1. NIRC - ICSI CA. SUNIL JAIN FCA DISA
PRESENTATION ON FEMA BY
CA. SUNIL JAIN FCA DISA

2. FEMA: TOPICS
OVERVIEW
Overseas Direct Investment including ODI under Liberalized remittance Scheme (LRS) for Residents; Immovable property outside India by Residents
External commercial borrowings(ECB)

3. FOREIGN EXCHANGE MANAGEMENT ACT 1999
FEMA – Introduction and Basic Structure
The Act
The regulation/ The rules
Master Circulars
Master Directions
AP DIR Circulars
Notifications
Press notes
Respective ministry Guidelines

4. DIRECT INVESTMENTS IN JV/WOS ABROAD
Foreign Exchange Management
(Transfer or issue of any foreign security) Regulations 2004
Read together with
Master Circular
Master directions
FAQs of RBI

5. DIRECT INVESTMENTS IN JV/WOS ABROAD
 "Direct investment outside India" means investment by way of contribution to the capital or subscription to the Memorandum of Association of a foreign entity or by way of purchase of existing shares of a foreign entity either by market purchase or private placement or through stock exchange, but does not include portfolio investment;

6. DIRECT INVESTMENTS IN JV/WOS ABROAD
 "Financial Commitment" means the amount of direct investment by way of contribution to equity, loan and 100 per cent of the amount of guarantees and 50 per cent of the performance guarantees issued by an Indian Party to or on behalf of its overseas Joint Venture Company or Wholly Owned Subsidiary;

7. DIRECT INVESTMENTS IN JV/WOS ABROAD AUTOMATIC ROUTE
Eligible Investor:
Companies
Partnerships registered under Indian Partnership Act 1932
Limited Liability Partnership
Body created under act of parliament

8. DIRECT INVESTMENTS IN JV/WOS ABROAD
"Joint Venture (JV)/WOS" means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country in which the Indian Party makes a direct investment; "Net Worth" means paid up capital and free reserves;

9. DIRECT INVESTMENTS IN JV/WOS ABROAD AUTOMATIC ROUTE
Financial commitment Limit:
Up to 400% of the net worth as on the date of the last audited balance sheet.
Investment to be in the shape of capital, loan &/or guarantees issued to or on behalf of JV/WOS

10. DIRECT INVESTMENTS IN JV/WOS ABROAD AUTOMATIC ROUTE
Form ODI to be submitted to designated branch of authorised dealer
For all transactions one branch of authorised dealer to be designated
Indian Investor should not be on RBI’s caution list or defaulters list
Auto route not available for Pakistan

11. DIRECT INVESTMENTS IN JV/WOS ABROAD AUTOMATIC ROUTE
Partial/Full acquisition of an existing foreign company permissible
Valuation of shares in such cases upto investment of USD 5m to be certified by CA/CPA
Otherwise by category I merchant banker

12. DIRECT INVESTMENTS IN JV/WOS ABROAD AUTOMATIC ROUTE
Method of Funding:
EEFC account
Drawl of Forex from authorised dealers
ADR/GDR
Proceeds of ECB
Capitalization of exports
Swap of shares

13. DIRECT INVESTMENTS IN JV/WOS ABROAD AUTOMATIC ROUTE
Procedure:
Selection of AD I bank
ODI form
CA Certificate in prescribed format
Certificate of Incorporation and MA/AA of foreign entity
Bank particulars of Foreign entity.

14. DIRECT INVESTMENTS IN JV/WOS ABROAD AUTOMATIC ROUTE
General Permission for Resident Individuals:
As gift from any person resident outside India
Cashless employees stock option scheme
By inheritance from resident or NR
ESOP offered by foreign company to employees of its branch/subsidiary
Qualification shares up to LRS limit
In lieu of professional services

15. DIRECT INVESTMENTS IN JV/WOS ABROAD AUTOMATIC ROUTE
General Permission for Resident Individuals:
Right shares against eligible holding
Bonus shares against existing shareholding
Out of Funds held in RFC account.

16. DIRECT INVESTMENTS IN JV/WOS ABROAD APPROVAL ROUTE
Form ODI
Factors considered by RBI:
Viability of project
Benefit which will accrue to India
Financial position & track record
Expertise of Indian party

17. DIRECT INVESTMENTS IN JV/WOS ABROAD APPROVAL ROUTE
ODI exceeding USD 1 (one) billion (or its equivalent) in a financial year would require prior approval of the Reserve Bank even when the total FC of the Indian Party is within the eligible limit under the automatic route (i.e., within 400% of the net worth as per the last audited balance sheet).

18. DIRECT INVESTMENTS IN JV/WOS ABROAD APPROVAL ROUTE
Proprietary concern/unregistered partnership
Only who are status holder exporters
Having proven track record
Unrealised exports <10%
Limited to 10% of average of last 3 years realised export turnover or 200% of net owned Funds which ever is lower
Trusts and societies: subject to eligibility criteria

19. DIRECT INVESTMENTS IN JV/WOS ABROAD
Reporting:
APR by 31st Dec.
Annual return of Foreign Liabilities and Assets by 15th July- FLA
Post investment Changes like diversification, step down subsidiary, shareholding pattern within 30 days

20. DIRECT INVESTMENTS IN JV/WOS ABROAD
Other Obligations of Indian Party:
Receive share certificates or instruments
Repatriation of all dues from JV/WOS within 60 days
ESOP reporting by Indian party

21. DISINVESTMENTS IN JV/WOS ABROAD
 An Indian Party, without approval of RBI transfer by way of sale to another Indian Party or to a person resident outside India provided:
the sale does not result in any write off
If listed through stock exch.
if unlisted the share price is not less than the value certified by a CA / CPA
the Indian Party does not have any outstanding dues from the JV or WOS;
the overseas concern has been in operation for at least one full year and APR filed.

22. DISINVESTMENTS IN JV/WOS ABROAD
 Without approval of RBI at less than the original amount invested:
where the JV / WOS is listed in the overseas stock exchange;
where the Indian Party is listed on a stock exchange in India and has a net worth of not less than ₹ 100 crore;
where the Indian Party is an unlisted company and the investment (or financial commitment) in the overseas venture does not exceed USD 10 million. and
where the Indian Party is a listed company with net worth of less than ₹ 100 crore but investment (or financial commitment) in an overseas JV/WOS does not exceed USD 10 million.

23. ODI UNDER LRS BY INDIVIDUALS
"Real estate business" means buying and selling of real estate or trading in Transferable Development Rights (TDRs) but does not include development of townships, construction of residential/commercial premises, roads or bridges;

24. ODI UNDER LRS BY INDIVIDUALS
Individuals can avail LRS to make capital account transaction only up to limit available under LRS thus net of other capital/current account transactions
It should be an operating entity only and cannot have any step down subsidiary
In form of equity or compulsory convertible preference shares

25. ODI UNDER LRS BY INDIVIDUALS
ODI needs to be submitted for such investment
Any change in the shareholding pattern should be intimated within 30 days.
APR is required to be filed
Disinvestment to be reported within 30 days

26. IMMOVABLE PROP. ABROAD BY RES.
Section 6(4):
A person resident in India may hold, own, transfer or invest in foreign currency, foreign security, or any immovable property situated outside India if such asset was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India

27. IMMOVABLE PROP. ABROAD BY RES.
FEM( Acquisition and Transfer of Imm. Prop. outside India) regulation 2000
Residents can hold property acquired as non-resident
Can acquire property out of RFC account
Out of liberalized 2.5 Lac USD scheme
Can inherit/receive as gift
Can resident borrow outside?

28. IMMOVABLE PROP. Cont..
Such property can be transferred by way of gift to relative resident.
Resident but national of a foreign state permitted to acquire/hold/transfer
Corporate having branches can acquire within the monetary limits set for branch expenses
Other acquisitions by RBI approval

29. IMMOVABLE PROP. Cont..
Case Study:
Resident individual acquiring shares under LRS of a foreign company having immovable property which is let out and earning rental income
The property is under mortgage and loan is served out of rental income.

30. EXTERNAL COMMERCIAL BORROWINGS(ECB)
FAQ:
Who is eligible borrower
Who is eligible lender
Purpose for which borrowings can be made
Automatic route/ Approval route
Time period/ interest rate
Whether an individual can borrow from Non resident relative

31. EXTERNAL COMMERCIAL BORROWINGS(ECB)
FAQ:
Whether an individual can borrow from non related non resident person
Whether company partnership or proprietor can accept deposit/ loan/ advance from non residents
What are the compliances required under FEMA

32. Section 6(2) : The reserve bank may in
consultation with the central government specify-
Any class or classes of capital account transactions which are permissible;
The limit up to which foreign exchange shall be admissible for such transactions

33. EXTERNAL COMMERCIAL BORROWINGS(ECB)
Regulation : Foreign exchange Management ( Borrowing and Lending in Foreign exchange) regulation 2000
Master direction 5/
AP(dir) circulars issued from time to time

34. EXTERNAL COMMERCIAL BORROWINGS(ECB)
Regulation 3:
Save as otherwise provided, no person resident in India shall borrow or lend in foreign exchange from or to a person resident in or outside India.
RBI authorised to specify the exceptions through regulations and circulars.

35. Applicable to industrial sector, infrastructure sector
EXTERNAL COMMERCIAL BORROWINGS(ECB)
AUTOMATIC ROUTE:
Applicable to industrial sector,
infrastructure sector
service sector in-Hotel Hospital & software

36. EXTERNAL COMMERCIAL BORROWINGS(ECB)
Eligible borrowers:
Corporate ( i.e companies registered under companies act 1956)
Infrastructure Finance companies
Units in SEZ
NGOs engaged in micro finance
Ineligible borrowers:
Individuals/Firms not eligible
Financial intermediaries and NBFCs

37. EXTERNAL COMMERCIAL BORROWINGS(ECB) AUTOMATIC ROUTE
Eligible lenders:
International banks
International capital Markets
Financial Institutions
Equipment Suppliers
Foreign Collaborators
Foreign Equity Holders

38. EXTERNAL COMMERCIAL BORROWINGS(ECB) AUTOMATIC ROUTE
Amount & Maturity:
For corporate
Up to USD 50m- maturity >/= 3yrs
Beyond USD 50m maturity >/= 5yrs
Maximum permissible amount
USD 750m during a financial year
Service sector viz. Hotel Hospital Software:
USD up to 200mUSD

39. EXTERNAL COMMERCIAL BORROWINGS(ECB) AUTOMATIC ROUTE
Eligible Foreign Equity Holders:
For ECB Up to 5 Million-Minimum equity 25%
For ECB exceeding USD 5 Million-Minimum equity 25% and Maximum ECB 4 times of foreign equity

40. EXTERNAL COMMERCIAL BORROWINGS(ECB) AUTOMATIC ROUTE
Infrastructure Sector Defined:
Power
Tele communication
Railways
Roads & Bridges
Sea Ports & Airports
Industrial Parks
Urban Infrastructure (water & sewage)
Mining exploration and refining
Cold storage for agriculture and allied produce

41. EXTERNAL COMMERCIAL BORROWINGS(ECB) AUTOMATIC ROUTE
Permissible End-use:
Capital Investment in Industrial Sector , Infrastructure Sector and specified service sector
As part of FDI in JV/ WOS
Payment for spectrum allocation
For lending by micro finance companies

42. EXTERNAL COMMERCIAL BORROWINGS(ECB) AUTOMATIC ROUTE
Prohibited use
Not permitted for onward lending
Not permitted for Investment in Capital Market
Not permitted in Real Estate
Repayment of existing Rupee loan
Not permitted for Working Capital / general corporate purposes unless it comes from equity holder and with minimum average maturity of 5 years.

43. EXTERNAL COMMERCIAL BORROWINGS(ECB) AUTOMATIC ROUTE
Cost ceiling for ECB
For ECB for 3 to 5 years- 300 basis points over 6 month LIBOR
For ECB > 5 Years – 450 basis points over 6 months LIBOR
Withholding Tax excluded for computing the limit

44. EXTERNAL COMMERCIAL BORROWINGS(ECB) AUTOMATIC ROUTE: Guarantee for ECB
Issuance of guarantees, stand by letter of credit, letter of undertaking, or letter of comforts by banks, financial institutions and NBFCs from India relating to ECB is not permitted

45. EXTERNAL COMMERCIAL BORROWINGS(ECB) AUTOMATIC ROUTE
PARKING OF ECB PROCEEDS:
Pending utilization, the funds required in foreign currency may be retained outside or brought into India
Can be temporarily invested in certificate of deposits, treasury bills etc which are highly liquid.
May be repatriated to India in regular rupee account
ECB required for rupee investment must be brought into India.

46. EXTERNAL COMMERCIAL BORROWINGS(ECB) AUTOMATIC ROUTE
Procedure & Reporting:
Enter into Loan agreement
Submit form 83 for allotment of loan registration no. to RBI (certified by CA) through AD Bank
Draw down of loan only after obtaining regd. No.
Remittance only after obtaining regd. No.
Periodical Returns with RBI in Form ECB-2

47. EXTERNAL COMMERCIAL BORROWINGS(ECB) AUTOMATIC ROUTE
RESPONSIBILITY:
The primary responsibility to ensure the compliance of regulation regarding auto route, eligibility of lender /borrower, costs, maturity period, etc. is that of the concerned borrower and contravention will be viewed seriously and invite penal action.
In case of doubt as regards eligibility to access the automatic route, applicant should take recourse to approval route.

48. EXTERNAL COMMERCIAL BORROWINGS(ECB) APPROVAL ROUTE
Eligible lender/borrower, permissible end-use, limit not covered under automatic route will require prior approval

49. EXTERNAL COMMERCIAL BORROWINGS(ECB) APPROVAL ROUTE
Eligible borrower (beyond auto route):
Borrowings beyond USD 750 Million
ECB by service sector – Hotels, Hospitals and software Companies beyond $ 200 million limit
ECB by Banks, Financial Institutions, NBFCs subject to certain conditions.

50. EXTERNAL COMMERCIAL BORROWINGS(ECB) APPROVAL ROUTE
Recognized Lenders:
All those covered under auto route
Foreign equity holders not complying ECB/ foreign equity ratio of 4:1

51. EXTERNAL COMMERCIAL BORROWINGS(ECB) APPROVAL ROUTE
Limits & Maturity:
Corporate can avail additional ECB with average maturity > 10 years
Service Sector beyond USD 200 Million for import of capital goods

52. EXTERNAL COMMERCIAL BORROWINGS(ECB) APPROVAL ROUTE
PROCEDURE COMPLIANCE FOR APPROVAL ROUTE:
Application in form ECB through AD bank to be submitted to ECB Division, Mumbai
Form 83 for obtaining loan registration number
Periodical filing of ECB-2 within 7 days of close of the month

53. EXTERNAL COMMERCIAL BORROWINGS(ECB) APPROVAL ROUTE: Guarantee for ECB
Issuance of guarantees, stand by letter of credit, letter of undertaking, or letter of comforts by banks, financial institutions and NBFCs from India relating to ECB is not permitted except in case of SME where it may be allowed with specific prior approval.

54. EXTERNAL COMMERCIAL BORROWINGS(ECB) APPROVAL ROUTE
Parking of Funds Pending Utilisation :
ECB may be parked outside in India
May be kept in rupee account in India with AD Category-I bank in India
Pre-Payments:
Upto USD 500 million by bank otherwise RBI permission subject to compliance with minimum average maturity period

55. EXTERNAL COMMERCIAL BORROWINGS(ECB) OTHER IMPORTANT POINTS
Conversion of ECB into equity:
For eligible investment under FDI rules including sectoral cap and pricing guidelines.

56. EXTERNAL COMMERCIAL BORROWINGS(ECB) OTHER IMPORTANT POINTS
Trade Credits for Imports:
Maturity < 3 years
Supplier, overseas bank and financial institutions
Include suppliers credits: credit extended by foreign supplier.
buyers credits: loan by importer from bank FI from outside India
USD 20 Million per import transactions
All costs 200 basis points above LIBOR

57. EXTERNAL COMMERCIAL BORROWINGS(ECB) OTHER IMPORTANT POINTS
Borrowings by Individual Residents from NRI relatives:
Permitted up to USD 2,50,000
Maturity exceeding 1 year
Interest free
Remittance from abroad
Repatriation allowed
Not to be used for agriculture/ plantation/ immovable property/shares debentures/ re-lending

58. EXTERNAL COMMERCIAL BORROWINGS(ECB) OTHER IMPORTANT POINTS
Acceptance of borrowing in RUPEE by Proprietorship/ Firm from NRIs/ PIO:
Only on non-repatriation basis
Maturity not exceeding 3 years
Remittance from NRE/NRO A/c/Inward remittance
Not to be utilized for re-lending agriculture, real estate, etc.

59. EXTERNAL COMMERCIAL BORROWINGS(ECB)
Resident can borrow by way of loan/overdraft etc from a bank situated outside India for execution outside India of a turnkey project or civil construction contract

60. EXTERNAL COMMERCIAL BORROWINGS(ECB)
A person who borrowed loan as resident and subsequently becomes resident can continue the loan
Rupee Loan granted by a resident to another resident may be continued even after lender becoming non resident.

61. EXTERNAL COMMERCIAL BORROWINGS(ECB)
SECURITY BY BORROWER:
The borrower can provide security of its choice to the lender.
Creation of charge of immovable property or shares of company in India is subject to obtaining prior no objection from the authorised dealer, who will give such permission on case to case basis.
Period of security should be co terminus with loan period

62. External Commercial Borrowing
Borrowing in Rupee by Indian companies
Through NCD by public offer
Redemption > /= 3 years
Utilization not in agriculture/plantation/real estate
Non repatriation/ repatriation options available
Only from NRI/PIO

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64. FEMA Remittances facilities for Residents-The statute: Section 8
Save as otherwise provided in this Act where any amount of foreign exchange is due or has accrued to any person resident in India such person shall take all reasonable steps to realize and repatriate to India such Foreign Exchange within such period and in such manner as may be specified by RBI

65. Liberalized Remittance Scheme(LRS)
Liberalised scheme of remittance up to 2.5 Lac USD per FY by individuals (only) including minors( PAN Mandatory )
Eligible for current account/capital account transactions
Immovable property, shares, donations, gifts and other permissible transactions
Opening of bank account outside India
To Pak, Bhutan, Nepal not permitted

66. Remittances facilities for Residents- The statute:
Section 4:
Save as otherwise provided in this Act, no person resident in India shall acquire, hold, own, posses, or transfer any Foreign exchange, Foreign Security, or any Immovable property outside India

67. FEMA Remittances facilities for Residents-The statute: Section 6
RBI in consultation with Central Govt to make regulations for capital account transactions

68. Liberalized Remittance Scheme(LRS)
The limit is subsumed with other permitted current account transactions listed in schedule III of rules
Transactions otherwise prohibited under FEMA not available under the scheme.
Banks not to extend credit facility for remittance under this scheme.

69. Liberalized Remittance Scheme
Permitted capital account transactions:
-Bank A/c
-Purchase of property
-Investment in listed/unlisted shares
-Debt Instruments, MF etc
-WOS/JV
-Loan to NRI relatives

70. Liberalized Remittance Scheme
*Remittance can be consolidated among family members for all current account transactions
*Consolidation for capital account transaction possible only if asset acquired in joint name.

71. Liberalized Remittance Scheme
Remittance procedure:
> Identify designated AD
> Application cum Declaration in prescribed format cum Form A2
> PAN Card for remittance >25000 USD
> KYC norms to be complied
> AD to ensure compliance

72. Liberalized Remittances Scheme
Income and sale proceeds of assets held abroad through remittances under the scheme need not be repatriated except in case of ODI
Rent, dividend, interest, capital gain,
Exception to the general rule that all funds be Repatriated

73. Liberalized Remittances Scheme Loan to NRI relative
Interest free with minimum maturity of 1 year
Within the overall limit under LRS
Borrowers personal / business requirements in India
Not to be utilized for prohibited purposes
Loan to be credited to NRO account
Cannot be remitted outside India
Repayment out of NRO / NRE / FCNR