FEMA, 1999 An overview, Inbound Investment & Compounding

FEMA, 1999 An overview, Inbound Investment & Compounding

FEMA, 1999 An overview, Inbound Investment & Compounding of Contraventions NIRC-ICSI October 22nd, 2016 2016 Deloitte Haskins & Sells LLP 1 FEMA, 1999 2016 Deloitte Haskins & Sells LLP 2 FEMA Legislation Provisions with respect to foreign exchange and related transactions are governed by: Foreign Exchange Management Act, 1999 (FEMA); Regulations made there under; Press notes issued by DIPP, Ministry of Commerce; Amendments in the law are carried out through; Notifications/ Clarifications issued by RBI Notifications/ Clarifications issued by DIPP 2016 Deloitte Haskins & Sells LLP 3 Inbound Investment

2016 Deloitte Haskins & Sells LLP 4 Entity Options Foreign Company SP/PF/AOP Liaison Office 2016 Deloitte Haskins & Sells LLP Operates as a foreign company Project Office Establishes an Indian LLP* Branch Office Establishes an Indian company Joint Venture

Wholly Owned Subsidiary 5 Approval Mechanism for BO/LO/PO Applicant Category Geography Based Opening of BO/LO/PO by: i. Pakistan ii. Bangladesh iii. Sri Lanka iv. Afghanistan v. Iran vi. China vii.Hong Kong viii.Macau Sector Based Opening of BO/LO/PO in: i. Jammu and Kashmir ii. North East region iii.Andaman

and Nicobar Islands i. Defence, ii. Telecom, iii. Private Security iv.Information and Broadcasting v. Sectors falling under the approval route Other Applicants i. NonGovernment Organization ii. Non-Profit Organization , iii.Body/ Agency/ Department of a foreign government To be approved by AD Bank where

principal business falls under sectors where 100 % FDI is allowed To be approved by RBI 2016 Deloitte Haskins & Sells LLP 6 Branch and Liaison Office Permissible Activities Liaison Office (also known as RO) a. Representing Parent/Group b. Promoting Export and Import c. Promoting Foreign/Technical Coll. d. Acting as Communication Channel Branch Office: a. EXIM of goods B2B b. Professional or Consultancy services. c. R&D activity of Parent. d. Promoting TC/FC, Technical Support; e. Acting as buying/selling agent

f. IT and ITES Services. g. Foreign airline / shipping company. 2016 Deloitte Haskins & Sells LLP 7 Branch and Liaison Office Criteria of considering Permission by RBI Liaison Office a. b. Track Record of 3 FYrs Profit Net worth of U$ 50K Branch Office: a. b. Track Record of 5 FYrs Profit Net worth of U$ 100K If above criteria cannot be met.LOC of Parent of LO/BO can be considered if they satisfies the criteria LO cannot carry any commercial activity or

earn income, meet expenses from O/S LO Initial regn. for 3 Yrs Renewable by AD except for NBFCs and Constn Development (excluding IDCs) Documents to file 2016 Deloitte Haskins & Sells LLP FNC to AD English version of COI/MOA duly attested by Embassy or Notary Public of country of registration 8 Branch and Liaison Office Expansion/Additional Activity OR Office by BO Annual Activity Certificate Closure RBI Prior Approval If more than 4 OfficesNEWS justification to RBI.One Nodal Office

LO/BO to file AAC alongwith its audited accounts within 6 months of close of the FY to AD and DGIT duly certified by the CA To AD by filing of : 1. 2. 3. 4. 5. 2016 Deloitte Haskins & Sells LLP RBI permission; Auditor Certificate for No Income Tax Dues; No pending Litigation; ROC Certificate; Any other document as advised by RBI while granting registration 9 Project Office Who can set up Conditions

2016 Deloitte Haskins & Sells LLP General Permission: Foreign Company if Project awarded by Indian Company Project should be funded from overseas Non Interest Bearing Bank A/C can be opened including Foreign Currency A/C Only permissible Debits and Credit Inter Project funds transfer require RBI prior approval Bank A/C should be closed on completion of Project 10 Regulations: Stringent

BO/PO/LO to be set up within 6 months from the date of approval letter, otherwise the approval shall lapse unless AD approval sought(RBI approval for further extension) Validity for NBFC engaged in construction and development sectorswill be for 2 years only. No further extension will be given. LO not to maintain more than 1 bank account at any given time without the prior permission of RBI. BO/PO/LO applicants from Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong, Macau and Pakistan needs to register with State Police Authorities An entity from Pakistan shall need prior approval of RBI to open a bank account for its PO in India 2016 Deloitte Haskins & Sells LLP 11 Regulations: Liberalized BO and PO can now raise fund and non-fund based facilities from banks Requirement of submission of report along with Annual Activity Certificate with Local Police Authorities is not mentioned in the circular. However, it will be clarified once the Master Direction on Reporting under FEMA is updated. The Foreign Currency Account of PO which was to be scrutinized by Concurrent Auditor of the respective AD banks as per erstwhile Regulations 2000 has been done away with. Existing PAN and bank accounts can be continued when a LO is permitted to upgrade into a BO Donation by BO/LO/PO of old furniture, vehicles, computers and other office items etc. to NGOs or other not-for-profit organizations may be permitted by the AD Banks after satisfying themselves about the

bonafides of the transaction. 2016 Deloitte Haskins & Sells LLP 12 Regulations: Clarification In cases the existing BO/LO is being shifted to another city in India, prior approval from the AD Bank is required Change in the name of the existing LO/BO may be permitted by the AD Bank only if the nonresident entity changes its name without change in ownership Change in name on account of acquisitions or mergers of foreign entities involving change in ownership, will require the acquired entity or new entity to apply afresh by closing the existing entity Change in the top management or CEO/MD/CMD etc. of the BO/LO does not require prior approval from the RBI/AD Bank. However, AD Bank should be intimated about the same. 2016 Deloitte Haskins & Sells LLP 13 FDI PolicyAn Overview 2016 Deloitte Haskins & Sells LLP 14 FDI Policy Overview (Illustrative list) Prohibited Agriculture (some exceptions)

Betting, Gambling & Lottery Chit funds & Nidhi company Real estate (except construction development and REITs) Retail Trading except SBRT/MBRT Tobacco products Trading in Transferable Development Rights Atomic Energy and Railway Operations (other than permitted activities) Restricted Some Sectors FDI Cap Civil Aviation (SATS/DSPA/RATS) 49% Petroleum refining by PSU 49% Telecom services 100% Pharma 100% (Brownfield) Single brand retail trading 100% Multi brand retail trading 51% Teleports/DTH/Mobile TV/HITS MSOs taking up digitalization with addressability. 100% Cable Networks (Other MSOs) 100%

FM Radio 49% Up-linking of News & Current Affairs TV Channels 49% Permitted 100% FDI permitted under auto route in other Sectors Defence 49% Insurance (under automatic route) 49% 2016 Deloitte Haskins & Sells LLP 15 Inbound Investments-FDI Reporting 30 days of fund receipt, 30 days FC-GPR, 180 days issue of Shares or Refunds Dividend/Interest Winding up/Liquidation

Eligible Sector Prohibited, Restricted or Automatic Route Indian Companies; and LLP INBOUND INVESTMENT Pricing SEBI /ALP for Issue n Transfer, Funding FIRC/NRE/ NRO/ FCNR(B) Conversion of ECB/TKH/Royalty/LD 2016 Deloitte Haskins & Sells LLP Eligible Entities Eligible Investors Eligible Instrument ES/ CMCPS/CMCD/O

ptions/Warrants/ PPS FCCB/FCEB/ADR -Bonus/Right/ ESOP and M&A PROI/Entity Incorporated o/s except Pakistan Bangladesh with permission of GOI, OCB by RBI/GOI NRI/FVCI/FPI 16 Inbound Investment- Transfer Reporting FC-TRS 60 days by Resident Gift or Sale CR, Buy Back, M&A and Restructuring Optionality ES/CCPS/CCD ES- ROE CCD/ CCPS- ALP No Assured

Return TRANSFER FIPB Approval Restricted Sector Breaches Sectoral Caps Pricing SEBI/ALP RBI Approval; NRI to NR Gift to NR Price relaxation 2016 Deloitte Haskins & Sells LLP 17 Funding Options Equity Ownership rights CCPS/CCD Carry fixed rate of Dividend/Interest Put/Call Option- No assured return Lock in

RPS/OCPS/NCD/ of 1 Yr. or such other OCD regarded as period ECB Partly Paid up shares allowed with 25% upfront and balance in 1yr except if > Rs. 500 Cr aptmt. of Monitoring Agency Warrants allowed if price/ or conversion formula is Coupon rate SBI PLR + 3% Put/Call OptionNo assured return Lock in of 1 Yr. ECB Eligibly norms for

borrowers /lenders Minimum Avg. Maturity Masala Bonds - Eligibility norms for lender based on jurisdiction; - 3 Yrs. Min. Maturity Monetary limit -Amount- INR 50 Bln. End use per FY restrictions All in cost ceiling on interest - End se restrictions: -Real Estate, Capital/ Domestic Investment, FDI Prohibited or such other

Activities, On lending period for above and Land Acquisition. known upfront and consideration paid in 18months 2016 Deloitte Haskins & Sells LLP 18 Reporting and Remittance Reporting Remittance 2016 Deloitte Haskins & Sells LLP Mandatory e-Biz Investment : 30 RBI reporting on receipt of money : FC(GPR) to RBI in 30 day through AD for FDI, ESOP, Right, Bonus, M&A, ECB, FCCB/ADR/GDR Transfer : FC(TRS) to AD within 60 days of receipt of consideration by Resident Through Authorized Dealer subject to WHT: Dividend Interest

Sale Proceeds of shares and other instruments Winding up/ Liquidation: Auditor Certificate for no o/s Liabilities or adequately provided for, If voluntary W/L no pending legal proceeding 19 Compounding of Contraventions 2016 Deloitte Haskins & Sells LLP 20 Compounding of Contravention Means.. Settle an offence committed by the contravener through imposition of a monetary penalty without going in for litigation after the contravener acknowledges having committed the contravention.. Objective.. To provide comfort by minimizing transaction costs, while taking severe view of willful, malafide and fraudulent transactions. But it is not equal to withdrawal of a charge or a complaint but an agreement not to pursue the legal battle and spare the accused from further consequences. 2016 Deloitte Haskins & Sells LLP 21 Compounding of Contraventions

Penalties for CONTRAVENTION Section 13 Contravention of Act Rules, Regulations, Notifications, Directions or Orders Sum for Contravention Quantifiable offence Upto 3 times Non quantifiable offence Upto Rs. 200,000

Continuing penalty Rs. 5000 per day COMPOUNDING Section 15 2016 Deloitte Haskins & Sells LLP 22 CompoundingSalient SalientFeatures Features Compounding Voluntary No suo-motto investigation Time Bound completion (Within 180 days) No further proceedings for contravention so compounded Payment of sum of contravention (within fifteen days)

Once the order is passed, no contravener seek to withdraw the order or to hold it as void or request a review of the order No appeal against the Order Non payment shall be deemed as no application is made No compounding before expiry of 3 years of previous order for similar contravention No Compounding of cases where approval of any statutory authority/Govt. etc. was required unless such approvals has been sought 2016 Deloitte Haskins & Sells LLP 23 Contraventions & Penalties at a glance 2016 Deloitte Haskins & Sells LLP 24 Compounding Authorities

Regional Offices - Delay in AR,FC-GPR Non Allotment/Refund in 180 days Violation of Pricing Guidelines Issue of Ineligible Instruments Issue of securities without RBI/FIPB approval Delay in Filing of FC-TRS-NR/RR/NR Recording of Transfer by Company without FC-TRS 2016 Deloitte Haskins & Sells LLP Central Office New Delhi - Acquisition of IMP in/outside India - LO, BO and PO - Deposits Mumbai - ECB - ODI - Export, Import and Others 25 Computation Matrix S. No

Type of Contravention Quantum of Penalty 1. Reporting Contraventions A. FEMA 20 Para 9(1)(A) (Advance Reporting), 9(1)(B) (Form FCGPR), part B of FC(GPR), FCTRS (Reg. 10) and taking on record FCTRS (Reg. 4) B. FEMA 3 Non submission of ECB statements C. FEMA 120 Non reporting/delay in reporting of acquisition/setup of subsidiaries/step down subsidiaries /changes in the shareholding pattern D. Any other reporting contraventions (Except In case of nonsubmission/ delayed submission of APR/ share certificates (FEMA 120) or AAC (FEMA 22) or FCGPR (B) Returns (FEMA 20) E. Reporting contraventions by LO/BO/PO

2016 Deloitte Haskins & Sells LLP Fixed amount : Rs10000/- (applied once for each contravention in a compounding application) + Variable amount as under: Upto 10 lakhs : 1000 per year Rs.10-40 lakhs : 2500 per year Rs.40-100 lakhs : 7000 per year Rs.1-10 crore : 50000 per year Rs.10 -100 Crore : 100000 per year Above Rs.100 Crore : 200000 per year In case of LO/BO/PO there shall be ceiling Rs.2 lakhs. In case of Project Office, the amount imposed shall be calculated on 10% of total project cost 26 Computation Matrix contd S. No Type of Contravention

Quantum of Penalty 2. Non-submission/ delayed submission of APR/ share certificates (FEMA 120) or AAC (FEMA 22) or FCGPR (B) Returns (FEMA 20) Rs.10000/- per AAC/APR/FCGPR (B) Return delayed. Delayed receipt of share certificate Rs.10000/- per year, the total amount being subject to ceiling of 300% of the amount invested. 3. A. Allotment/Refunds Para 8 of FEMA 20/2000-RB (non-allotment of shares or allotment/ refund after the stipulated 180 days) B. LO/BO/PO Other than reporting contraventions Rs.30000/- + given percentage: 1st year : 0.30% 1-2 years : 0.35% 2-3 years : 0.40% 3-4 years : 0.45% 4-5 years : 0.50% >5 years : 0.75% (For project offices the amount of contravention shall be deemed to

be 10% of the cost of project). 2016 Deloitte Haskins & Sells LLP 27 Computation Matrix cont S. No Type of Contravention Quantum of Penalty 4. All other contraventions except Corporate Guarantees Rs.50000/- + given percentage: 1st year : 0.50% 1-2 years : 0.55% 2-3 years : 0.60% 3-4 years : 0.65% 4-5 years : 0.70% > 5 years : 0.75% 5. Issue of Corporate Guarantees without UIN/ without permission wherever required /open ended guarantees or any other contravention related to issue of Corporate Guarantees. Rs.500000/- + given percentage: 1st year : 0.050%

1-2 years : 0.055% 2-3 years : 0.060% 3-4 years : 0.065% 4-5 years : 0.070% >5 years : 0.075% In case the contravention includes issue of guarantees for raising loans which are invested back into India, the amount imposed may be trebled. 2016 Deloitte Haskins & Sells LLP 28 Computation Matrix- Conditions Overall limit of 3 times; In case the amount of contravention is less than Rs. One lakh, the total amount imposed should not be more than amount of simple interest @5% p.a. calculated on the amount of contravention and for the period of the contravention in case of reporting contraventions and @10% p.a. in respect of all other contraventions; In case of paragraph 8 of Schedule I to FEMA 20/2000 RB contraventions, the amount imposed will be further graded as under; If the shares are allotted after 180 days without the prior approval of Reserve Bank, 1.25 times the amount calculated as per table above (subject to above provisos). If the shares are not allotted and the amount is refunded after 180 days with the Banks permission: 1.50 times the amount calculated as per table above (subject to above provisos). If the shares are not allotted and the amount is refunded after 180 days without the Banks permission: 1.75 times the amount calculated as per table above (subject to above provisos). In cases where it is established that the contravenor has made undue gains, the amount thereof

may be neutralized to a reasonable extent by adding the same to the compounding amount calculated as per chart. If a party who has been compounded earlier applies for compounding again for similar contravention, the amount calculated may be enhanced by 50%; For calculating amount in respect of reporting contraventions, the period of contravention may be considered proportionately {(approx. rounded off to next higher month 12) X amount for 1 year}. The total no. of days does not exclude Sundays/holidays. 2016 Deloitte Haskins & Sells LLP 29 Discussion Atul Mittal Director Deloitte Haskin & Sells. 9810065744 2016 Deloitte Haskins & Sells LLP 30 Past Chairman-NIRC-ICSI & Central Council member This material has been prepared by Deloitte Haskins & Sells LLP (DHSLLP), a member of Deloitte Touche Tohmatsu Limited, on a specific request from you and contains proprietary and confidential information. This material may contain information sourced from publicly available information or other third party sources. DHSLLP does not independently verify any such sources and is not responsible for any loss whatsoever caused due to reliance placed on information sourced from such sources. The information contained in this material is intended solely for you. Any disclosure, copy or further distribution of this material or the contents thereof is strictly prohibited. Nothing in this material creates any contractual relationship between DHSLLP and you. Any mutually binding legal obligations or rights may only be created between you and DHSLLP upon execution of a legally binding contract. By using this material and any information contained in it, the user accepts this entire notice and terms of use.

2016 Deloitte Haskins & Sells LLP

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