FDI in General Vadodara Branch of WIRC 8th June 2019 By: CA Manoj Shah e-mail :manoj@shahmodi.com

OECD Benchmark definition of FDI Direct investment is a category of cross-border investment associated with a resident in one economy having control or a significant degree of influence on the management of an enterprise that is resident in another economy. It also includes investment in indirectly influenced or controlled enterprise. Objective of FDI (From Foreword to OECD Benchmark Definition): With the right policy framework, FDI can provide financial stability, promote economic development and enhance the well being of societies.

Direct Investment vs. Portfolio Investment Balance of Payment Manual issued by International Monetary Fund: Dir Inv is related to control or significant influence and tends to be associated with ‘lasting relationship’ Direct Investor may supply know-how, technology, management & marketing Enterprises in dir inv relationship are likely to trade and finance with each other

Portfolio Investment PI have lesser role in decision making of the enterprise. It is associated with financial markets and with their specialized service providers- exchanges, dealers, regulators.

Direct Investor A direct investor is an entity or group of related entities that is able to exercise control or a significant degree of influence over another entity that is resident of a different economy.

Criteria to determine ‘Control’ & ‘Influence’- as per Balance of Payment manual Immediate direct investment relationships arise when a direct investor directly owns equity that entitles it to 10 percent or more of the voting power in the direct investment enterprise. Control is determined to exist if the direct investor owns more than 50 percent of the voting power in the direct investment enterprise. A significant degree of influence is determined to exist if the direct investor owns from 10 to 50 percent of the voting power in the direct investment enterprise.

FEMA Regulations for FDI Section 6(3) of FEMA- without prejudice to the generality of the provisions of sub-sec (2), the RB may by regulations, prohibit, restrict or regulate the following- (b)- transfer or issue of any security by a PROI Notification No. FEMA 20(R)/2017-RB dated 07-11-2017 – Foreign Exchange Management (Transfer or Issue of Security by Person Resident Outside India - TISPRO), Regulations 2017 in terms of Sec 6(3)(b) This Notification supersedes Notifications 20 & 24 [Foreign Exchange Management (Investment in Firm or Proprietary Concern in India), Regulations 2000] New RBI Master Directions and FAQs.

Snapshot of Notification 20R Reg 3 Restriction on Investment by PROI Reg 4 Restriction on receiving Investment Reg 5 Permission for making Investment by PROI Reg 6 Acquisition through a Rights issue or Bonus Issue Reg 7 Issues of Shares under ESOP Scheme

Snapshot of Notification 20R Reg 8 Issue of Convertible Notes by Start ups. Reg 9 Merger or demerger or amalgamation of Indian Companies Reg 10 Transfer of Capital Instruments of Indian Company to or by PROI Reg 11 Pricing Guidelines Reg 12 Taxes and Remittance of Sales Proceeds

Snapshot of Notification 20R Reg 13 Reporting Requirements Reg 14 Downstream Investment Reg 15 Prohibited Activities for investment by PROI Reg 16 Permitted Sectors, entry routes and sectoral caps for total foreign investment

FEMA 20(R) – Few Definitions Particulars Reg 2(v) - Capital Instruments Equity Shares including partly paid (In case of Partly paid shares 25% consideration upfront and balance in 12 months). Debentures (Fully, mandatorily and compulsorily convertible). Preference Shares (Fully, mandatorily and compulsorily convertible). Share Warrants (As per SEBI Regulations. 25% consideration upfront and balance in 18 months) Non-Convertible/optionally convertible/partially convertible preference shares issued as on and up to April 30, 2007. Optionally Convertible/partially convertible debentures issued up to June 7, 2007 till their original maturity. Reg 2(xxv) Indian Entity Indian Company or a LLP.

FEMA 20(R) - Definitions Definitions Particulars Reg 2(vi) Convertible Notes An instrument issued by a start up company evidencing receipt of money initially as debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of such start up company, within a period of five years from the date of such issue of the convertible note, upon occurrence of specified events as per the other terms and conditions agreed to and indicated in the statement. Reg 2(xxvii) – Investment To subscribe, acquire, hold or transfer any security or unit issued by a person resident in India. Explanation: This will include to acquire, hold or transfer depository receipts issued outside India, the underlying of which is a security issued by a person resident in India. For the purpose of LLP, investment shall mean capital contribution or acquisition of profit shares;

FEMA 20(R) - Definitions Definitions Particulars Reg 2(xviii) Foreign Investment Investment made by a person resident outside India on repatriable basis in - Capital Instruments of an Indian Company; or to the capital of an LLP. (Explanation: If beneficial interest is held by PROI and declaration for same is made, then even though investment is made by a resident, it shall be treated as Foreign Investment). Note: PROI may hold Foreign Investment either as FDI or FPI Reg 2(xvii) – Foreign Direct Investment (FDI) Investment through Capital Instruments by PROI – In an unlisted Indian Company; or In 10% or more of post issue paid up capital on fully diluted basis of a listed Indian Company. (Note: In case of existing investment in a listed company, if it falls below 10% of post issue paid up capital, it shall continue to be treated as FDI)

FEMA 20(R) - Definitions Definitions Particulars Reg 2(xii) FDI linked performance conditions The sector specific conditions stipulated in Regulation 16 of Notification 20R for companies receiving foreign investment. Reg 2(x) – Employees Stock Option (ESOP) ESOP as defined under Companies Act 2013 and issued under regulations issued by SEBI. (As per Reg 7 scheme can be either as per SEBI or Companies Act 2013) Reg 2(xxxix) – Sectoral Cap The maximum investment including both foreign investment on a repatriation basis by PROI in capital instruments of a company or the capital of an LLP and indirect foreign investment. This shall be composite limit for the Indian Investee entity. (In Annual Return on FLA only NRI holding on repatriation basis is to be mentioned. EMF requires reporting of NRI holding on repatriation basis).

FEMA 20(R) - Definitions Definitions Particulars Reg 2(xix) Foreign Portfolio Investment (FPI) Investment made by a PROI in capital instruments where such investment is - Less than 10% of post issue paid up capital on fully diluted basis of listed company; or less than 10% of paid up value of each series of capital instruments of a listed Indian Company. (Note – RFPIs - obtaining SEBI registration is a must).

FAQs on FDI Definitions FAQ No. 8 on FDI - Whether the foreign investment will be classified as FDI or FPI based on the schedule under which the investment is being made. Answer: No, FDI and FPI are agnostic from the point of view of the schedule under which investment has been made. It is the percentage which defines whether it is direct or portfolio investment. Q.9: For an FPI investment, once the investment is classified as FDI (basis total holding), if the FDI holding comes back to <10%, will the holdings be classified as FPI again? Answer: Once an FDI always an FDI.

Restrictions on Investment by PROI (Reg 3) vs Restrictions on Investment by PROI (Reg 3) vs. Restriction on receiving Investment (Reg 4) Restriction on Investment by PROI – Reg 3 Restriction on receiving Investment – Reg 4 Save as otherwise provided in Act, rules or regulations – No PROI shall make any investment in India. RBI may on an application made to it and for sufficient reasons permit PROI to make any investment in India subject to such conditions as may be considered necessary. Save as otherwise provided in Act, rules or regulations - - Indian Entity (i.e. Company or LLP) or - Investment vehicle or - Venture capital fund or - Firm or - Association of Persons or - Proprietary Concern Shall not receive or record any investment in India from PROI. (RBI may permit the same on an application made to it).

Permissions for investment to PROI– Regulation 5 Reg./Schedule Particulars 5(1) – Schedule 1 PROI can subscribe, purchase or sell capital instruments of Indian Company as per terms and conditions of Schedule 1. Prior Approval of RBI for investment by Citizens of Bangladesh or Pakistan or entity incorporated in Bangladesh and Pakistan. Citizen of Pakistan or entity incorporated in Pakistan cannot invest in defence, space, atomic energy and activities prohibited for foreign investment 5(2) – Schedule 2 Purchase or Sell of Capital Instruments of Listed Indian Company on stock exchange by Foreign Portfolio Investors 5(3) – Schedule 3 Purchase or Sell of Capital Instruments of Listed Indian Company on stock exchange by NRIs or OCIs on repatriation basis. 5(4) – Schedule 4 Purchase or Sell of Capital Instruments or convertible notes of Indian Company or units or contribution to capital of LLP or firm or proprietary concern by NRIs or OCIs on non-repatriation basis.

Permissions for investment to PROI– Regulation 5 Reg./Schedule Particulars 5(5) – Schedule 5 Purchase or sell of securities other than Capital Instruments by PROI 5(6) – Schedule 6 Investment in a LLP 5(7) – Schedule 7 Investment by a Foreign Venture Capital Investor 5(8) – Schedule 8 Investment by PROI in Investment vehicles 5(9) – Schedule 9 Investment in Depository Receipts by PROI 5(10) – Schedule 10 Issues of Indian Depository Receipts

Rights Issue or Bonus Issue – Regulation 6 PROI having Investment in Indian company may make investment in capital instruments issued by such company as rights or bonus issue subject to following: Offer is in compliance of Companies Act 2013 There is no breach of sectoral cap In case of a listed Indian company, the rights issue to persons resident outside India shall be at a price determined by the company; In case of an unlisted Indian company, the rights issue to persons resident outside India shall not be at a price less than the price offered to persons resident in India. From 12/11/2002, the Indian company could, on an application made to it, allot to existing shareholders who are PROIs additional capital instruments (other than share warrants) as a rights issue over and above their rights entitlement subject to individual or sectoral caps, as the case may be. (Para 6.11.3 of Master Direction)

Renunciation of Right Shares Para 6.11.4 of Master Direction: PRI and PROI may subscribe for additional shares over and above the shares offered on rights basis by the company and also renounce the shares offered either in full or part thereof in favour of a person named by them. The facility at para 6.11.3 (additional shares acquired as rights) and para 6.11.4(1) (acquired on renunciation) of Master Direction would not be available to investors who have been allotted such shares as Overseas Corporate Bodies (OCBs). The capital instruments to be acquired on renunciation of rights shall be subject to the same conditions including restrictions in regard to repatriability as applicable to the original holding against which rights issue has been made.

ESOPs and Sweat Equity Shares – Regulation 7 Permissible to Indian Company to issue ESOP/Sweat equity shares to its employees/directors or employees/directors of its holding company or joint venture or wholly owned overseas subsidiary/subsidiaries who are PROI. Scheme is either as per SEBI Regulations or Companies Act 2013. ESOP/Sweat Equity Shares shall be in compliance with sectoral caps

Merger or Demerger or Amalgamation of Indian Companies – Regulation 9 Merger/Demerger/Amalgamation: Issue of Shares to PROI under scheme of merger/demerger/amalgamation subject to approval by NCLT. Entry routes, sectoral caps and attendant conditionalities to be complied with. Issue of Bonus NCDs: Indian Company may issue bonus NCDs or NCPs out of its general reserves subject to approval of scheme of arrangement by NCLT. Original investment must be in compliance with these regulations. Issue to be in accordance with Companies Act 2013

Transfer of Shares Regulation 10 of FEMA 20R * Prior Government approval will be required for any transfer in case the company is engaged in sector which requires government approval. # NRI holding on non repatriation basis or under 6(5) and transferring to R is under automatic route and does not require any compliance. Sub Regulation Transfer Between Mode of Transfer Automatic/Approval 1 NR (other than NRI or OCI or OCB) to any NR Sale or Gift Automatic Route * 2 NRI / OCI holding on repatriation basis to any NR 3 NR to R # Sale (sale on stock exchange also covered) or Gift or Buyback or reduction of capital

Prior Approval and subject to conditions Transfer of Shares Regulation 10 of FEMA 20R Sub Regulation Transfer Between Mode of Transfer Automatic/Approval 4 NRI / OCI holding on non-repatriation basis to any NR Sale Automatic Route 5 R or NRI / OCI holding on non-repatriation basis to NR Gift Prior Approval and subject to conditions 6 NRI / OCI on non-repatriation basis to NRI / OCI to hold on non-repatriation basis

Transfer of Shares Regulation 10 of FEMA 20R Sub Regulation Transfer Between Mode of Transfer Automatic/Approval 7 PROI holding capital instruments containing optionality clause and exercising option/right, may exit without any assured return subject to pricing guidelines and lock in period of 1 year. Tata Teleservices and NTT Docomo matter – “Damage” vs. “Assured return” Over indebted countries often see run on their currency. 8 Erstwhile OCB Subject to directions issued by RBI (Notification No. FEMA101/2003-RB dated 03.10.2003). (A.P. Dir Circular No. 14 of 16.09.2003 and Circular No. 44 of 08.12.2003)

Transfer of Shares Regulation 10 of FEMA 20R Sub Regulation Transfer Between Mode of Transfer Automatic/Approval 9 Transfer on deferred payment basis between R & NR: An amount not exceeding 25% can be paid on deferred basis within 18 months from date of transfer agreement. can be settled through either indemnity or escrow account. 10 In case of transfer from R to NR, NR may open an Escrow Account. Such escrow account may be funded by way of inward remittance from outside India. 11 Pricing Guidelines shall not be applicable for any transfer by way of sale done in accordance with SEBI regulations where pricing is prescribed by SEBI.

Transfer of Shares Regulation 10 of FEMA 20R Pledge of Shares: Sub Regulation Transfer Between Mode of Transfer Automatic/Approval 12 Pledge of Shares: Transfer of capital instruments by way of pledge of Indian Company: Promoter may pledge shares of borrowing company for securing ECB subject to following: Period of pledge is co-terminus with maturity of ECB in case invocation transfer shall be in accordance with RBI directions. Statutory Auditor certificate for utilisation of ECB proceeds. NOC of AD shall be obtained for pledge.

Transfer of Shares Regulation 10 of FEMA 20R Pledge of Shares: Sub Regulation Transfer Between Mode of Transfer Automatic/Approval 12 Pledge of Shares: PROI holding capital instruments in an Indian Company may pledge: In favour of banks in India to secure credit facilities for bonafide purposes. in favour of overseas bank in favour of NBFC registered with RBI to secure credit facilities being extended to Indian Company for bonafide purposes.

Pricing Guidelines Regulation 11 of FEMA 20R Sub Reg Particulars Issued by company to person resident outside India In case of Listed Company price should not be less than price worked out in accordance with relevant SEBI guidelines In case of unlisted company price should not be less than valuation done as per any internationally accepted method. Explanation – In case of convertible instruments, price/conversion formula to be determined upfront at time of issue. Further, price at time of conversion should not be lower than fair value at the time of issuance. 2 Transferred from R to NR Same as above

Pricing Guidelines Regulation 11 of FEMA 20R Sub Reg Particulars 3 Transferred from NR to R Shall not exceed – Listed Company - as worked out in accordance with SEBI guidelines Unlisted Company – as per valuation 4 Swap of Capital Instruments Valuation will have to be done by merchant banker registered with SEBI or an Investment banker outside India registered with appropriate authority of host country. 5 Subscription to MOA Such investments shall be made at face value subject to entry route and sectoral caps. 6 Share Warrants Price/Conversion formula shall be determined upfront.

Reporting Regulation 13 of FEMA 20R Sub Reg Form Particulars 2 FCGPR Reporting of Allotment of Capital Instruments within 30 days of allotment. (Clarification - Allotment of shares under IPO or QIP under applicable SEBI regulations need not be reported in FCGPR – Part IV of Para A(1)(b)(iii) of Master Direction of Reporting under FEMA) 3 Annual Return Return on Foreign Liabilities and Assets to be filed on or before 15th July every year. 4 FCTRS Transfer of Capital Instruments: - PROI (repatriation basis) to PROI (non-repatriation basis) - PROI (repatriation basis) to R Onus of reporting is on resident transferor/transferee or PROI holding on non-repatriation basis. Transfer of Capital Instruments on stock exchange by PROI.

Reporting Regulation 13 of FEMA 20R Sub Reg Form Particulars 4 FCTRS Transfer of Capital Instruments on deferred payment basis shall be reported on receipt of every tranche of payment. Form is to be filed within 60 days of transfer of capital instruments or receipt/remittance of funds whichever is earlier. 5 ESOP Indian Company issuing ESOP has to file the form within 30 days from the date of issuing stock option.

Reporting Regulation 13 of FEMA 20R Sub Reg Form Particulars 6 7 8 11 Depository Receipt Return (DRR) Domestic Custodian shall file DRR within 30 days of close of the issue. 7 LLP I Receipt of amount of consideration for capital contribution and acquisition of profit shares to be reported within 30 days from date of receipt. 8 LLP II Disinvestment/Transfer of capital contribution or profit share between R to NR and vice versa within 60 days from date of receipt of funds. 11 Downstream Investment (DI) - Indian entity shall notify to Secretariat of Industrial Assistance (SIA), DIPP within 30 days of investment. - Further, it has also to file Form DI on FIRMS portal within 30 days from date of allotment of capital instruments.

Late Submission Fees – Regulation 13.2 For transactions on or after 7th November 2017, in case of any reporting delays, entity /person responsible shall be liable to payment of Late Submission Fees (LSF). FAQs on LSF Q.44: What is meant by Late Submission Fee (LSF)? Answer: For the transactions undertaken on or after November 7, 2017, in case of reporting delays, the person/ entity responsible for filing the reports as provided in Part IV of the Master Direction on Reporting shall be liable for payment of Late Submission Fee (LSF). The payment of LSF is an additional option for regularizing reporting delays without undergoing the compounding procedure. Q.45: Whether compounding option is available for reporting delays Answer: The payment of LSF is an additional facility for regularizing reporting delays without undergoing the compounding procedure. However, this does not mean that the applicant cannot apply for compounding. Both options are available to the applicant for the transactions undertaken on or after November 7, 2017.

Downstream Investment (DI) – Regulation 14 Concept of Ownership: Indian Company – beneficial holding of more than 50% of capital instruments of the company. LLP – capital contribution of more than 50% and having major profit share. Company / LLP owned by Resident Indian Citizens – ownership is vested in resident Indian Citizens and / or Indian Companies which are owned and controlled by resident Indian Citizens. Company / LLP owned by PROI – ownership with PROI.

Downstream Investment (DI) – Regulation 14 Concept of Control: Indian Company – beneficial holding of more than 50% of capital instruments of the company. LLP – capital contribution of more than 50% and having major profit share. Company / LLP owned by Resident Indian Citizens – ownership is vested in resident Indian Citizens and / or Indian Companies which are owned and controlled by resident Indian Citizens. Company / LLP owned by PROI – ownership with PROI.

Downstream Investment (DI) – Regulation 14 Downstream Investment means investment by an Indian entity or an Investment Vehicle in capital instruments or capital of another Indian entity. Indirect Foreign Investment means downstream investment received by an Indian entity from: Another Indian Entity (IE) which has received Foreign Investment (FI) and (i) IE is not owned and controlled by resident Indian citizens or (ii) owned or controlled by PROI. An investment vehicle whose sponsor or manager or investment manager (i) is not owned or controlled by resident Indian citizens or (ii) owned and controlled by PROI.

Downstream Investment (DI) – Regulation 14 ‘Total Foreign Investment’ means the total of foreign investment and indirect foreign investment and the same will be reckoned on a fully diluted basis; Indian Entity (Company or LLP) receiving indirect foreign investment shall comply with entry route, sectoral caps, pricing guidelines and other relevant conditions as applicable for foreign investment.

Downstream Investment (DI) – Regulation 14 Calculation Guidelines: Any equity of PROI from conversion of any debt instruments shall be reckoned for total foreign investment. Portfolio Investments as on 31st March shall be considered for computing total foreign investment. Methodology for calculation will apply at each stage of investment in Indian Companies.

Downstream Investment (DI) – Regulation 14 Compliance Conditions: BOD approval. DI through funds received from out of India and / or through internal accruals. Internal accruals means profits transferred to reserve account (net of taxes). Funds borrowed in domestic market cannot be used.

Downstream Investment (DI) – Regulation 14 Auditor’s Certificate: Indian Company making DI shall be responsible for ensuring compliance of downstream provisions. Indian Company has to obtain Statutory Auditor’s Certificate mentioning compliance of downstream provisions. The same is also to be reported in Directors Report. In case of qualified auditor report, it shall be brought to the notice of Regional Office of RBI.

Downstream Investment (DI) – Regulation 14 Valuation of downstream investments: Foreign investor making fresh investments in Indian Company for purpose of making Downstream Investment. For valuation of Indian Company even downstream company’s value also to be considered. No specific RBI guidelines for carrying out valuation of downstream company. But value of downstream company needs to be considered while valuing shares of Indian Company.

Prohibited Activities – Regulation 15 Lottery Business including government / private lottery, online lotteries Gambling and Betting including casinos Chit Funds Nidhi company Trading in TDRs Real Estate Business or Construction of Farm Houses Manufacturing of cigars, cheroots, cigarillos and cigarettes of tobacco or of tobacco substitutes Activities not open to private sector investment e.g. Atomic Energy, Railway operations (other than permitted activities). Foreign technology collaboration in any form including license for franchise, trademark, brand name, management contract is also prohibited in lottery business and Gambling and Betting activities.

Unincorporated JV Unincorporated Joint Ventures - Co-operation Agreements/Strategic Alliances It’s a contractual relationship/arrangement like a cooperation agreement or a strategic alliance wherein the parties agree to collaborate as independent contractors rather than shareholders in a company or partners in a legal partnership. Co-operation agreements / strategic alliances can be employed for the following types of business activities: Technology transfer agreements Joint product development Purchasing agreements Distribution agreements Marketing and promotional collaboration Intellectual advice In such a JV the rights, duties and obligations of the parties as between themselves.

Entry Routes and Sectoral Caps – Regulation 16 Automatic Route – No prior approval required. Government Route – Prior approval is required and investment is subject to conditions stipulated therein in the approval. Sectoral compliance: Sectoral caps are indicated in the Schedule. Sectors/activities not listed in schedule or not prohibited are 100% under automatic route. Investing Companies not registered as NBFC or CICs – under Approval route. Investing companies registered as NBFC – 100% under automatic route. * Sectors/activities not listed in schedule or not prohibited under Reg 15, foreign investment is permitted up to 100% on automatic route.

Sectoral Caps (Schedule of Reg 16) Automatic Route with/without conditions: Sector/Activity % Agriculture (Floriculture/Horticulture) & Animal Husbandry 100% Plantation Mining Petroleum and Natural Gas 100% - Exploration 49% - PSU refining Manufacturing Construction Development – Townships, Housing, Built up infrastruture Industrial Parks Satellites – Establishment and Operations Trading – Cash and Carry, Wholesale, E commerce, Single Brand Retail, Duty Free Shops Railway Infrastructure

Sectoral Caps (Schedule of Reg 16) Partly Automatic and Partly under Government route with / without conditions: Sector/Activity Automatic Approval Defence Up to 49% Beyond 49% Broadcasting 100% automatic or 49% approval per activity Print Media Approval route per activity Civil Aviation 100% Up to 49% for Air Transport Services Beyond 49% for Air Transport Services Telecom Multi Brand Retail -- 51% Pharmaceuticals Greenfield – 100% Brownfield – up to 74% Brownfield – beyond 74% Financials Services 20%, 49%, 74% and 100% automatic as well as approval Railway Infrastructure

Certain Issues in FDI Deferment in conversion to equity shares of convertible instruments requires prior RBI approval. FDI inward remittance cannot be credited to EEFC account. Investment made with assured return by promoter or investee company is prohibited. NR to NR transfer of shares of company engaged in sectors/activities under approval route without obtaining prior government approval.

Manner of Investments – Issue of shares against pre-incorporation expenses Para 1(3) of Schedule 1: Indian WOS may issue capital instruments to its foreign parent against pre-incorporation / pre-operative expenses up to limit of 5% of its authorised capital or USD 5,00,000 whichever is lower, provided Indian WOS is engaged in sector where 100% Foreign investment is allowed under automatic route and there are no FDI Linked performance conditions. Reporting in FCGPR is to be done within 30 days from date of issue of capital instruments but not later than 1 year from date of incorporation. Certificate of Statutory Auditor is to be obtained certifying utilisation of funds.

Manner of Investments – Issue of shares against specific dues Para 1(4) of Schedule 1 Issue of capital instruments by Indian Company against – Swap of capital instruments, Import of capital goods/machinery/equipment (excluding second hand machinery) Pre-operative/Pre-incorporation expenses (including payments of rent) shall be subject to compliance with conditions prescribed by Central Government and / or RBI and under automatic route provided Indian Company is engaged in an automatic route sector. Government approval shall be obtained if the Indian investee company is engaged in a sector under Government route.

Additional Conditions – Issue of Shares FDI Policy Circular of 2017 - Additional conditions for issue of shares against import of capital goods/machinery/equipment: Import has to be in accordance with EXIM Policy of Government of India as defined by DGFT/FEMA provisions relating to imports. Application must clearly indicate the beneficial ownership and identity of Importer Company as well as overseas entity. Application for conversion of import payables in FDI must be made within 180 days from date of shipment.

Additional Conditions – Issue of Shares FDI Policy Circular of 2017 - Additional conditions for issue of shares against pre-operative/pre-incorporation expenses: FIRC for funds remitted by overseas promoters for expenditure incurred is to be submitted. Pre-incorporation/pre-operative expenses are to be verified and certified by Statutory Auditor. Payments should be made by foreign investor directly or through bank account opened by foreign investor as provided under FEMA regulations. Application for capitalisation complete in all respects shall be made within 180 days from date of incorporation.

Additional Conditions – Issue of Shares FDI Policy Circular of 2017 - General Conditions: All request of conversion should be accompanied by special resolution of company. Government’s approval will be subject to RBI pricing guidelines and appropriate tax clearance. Issue of share against import of capital goods/machinery/equipment and pre-operative/pre-incorporation expenses is to be reported to RBI in form FCGPR as per procedure prescribed.

Manner of Investment – Issue of Shares against any funds payable Para 1(5) of Schedule 1 – Issue of equity shares against any funds payable (A.P. DIR Circular No. 31 dated 17.09.2014) - Indian Company may issue shares against any funds payable to a person resident outside India. The remittance for the funds so payable must not require prior permission of Central Government or RBI.

Remittance of pre-incorporation expenses Current Account Rules – Remittance of pre-incorporation expenses: Indian Entity can make remittance of: 5% of investment or USD 1,00,000 For reimbursement of pre-incorporation expenses

Modes of Payment – Schedule 1 of FEMA 20R Mode of Payment: Inward Remittance Out of funds held in NRE/FCNR(B) Against any funds payable Swap of Capital Instruments Compounding Orders for contravention of Mode of Payment: CA No. 4302/2017 dated 05.07.2017 in case of Mahesh Mohan Uberoi whereby payment for subscription of shares was made by an Indian company to the company issuing shares and not received through inward remittance from abroad from the non-resident investor. CA No. 4536/2018 dated 05.01.2018 in case of Mahesh Ramakrishnan where FDI proceeds were received through third party intermediary and not through authorised person.

Obligation of NR fulfilled by another NR - Judgment Judgement of Appellate Tribunal for Foreign Exchange in matter of Jaipur IPL Cricket (P) Ltd. vs. Special Director, Directorate of Enforcement, Mumbai [2017] 81 taxmann.com 175 (ATFFE – New Delhi) Payment of Performance Deposit for bidding of tender of Cricket team was made on behalf of NR investor by another NR, was held as contravention of Section 3(b) of FEMA.

Receipt of consideration from PROI other than to whom capital instruments are issued Part IV - Para A(1)(b)(iv) of Master Direction on Reporting under FEMA: In case the Indian company issues shares to a person resident outside India other than to the person resident outside India from who the inward remittance has been received, the form FC-GPR has to be filed along with the following documents: KYC reports of both the remitter and beneficial owner. NOC from remitter for issuing capital instruments to beneficial owner mentioning their relationship. A letter from beneficial owner explaining reasons for the remitter making the remittance on its behalf. Copy of agreement/board resolution of investee company for issuing capital instruments to a person other than from whom remittance has been received.

Time Limit for allotment - Schedule 1 of FEMA 20R Time for allotment: Capital Instruments to be issued within 60 days from date of receipt of consideration. If not issued within 60 days, the amounts to be refunded within 15 days from date of completion of 60 days. Compounding Orders for contravention of delay in refund of share consideration upon cancellation of share transfer agreement: CA No. AHM-114/2018-19 in case of Chhaganbhai Detroja wherein there was delay in refund of amount received towards transfer of shares beyond 60 days.

Schedule 4 of FEMA 20R – Investment by NRIs/OCIs on non-repatriation basis Investment on non-repatriation basis: NRIs/OCIs including a company, trust, partnership firm, incorporated outside India and owned and controlled by NRIs and OCIs may invest on non repatriation basis in following: Capital instruments of a company Units of an Investment vehicle Capital contribution of a LLP Convertible notes of start up company The investment will be treated as domestic investment at par with investment made by residents.

Schedule 4 of FEMA 20R – Investment by NRIs/OCIs on non-repatriation basis Prohibition: Investment in following is prohibited: Nidhi Company Company engaged in agricultural/plantation activities Real estate business Construction of farm houses Trading in Transferable Development Rights Real Estate business has same meaning as laid down in Reg 16.

Schedule 4 of FEMA 20R – Investment by NRIs/OCIs on non-repatriation basis Mode of Payment: Inward remittance from abroad, or Out of funds held in NRO/NRE/FCNR(B) account Sale Proceeds: Credited only to NRO account irrespective of the type of account from which the consideration was paid. Reporting: There is no reporting for investment by NRIs/OCIs under Schedule 4. Even FLA reporting is not required since investment is deemed to be domestic investment. However, as per Companies Act, in Annual Return the same will be shown as investment by NRIs. Pricing guidelines shall not be applicable for investments under Schedule 4

Schedule 4 of FEMA 20R – Investment by NRIs/OCIs on non-repatriation basis Investment in Partnership Firm or Proprietary concern: Allowed to NRIs/OCIs on non-repatriation basis. Firm or proprietary concern shall not be engaged in business of agricultural/plantation, print media or real estate. Investment through Inward remittance from abroad, or out of funds held in NRO/NRE/FCNR(B) account. Sale proceeds shall be credited only to NRO account irrespective of the type of account from which the consideration was paid.

Schedule 6 of FEMA 20R – Investment in LLP PROI (other than citizen of Pakistan or Bangladesh) or an entity incorporated outside India (other than entity of Pakistan or Bangladesh) not being FPI or FVCI can invest in capital of LLP. Foreign investment in LLP is under automatic route and is permitted in sectors/activities where investment upto 100% is under automatic route and there are no FDI Linked Performance Conditions (such as Construction Development etc.). Investment by way of capital contribution or by acquisition/transfer of profit shares should not be less than fair price worked as per internationally accepted method of capital contribution/profit share.

Schedule 6 of FEMA 20R – Investment in LLP Investment shall be made by way of inward remittance through banking channels or out of funds held in NRE or FCNR(B) account. Disinvestment proceeds may be remitted outside India or credited to NRE or FCNR(B) account. For receipt of capital contribution Form LLP I is to be filed within 30 days of investment. For transfer / disinvestment Form LLP II is to be filed within 60 days of disinvestment.

Round Tripping Round tripping as a term is nowhere defined under FEMA, nor in any circulars issued by RBI. It refers to a strategy wherein an Overseas Entity is established for the sole purpose of routing funds back to India. Round tripping arrangement leads to contravention under Outbound Investment. As ODI would not meet the criteria of bonafide business activities (Refer Regulation 6(2)(ii) of Notification No. FEMA.120/RB-2004) A.P. (DIR Series) Circular No. 41 dated November 25, 2014 was issued by RBI on Routing of funds raised abroad to India.

Round Tripping – Compounding Orders CA No. 3867/2015 dated 03.06.2016 in case of Binani Ind Ltd. – Contravention of Reg 6(2)(ii) of FEMA 120. Applicant had merged its Indian subsidiary with overseas WOS with purpose of achieving business synergy and business consolidation. Hence Post Facto was granted. CA No. 3946/2016 dated 29.08.2016 in case of Shubkam Ventures – Overseas WOS made investment back into an Indian entity leading to non bonafide activity. RBI asked for unwinding of transaction and carried out compounding.

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