April 27, 2008 Foreign Exchange Management Act, Harshal Kamdar

April 27, 2008 FEMA – Basics Steps to do a FEMA Research Recent Updates –Relevant Circular / Notification / Amendment –Issues –Practical aspects & experiences Questions? FEMA – Basics Steps to do a FEMA Research Recent Updates –Relevant Circular / Notification / Amendment –Issues –Practical aspects & experiences Questions? Contents

April 27, 2008 FEMA, 1999 – The ACT (wef…?) Rules – Current Account Rules, Compounding Rules Regulations – Notifications under FEMA AP DIR(?) Series Circulars – issued by the RBI Master Circulars – July every year! Memorandum of Instructions, Exchange Control Manual Prescribed Forms Allied Acts – to name a few… FDI Policy ie the NIP 1991 FDI Policy - Amended by PRESS NOTES issued by DIPP (SIA) SIA Manual Press RELEASES by the PIB – Not effective FEMA, 1999 – The ACT (wef…?) Rules – Current Account Rules, Compounding Rules Regulations – Notifications under FEMA AP DIR(?) Series Circulars – issued by the RBI Master Circulars – July every year! Memorandum of Instructions, Exchange Control Manual Prescribed Forms Allied Acts – to name a few… FDI Policy ie the NIP 1991 FDI Policy - Amended by PRESS NOTES issued by DIPP (SIA) SIA Manual Press RELEASES by the PIB – Not effective Basics

April 27, 2008 FERA, 1973 Foreign Contribution Regulation Act, 1976 Prevention of Money Laundering Act, 2002 Foreign Trade (D & R) Act, 1992 Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 Exim Policy FERA, 1973 Foreign Contribution Regulation Act, 1976 Prevention of Money Laundering Act, 2002 Foreign Trade (D & R) Act, 1992 Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 Exim Policy Allied Acts

April 27, 2008 Applicability of FEMA depends on: residential status of the person; and nature of the transaction (ie, capital account or current account) Applicability of FEMA depends on: residential status of the person; and nature of the transaction (ie, capital account or current account) Applicability

April 27, 2008 Capital account transactions alter assets or liabilities (including contingent liabilities) “outside India of persons resident in India”, or those “in India of persons resident outside India” and include certain specified transactions [Section 2(e)] Current account transactions are those that are not capital account transactions, and specifically include: –payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business; –payments due as interest on loans, net income from investments; –remittances for living expenses of parents/ spouse/ children residing abroad, expenses in connection with foreign travel, education/ medical care of parents/ spouse/ children [Section 2(j)] Capital account transactions alter assets or liabilities (including contingent liabilities) “outside India of persons resident in India”, or those “in India of persons resident outside India” and include certain specified transactions [Section 2(e)] Current account transactions are those that are not capital account transactions, and specifically include: –payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business; –payments due as interest on loans, net income from investments; –remittances for living expenses of parents/ spouse/ children residing abroad, expenses in connection with foreign travel, education/ medical care of parents/ spouse/ children [Section 2(j)] Applicability

April 27, 2008 Cardinal Rule -- Drawal of foreign exchange for: –capital account transactions is not permitted, except under specific or general permission of the Reserve Bank of India (‘RBI’) / Government of India –current account transactions is freely permitted, unless the transaction is restricted by the RBI Cardinal Rule -- Drawal of foreign exchange for: –capital account transactions is not permitted, except under specific or general permission of the Reserve Bank of India (‘RBI’) / Government of India –current account transactions is freely permitted, unless the transaction is restricted by the RBI

April 27, 2008 Step 1 Step 2 Stick to basics – read, research and conquer!!! Practical aspects! Step 1 Step 2 Stick to basics – read, research and conquer!!! Practical aspects! Steps to do a FEMA research

April 27, 2008 Residential status A “person resident in India” means: –an individual who satisfies certain conditions (discussed in the next slide) –a person or body corporate registered or incorporated in India –an office, branch or agency in India owned or controlled by a person resident outside India –an office, branch or agency outside India owned or controlled by a person resident in India [Section 2(v)] A “person resident outside India” means a person who is not resident in India [Section 2(w)] A “person resident in India” means: –an individual who satisfies certain conditions (discussed in the next slide) –a person or body corporate registered or incorporated in India –an office, branch or agency in India owned or controlled by a person resident outside India –an office, branch or agency outside India owned or controlled by a person resident in India [Section 2(v)] A “person resident outside India” means a person who is not resident in India [Section 2(w)]

April 27, 2008 A “person resident in India” means a person residing in India for more than 182 days during the preceding financial year but does not include: Residential status of an individual (a)a person who has gone out of India or who stays outside India, in either case: –for or on taking up employment outside India, or –for carrying on outside India a business or vocation outside India, or –for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period; (b)a person who has come to or stays in India, in either case, otherwise than: –for or on taking up employment in India, or –for carrying on in India a business or vocation in India, or –for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period. A “person resident outside India” means a person who is not resident in India.

April 27, 2008 FEMA – Recent Updates

April 27, 2008 Avenues Foreign Direct Investment Foreign Institutional Investors NRIs, repatriation, non-repatriation basis Foreign Venture Capital Funds Investment in Partnerships, etc in India Avenues Foreign Direct Investment Foreign Institutional Investors NRIs, repatriation, non-repatriation basis Foreign Venture Capital Funds Investment in Partnerships, etc in India Foreign investments in Indian Companies

April 27, 2008 Avenues Equity Shares Preference shares, convertible and redeemable Convertible debentures (optionally convertible???) All sectors, except prohibited, restricted sectors Avenues Equity Shares Preference shares, convertible and redeemable Convertible debentures (optionally convertible???) All sectors, except prohibited, restricted sectors Foreign Direct Investment

April 27, 2008 Amendments Change announced on April 30, 2007 vide DEA’s Press Release No respite to investors who had remitted funds to India RBI issued a circular on June 8, 2007 w.e.f May 1, 2007 Only convertibles allowed under FDI Non-convertibles, optionally convertibles, partially convertibles to conform with ECB Guidelines Finally relief to investors who had remitted funds before April 30, 2007 Amendments Change announced on April 30, 2007 vide DEA’s Press Release No respite to investors who had remitted funds to India RBI issued a circular on June 8, 2007 w.e.f May 1, 2007 Only convertibles allowed under FDI Non-convertibles, optionally convertibles, partially convertibles to conform with ECB Guidelines Finally relief to investors who had remitted funds before April 30, 2007 Preference shares – June 8, 2007

April 27, 2008 Amendments No change announced on April 30, 2007 vide DEA’s Press Release RBI issued a circular on June 8, 2007 w.e.f that date for CDs Respite to investors –who had remitted funds to India –existing investments in non-convertible, optionally convertible instruments Only convertibles allowed under FDI henceforth Non-convertibles, optionally convertibles, partially convertibles to conform with ECB Guidelines? Amendments No change announced on April 30, 2007 vide DEA’s Press Release RBI issued a circular on June 8, 2007 w.e.f that date for CDs Respite to investors –who had remitted funds to India –existing investments in non-convertible, optionally convertible instruments Only convertibles allowed under FDI henceforth Non-convertibles, optionally convertibles, partially convertibles to conform with ECB Guidelines? Convertible Debentures – June 8, 2007

April 27, 2008 Structures, to tell a few… Put option!!! Arrow – Instrument, dotted line – Cash flow Structures, to tell a few… Put option!!! Arrow – Instrument, dotted line – Cash flow Structures vis-à-vis intention of amendment India Outside India I Co 1I Co 2 F Co After X period, I Co 1 has cash

April 27, 2008 Structures… Buyback (not redemption) of preference shares Issue of CCPS by I Co to F Co Buyback by I Co Allowed under October 4, 2004 Circular as clarified Structures… Buyback (not redemption) of preference shares Issue of CCPS by I Co to F Co Buyback by I Co Allowed under October 4, 2004 Circular as clarified Structures vis-à-vis intention of amendment

April 27, 2008 Issues, Practical aspects – Put option, buyback Technically – may be fine as long as transfer allowed under October 4, 2004 Circular / clarification dated August 30, 2005 Practically defends the intention of amendments Issues, Practical aspects – Put option, buyback Technically – may be fine as long as transfer allowed under October 4, 2004 Circular / clarification dated August 30, 2005 Practically defends the intention of amendments Structures vis-à-vis intention of amendment

April 27, 2008 Earlier position Advance against equity allowed under FEMA Reporting requirement Remittance under general permission – Circular 45 of 2002 –Subject to Authorised Dealer’s satisfaction! Circular dated December 14, day ceiling limit provided, going forwards – otherwise… For advances received earlier > 180 days as on November 29, 2007 – RBI approval required Principle of promissory by estoppel Notification dated November 13, 2007 w.e.f November 29, 2007 Earlier position Advance against equity allowed under FEMA Reporting requirement Remittance under general permission – Circular 45 of 2002 –Subject to Authorised Dealer’s satisfaction! Circular dated December 14, day ceiling limit provided, going forwards – otherwise… For advances received earlier > 180 days as on November 29, 2007 – RBI approval required Principle of promissory by estoppel Notification dated November 13, 2007 w.e.f November 29, 2007 FDI – Refund of advance subscription money

April 27, 2008 Practical aspects – approval Approval granted by the respective Regional Office Board resolution along with a specific action plan required Rationale for not issuing shares till date Practical aspects – approval Approval granted by the respective Regional Office Board resolution along with a specific action plan required Rationale for not issuing shares till date FDI – Refund of advance subscription money

April 27, 2008 Amendments Replaced the erstwhile USD 100,000 scheme (May 8, 2007) which replaced the erstwhile USD 50,000 scheme (December 20, 2006) Changed the remittance period from calendar year to financial year Limits for Gifts and Donations subsumed within USD 200,000 Unlimited avenue to invest in a listed company overseas removed What continues… Applicable to resident individuals Allowed for capital and / or current account transactions Restrictions –Schedule I / II, –Bhutan, Nepal, Mauritius or Pakistan –Countries identified by FATF / Terrorist countries separately notified by RBI Amendments Replaced the erstwhile USD 100,000 scheme (May 8, 2007) which replaced the erstwhile USD 50,000 scheme (December 20, 2006) Changed the remittance period from calendar year to financial year Limits for Gifts and Donations subsumed within USD 200,000 Unlimited avenue to invest in a listed company overseas removed What continues… Applicable to resident individuals Allowed for capital and / or current account transactions Restrictions –Schedule I / II, –Bhutan, Nepal, Mauritius or Pakistan –Countries identified by FATF / Terrorist countries separately notified by RBI The USD 200,000 scheme – September 26, 2007

April 27, 2008 Questions???

April 27, 2008 Thank You