO regulations have now been divided into Non-Debt Rules and Debt Regulations. Subsequently, on 5^th December, 2019 the Central Government has further amended the Non-Debt Rules. A snapshot of the revised FDI regime is as under:

(B) Overview of Non-Debt Instrument Rules, 2019

These can be further divided as under:

(C) Key changes in revised FDI regulations governing Non-Debt Instruments are summarised below:

(1) New definition of hybrid securities

Hybrid securities have been defined as under:

‘Hybrid securities’ means hybrid instruments such as optionally or partially convertible preference shares or debentures and other such instruments as specified by the Central Government from time to time, which can be issued by an Indian company or trust to a person resident outside India;

The expression ‘hybrid instruments’ has not been used in the Non-Debt Instruments Rules. Therefore, the intention of introducing these definitions is not clear and one would have to wait for some clarification from the Government on the same.

(2) Power to Central Government

The erstwhile FDI regime governed by TISPRO provided powers to RBI for regulating investment in India by persons resident outside India. Under the new regime of Non-Debt Rules, RBI in consultation with the Central Government will regulate Non-Debt investments in India by a person resident outside India.

(3) Mode of payment, remittance and reporting requirements

The mode of payment for Non-Debt Instruments along with remittance of sales proceeds will now be governed by the Payment Regulations, 2019. These regulations are broadly similar to those contained in TISPRO. The Payment Regulations, 2019 now specifically provide that transfer of capital contribution or profit share in an LLP between a resident and a non-resident shall be reported by resident transferor / transferee in Form LLP (II).

(4) Liberalisation for Foreign Portfolio Investors

Investment by FPIs into unlisted Indian companies

◆ Schedule 2 of the erstwhile TISPRO provided that Foreign Portfolio Investors (FPI) could purchase or sell capital instruments of an Indian company listed on a recognised stock exchange in India.

◆ Chapter IV of the Non-Debt Rules now provide that FPI can purchase or sell equity instruments of an Indian company which is listed or to be listed on a recognised stock exchange in India.

◆ Thus, earlier where FPIs were eligible to invest in capital instruments of only listed Indian companies, under the new framework FPIs are also allowed to invest in equity instruments which are to be listed on any recognised stock exchange in India.

Investment limit of FPIs

◆ Schedule 2 of the erstwhile TISPRO provided that the individual limit of a single FPI holding in an Indian company shall be less than 10% of the total paid-up equity capital on fully-diluted basis. Additionally, on an aggregate basis, total shareholding of all FPIs in an Indian company should not exceed 24%. However, this aggregate limit of 24% could be increased by the Indian company up to the sectoral cap with specific approval of the board of directors and a special resolution being passed at the general meeting.

◆ The Non-Debt Rules now provide that with effect from 1^stApril, 2020, the default aggregate FPI limits in an Indian company is the applicable sectoral cap, as laid out in Schedule I of the Non-Debt Instruments Rules and is not capped at 24% as applicable in the erstwhile TISPRO. Additionally, it has also been provided that before 31^st March, 2020, the above aggregate limit of sectoral caps can be reduced to 24%, 49% or 74% as deemed fit by the company with the approval of its Board and passing of a special resolution. Further, once the Indian company has decreased its aggregate limit from sectoral cap to a lower threshold of 24%, 49% or 74%, as the case may be, the same can also be increased by the company in future. However, if an Indian company increases FPIs’ aggregate investment limit to higher limit, the same cannot be decreased in future. Thus, if any Indian company wants to reduce the aggregate FPI limits from sectoral cap to lower threshold of 24%, 49% or 74%, the same should be undertaken before 31^st March, 2020.

◆ Additionally, it is also specifically clarified that in sectors where FDI is prohibited, aggregate FPI limit is capped at 24%.

◆ Further, in case the applicable FPI ceiling limit is breached, FPI would need to divest its holdings within a period of five trading days. Failure to do so would result in the entire FPI limits being classified as FDI and the relevant FPI investor will no longer be allowed to make further investments under the FPI route.

◆ Additionally, FPIs have now been specifically allowed to purchase units of domestic mutual funds or Category III alternative investment fund or offshore fund for which no-objection is issued in accordance with the SEBI (Mutual Fund) Regulations, 1996 and which, in turn, invests more than 50% in equity instruments on repatriation basis subject to the terms and conditions specified by SEBI and RBI.

Investment by FPIs into interest rate derivatives

◆ FPIs were earlier permitted to invest in interest rate derivatives under the erstwhile TISPRO. However, under the new Non-Debt Rules, FPIs are not permitted to invest in interest rate derivatives.

(5) Liberalisation for Non-Resident Indians (‘NRIs’) and Overseas Citizen of India (‘OCI’)

◆ OCIs can now enrol for the National Pension Scheme governed and administered by the Pension Fund Regulatory and Development Authority of India.

◆ Further, NRIs and OCIs can now also invest in units of domestic mutual funds which invest more than 50% in equity on non-repatriation basis.

(6) Investments by other non-resident investors

◆ Eligible Foreign Entities as defined in SEBI Circular dated 9^th October, 2018 and having actual exposure to the Indian physical commodity market have now been allowed to participate in the domestic commodity derivative market as per the framework specified by SEBI. Eligible Foreign Entities have been defined to mean persons resident outside India as per provisions of FEMA and who are having actual exposure to Indian physical commodity markets.

(7) General provisions

◆ A clarification has been introduced to provide that in case of transfer of equity instruments held on a non-repatriation basis to someone who wants to hold it on a repatriation basis, the transferee will have to comply with the other requirements of pricing and sectoral caps, among others, similar to any other non-resident investor holding shares on a non-repatriation basis. Further, under TISPRO, for transfers which were not under the general permission, permission was to be sought only from RBI. However, the Rules now require the permission to be sought from RBI in consultation with the Central Government.

◆ In the case of issuance of shares to non-residents pursuant to a scheme of merger or amalgamation of two or more Indian companies, or a reconstruction by way of demerger or otherwise of an Indian company, where any of the companies involved is listed on a recognised stock exchange in India, then the scheme of arrangement shall need to be in compliance with the SEBI (Listing Obligation and Disclosure Requirement) Regulations, 2015.

◆ In case of Downstream Investments, the meaning of ‘Ownership of an Indian Company’ has been changed; it now states:

‘ownership of an Indian company’ shall mean beneficial holding of more than fifty percent of the equity instruments of such company; and ‘ownership of an LLP’ shall mean contribution of more than fifty percent in its capital and having majority profit share;

The TISPRO regulations provided 50% of capital instruments for determining ownership of an Indian company and not equity instruments as defined above.

(8) Sectoral limits

◆ The sectoral limits for investment in different sectors under the Non-Debt Rules are similar to the erstwhile TISPRO as amended by Press Note 4 (2019 series) dated 18^th September, 2019.

(9) Remaining provisions relating to investment, transfer of securities, eligibility etc.

◆ All remaining provisions of Non-Debt Rules relating to investment, transfer, eligibility are broadly similar to those under the erstwhile TISPRO.

Key changes in revised FDI regulations governing debt instruments are summarised below:

◆ Earlier, TISPRO allowed only FPIs, NRIs and OCIs to trade in exchange-traded derivatives. However, the revised Debt Regulations now permit all persons resident outside India to trade in exchange-traded derivatives subject to limits prescribed by SEBI and other conditions specified in Schedule 1.

◆ Additionally, FPIs are now allowed to invest in non-convertible debentures / bonds issued by an unlisted Indian company. Earlier TISPRO allowed FPIs to invest in non-convertible debentures / bonds of following companies:

(a) listed Indian companies; or

(b) companies engaged in infrastructure sector; or

(d) Primary issue of non-convertible debentures / bonds provided they are listed within 15 days of issuance.

◆ Further, any person resident outside India can enter into any derivative transaction subject to conditions laid down by RBI.

◆ Additionally, it is now clarified that AD Bank can allow inward as well as outward remittances for permitted derivatives transaction.

(10) Remaining provisions relating to investment, transfer of securities, eligibility, etc.

All remaining provisions of Debt Regulations relating to investment, transfer, eligibility, taxes, repatriation are broadly similar to the erstwhile TISPRO.

Applicability of ECB provisions

◆ Earlier TISPRO only governed investment by FPIs, NRIs, OCIs, foreign central banks and multilateral development banks in government securities, debt, non-convertible debentures and security receipts. The same are now covered under Debt Regulations.

◆ In respect of debt instruments, other than the above, the same will be governed by ECB Regulations. Hence, non-convertible or optionally convertible debentures or preference shares would continue to be governed by ECB Regulations.

◆ Debt Regulations only allow FPIs to invest in non-convertible debentures / bonds of an Indian company. Hence, NRIs, OCIs or any other person resident outside India if he / she wants to invest in non-convertible or optionally convertible instruments which are qualified as debt, the same would need to be in compliance with ECB Regulations.

CONCLUSION

With the onset of the above amendments, the FDI regime has now been divided into two categories, viz., Non-Debt and Debt. Further, Non-Debt would henceforth be governed by the Central Government in association with the RBI and Debt would be governed by RBI.

Going forward, it needs to be seen how this arrangement of the RBI and the Central Government works in tandem to ensure that relevant approvals under FEMA are received at the earliest.

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