Rajkot Branch of WIRC of ICAI

Rajkot Branch of WIRC of ICAI
INBOUND INVESTMENTS Presented by: Mr. Chetan M Shah Mehta Chokshi & Shah Chartered Accountants 12th May 2018 Rajkot Branch of WIRC of ICAI MEHTA CHOKSHI & SHAH

Forms of Investment by Foreigners
Investment in/through Start-ups Partnership/Proprietary Concern BO/LO/PO etc. NBFC Companies/LLPs Automatic Route Approval Route MEHTA CHOKSHI & SHAH

Set-up of a Partnership/ Proprietorship concern
Investment in Partnership or Proprietorship Foreigners NRI Others Allowed on non-repatriation basis Not Allowed All foreign investments are repatriable (net of applicable taxes) except in cases where the investment is made or held on non-repatriation basis MEHTA CHOKSHI & SHAH

Establishment of BO/LO/PO
Branch Office Liaison Office Project Office Any Other Place Defence, Telecom, Private Security or Information and Broadcasting Approval of RBI is not required in cases where Govt approval or license/permission by the concerned Ministry/Regulator has already been granted. MEHTA CHOKSHI & SHAH

Schemes for Inbound Investment – FEMA 20
Schedule Name 1 Foreign Direct Investment Scheme 2 Purchase/sale of shares and/or convertible debentures of an Indian company by a registered Foreign Institutional Investor under Portfolio Investment Scheme 3 Purchase/sale of shares and/or convertible debentures by an NRI /OCB on a Stock Exchange In India on repatriation basis under Portfolio Investment Scheme 4 Purchase/Sale of Capital Instruments or convertible notes of an Indian company or Units or contribution to the capital of an LLP by Non-Resident Indian (NRI) or Overseas Citizen of India (OCI) on Non-Repatriation basis 5 6 Purchase and sale of securities other than shares or convertible debentures of an Indian company by a person resident outside India. Investment in a LLP MEHTA CHOKSHI & SHAH

Advantages: Both Host and home get benefit from FDI
Host country - use this for its economic development Home country - supply its abundance resources and widen its market Advantages: MEHTA CHOKSHI & SHAH

Advantages (Contd): Economic Development Stimulation.
Easy International trade Employment and economic boost Development of human capital resources Tax incentives Resource transfer Increased productivity, etc……. Advantages (Contd): MEHTA CHOKSHI & SHAH

Disadvantages Hindrance to Domestic Trade Risk from Political changes
Negative Influence on Exchange Rates Economic Non-viability Negative impact on the country’s investment Modern-Day Economic Colonialism Expropriation. etc.…… Disadvantages MEHTA CHOKSHI & SHAH

FDI- Inflows in INDIA MEHTA CHOKSHI & SHAH

FDI – Legal Regime FEMA, 1999 (Related FEMA regulations including FEMA 20) The consolidated FDI Policy released by the DIPP every year, the most recent being FDI Policy The FDI Policy subsumes and supersedes all Press Notes/Press Releases/Clarifications/Circulars issued by DIPP as of August 27, 2017. The policy pronouncement are made by the DIPP through press notes/press releases - notified by the RBI as amendments to FEMA 20. However, since FEMA 20 constitutes legal regulation, in case of any conflict with the FDI Policy, the provisions of FEMA 20 shall prevail. Most recently, the RBI has notified the newly amended Foreign Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2017 (notification no. FEMA 20(R)/2017-RB) MEHTA CHOKSHI & SHAH

FDI – Legal Regime APPLICABLE PROVISIONS:
Regulation 5 (1) of FEMA 20 provides for instruments in capital instruments and states that the same is subject to conditions specified in Schedule I. The Annual FDI Policy and FEMA 20 mirror each other MEHTA CHOKSHI & SHAH

Definition Instruments Non-Resident FDI - Key Concepts
Investment by non-resident entity/person resident outside India in the capital of an Indian company under Schedule 1 of FEMA 20 Definition Equity shares, CCDs, CCPs, Warrants, Partly paid up shares, Convertible notes (for start-ups) Instruments A person who is not resident in India Non-Resident MEHTA CHOKSHI & SHAH

Resident FDI - Key Concepts
Person residing in India for more than 182 days during the preceding financial year (subject to certain exceptions for employment etc) Any 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 Resident MEHTA CHOKSHI & SHAH

Guaranteed returns Pricing guidelines FDI - Key Concepts
Guaranteed returns” are not permitted Indian obligors cannot normally take refuge under Indian laws for contractually agreed ‘put’ options at assured returns. Guaranteed returns DCF replaced with any ‘internationally accepted pricing methodology No “guaranteed returns” Non-resident cannot acquire securities from a resident below FMV Non-resident cannot sell securities to a resident above FMV Pricing guidelines MEHTA CHOKSHI & SHAH

FDI - Key Concepts Deferred consideration Optionality Clauses
Deferred consideration (and escrow) permitted for upto 18 months from the date of the transfer agreement, and indemnities permitted for upto 18 months from the date of the payment of full consideration, both for a maximum amount of 25% of the full consideration, without RBI approval Considerably simplifies deal structuring and may help in evolution of completion accounts/ pure holdback Deferred consideration Permitted subject to 1 year lock-in (or higher period prescribed by regulator) No assured return. Exit price to be determined using ‘internationally accepted pricing methodology Optionality Clauses MEHTA CHOKSHI & SHAH

Warrants and partly paid shares FDI - Key Concepts
Partly paid equity shares and warrants (for listed companies) permitted for companies in automatic sector 25% of consideration to be paid upfront, balance to be brought in 12 months (for partly paid equity shares) and 18 months (for warrants) Price/ conversion to be determined upfront Total price of equity shares and conversion price of warrants to comply with pricing mechanism Warrants and partly paid shares MEHTA CHOKSHI & SHAH

Instruments for receiving foreign investment in an Indian company
Equity Shares Fully and mandatorily convertible pref. shares/ Deb Partly paid equity shares and warrants “FDI compliant instruments” are subject to a minimum lock-in period of one year or as prescribed for the specific sector, whichever is higher, but without any option or right to exit at an assured price. MEHTA CHOKSHI & SHAH

FDI compliant instruments
Non / optionally / partially convertible preference shares issued as on and up to April 30, 2007 And Optionally / partially convertible debentures issued up to June 7, 2007 till their original maturity FDI compliant instruments Non/ optionally / partially convertible pref. shares issued after April 30, 2007 And Optionally / partially convertible debentures issued after June 7, 2007 Debt MEHTA CHOKSHI & SHAH

Regulatory framework for FDI
Government of India Ministry of Finance Department of Economic Affairs Relevant Ministry/Department to provide Approval* RBI Foreign Exchange Department Ministry of Commerce and Industry Department of Industrial Policy and Promotion Secretarial for Industrial Assistance MEHTA CHOKSHI & SHAH

Automatic Route in most Sector
FDI Approval Route Automatic Route in most Sector RBI No permission required, only to notify RBI within 30 days of issue of shares of foreign investor Government Route for few sector FIPB Approval is granted generally in 30 days MEHTA CHOKSHI & SHAH

Chapter has been replaced due to abolition of FIPB
Chapter has been replaced due to abolition of FIPB. Issue of SOP by DIPP for processing of FDI proposals Approval Process Application for approval to be placed before the relevant sectoral authority specified under the FDI Policy. In case of any doubt about the relevant authority, DIPP is empowered to determine the relevant authority. In case an approval is rejected or additional conditions are imposed by an authority, concurrence of DIPP is required. Proposals involving FDI of more than INR 5000 crore to be place before Cabinet Committee of Economic Affairs. Applications can be filed online. In case the application is not digitally signed, then a physical copy required to be sent. Comments to be uploaded by the authority within 4 weeks of receipt of application (except in some cases) failing which it is deemed that they have no comments. Certain sectors (such as broadcasting, telecom, defence, civil aviation, mining) also require comments from Ministry of Home Affairs Applications may be sent by the authority to DIPP for clarifications in relation to questions on FDI Policy. MEHTA CHOKSHI & SHAH

Modes Of Payment receiving FDI in an Indian company including start-ups.
M O P inward remittance through normal banking channels debit to NRE/ FCNR (B) account of a person concerned maintained with an AD Category I bank debit to non-interest bearing Escrow account in Indian Rupees in India which is opened with the approval from AD Category – I bank conversion of royalty/lumpsum/technical know-how fee due for payment or conversion of ECB conversion of pre-incorporation/ pre-operative expenses incurred by the a non-resident entity up to a limit of five percent of its capital or USD 500,000 whichever is less conversion of import payables/ pre incorporation expenses/ can be treated as consideration for issue of shares with the approval of FIPB against any other funds payable to a person resident outside India, the remittance of which does not require the prior approval of the Reserve Bank or the Government of India: and Swap of capital instruments, provided where the Indian investee company is engaged in a Government route sector, prior Government approval shall be required MEHTA CHOKSHI & SHAH

Reporting Requirements (Regulation 13 of FEMA)
Advance Remittance Form (ARF) – Form Foreign Currency-Gross Provisional Return (FC-GPR) – For FDI Annual Return on Foreign Liabilities and Assets (FLA) MEHTA CHOKSHI & SHAH

Form Foreign Currency – Transfer of Shares (FC-TRS) – Applicable to a transfer of capital instruments to a foreign resident Form Employees’ Stock Option – Applicable to an Indian Company issuing employees’ stock option to persons resident outside India who are its employees/directors Form Depository Receipt Return (DRR) - Domestic Custodian to report in Form DRR Form LLP (I) – LLP receiving amount of consideration for capital contribution and acquisition of profit shares shall submit Form LLP(I) MEHTA CHOKSHI & SHAH

Form LLP(II) – Disinvestment/transfer of capital contribution or profit share between a resident and a non-resident shall be reported in Form LLP (II) Form LEC (FII) – AD Banks shall report to the RBI in Form LEC (FII) the purchase/transfer of capital instruments by FPIs on the stock exchanges in India LEC (NRI) – Applicable to AD Banks for the purchase/transfer by NRI/OCI Form Convertible Note – Indian Startup Company to report to AD Bank MEHTA CHOKSHI & SHAH

FDI-Prohibited Sectors
Lottery Business including Government/private lottery, online lotteries, etc. Gambling and Betting including casinos etc. Chit funds Nidhi company Trading in Transferable Development Rights (TDRs) Real Estate Business or Construction of Farm Houses MEHTA CHOKSHI & SHAH

FDI-Prohibited Sectors
‘Real estate business’ shall not include development of townships, construction of residential /commercial premises, roads or bridges and Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) Regulations 2014. Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes Activities/sectors not open to private sector investment e.g.(I) Atomic Energy and (II) Railway operations (other than permitted activities mentioned in para 5.2). Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities. MEHTA CHOKSHI & SHAH

Sector specific conditions on FDI
Sr. No. Sector Provision 1. Manufacturing Most of the sectors permitted. 100% FDI under Government approval route is allowed for retail trading, including through e-commerce, in respect of food products manufactured and/or produced in India. 2. Cash & Carry Wholesale Trading/Wholesale Trading (including sourcing from MSEs) B to B permitted Sales made to Entities holding trade licences / statutory registrations, etc. allowed Sales of goods used for personal consumption prohibited 3. E-Commerce activities -100% FDI under automatic route is permitted in market place model of e-commerce - FDI is not permitted in inventory based model of e-commerce. MEHTA CHOKSHI & SHAH

Sr. No. Sector Provision 4. Single Band Product Retailing Automatic Route upto 100% Products to be sold should be of Single Brand only Should be of same brand internationally It should be branded during manufacturing 30% Indian Sourcing requirement if investment above 51% E-commerce permitted to only brick and mortar stores 5. Multi Brand Retail Trading Upto 51% under Government route Minimum about to be infused - $ 100 million 30% of value of procurement to be sourced from MSME 6. Pharma Greenfield 100% under Automatic Brownfield 100% permitted but automatic upto 74% However manufacturing of medical devices % FDI permitted MEHTA CHOKSHI & SHAH

Sr. No. Sector Provision 7. Construction Development: Townships, Housing, Built-up Infrastructure Conditions with regard to minimum no longer applicable Each phase of construction will be regarded as a separate project 3-year lock-in but for each tranche of FDI “Real Estate Business” - Dealing inland and immovable property prohibited and also farm house and TDRs Earning of rent/lease income will not be regarded as real estate business FDI permitted in completed projects for operation and management of townships, malls/shopping complexes and business centres – Subject to conditions MEHTA CHOKSHI & SHAH

Sectorial Caps- FDI in NBFC
Foreign Investment in NBFC is allowed under automatic route in only 18 activities which are as follows: Merchant Banking Under Writing Portfolio Management Investment Advisory Services Financial Consultancy Stock Broking Asset Management Venture Capital Custodian Services Factoring Credit Rating agencies Leasing & Finance Forex Broking Credit Card Business Housing Finance Money Changing Business Micro Credit Rural Credit MEHTA CHOKSHI & SHAH

Other Conditions Investment would be subject to following minimum capitalisation norms: US $ 0.5 million for foreign capital up to 51% to be brought upfront US $ 5million for foreign capital more than 51% and upto 75% to be brought upfront US $ 50 million for foreign capital more than 75% out of which US $ 7.5 million to be brought upfront and the balance in 24 months. NBFCs having foreign investment more than 75% and up to 100% and With a minimum capitalisation of US $ 50 million, can set up step down subsidiaries for specific NBFC activities, without any restriction on the number of operating subsidiaries and without bringing in additional capital, MEHTA CHOKSHI & SHAH

Who can invest in a Start-ups?
Non-Resident Person who is citizen/resident of Pakistan or Bangladesh Others Through CN Can invest for an amount of Rs. 25 lacs or more in a single tranche Cannot invest Subj to approval of Govt if applicable Amount should be recd through banking channels only MEHTA CHOKSHI & SHAH

What is a Convertible Note(CN)?
repayable at the option of the holder, or which is convertible into such number of equity shares of such startup company within a period not exceeding five years from the date of issue instrument issued by a start-up company evidencing receipt of money initially as debt MEHTA CHOKSHI & SHAH

Downstream Investment
Means indirect foreign investment by an eligible Indian entity, into another Indian Company/LLP. Indirect foreign investment means when downstream investment is received from: an entity which is not owned or controlled by an Indian citizen or is owned or controlled by a person resident outside India an investment vehicle whose sponsor or manager is not owned or controlled by an Indian citizen or is owned or controlled by a person resident outside India MEHTA CHOKSHI & SHAH

Ownership refers to holding more than 50% share instruments while control refers to the right to appoint majority of the directors or to control the management or policy decisions Such investment is subject to sectoral caps Downstream investment made in accordance with the guidelines in existence prior to February 13, 2009 would not require any modification to conform to these regulations. All other investments, after the said date, would come under the ambit of these regulations. Downstream investments made between February 13, 2009 and June 21, 2013 which is not in conformity with these regulations should have been intimated to the Reserve Bank by October 3, 2013 for treating such cases as compliant with these regulations. MEHTA CHOKSHI & SHAH

Indian Company (Owned and controlled by Non-residents) investing in non-FDI compliant instruments issued by another Indian Company will not be considered as indirect foreign investment for the investee company. MEHTA CHOKSHI & SHAH

Non-Resident acquiring shares on Stock Exchange
Mode of Payments - by way of normal banking channels, or - by way of debit to the NRE/ FCNR account; - by debit to non-interest bearing Escrow account (in Indian Rupees) maintained in India with the AD bank; - the consideration amount may also be paid out of the dividend payable by Indian investee company, in which the said non-resident holds control Foreigners FPIs and FIIs NRIs A non-resident, other than portfolio investor, is eligible to acquire shares on stock exchange through a registered broker subject to certain condition Others Not Allowed Allowed MEHTA CHOKSHI & SHAH

Regulation regarding portfolio investments by registered FPIs & NRIs
Foreign Portfolio Investments (Maximum Limit for Investment) FPI NRI Investment by individual FPIs - < 10% of the paid up capital of the Indian Company NRI can purchase shares upto 5% of the paid up capital of the Indian Company The aggregate investment by FPIs should not exceed 24% of the Paid up capital All NRIs taken together cannot purchase more than 10% of the paid up value of the Company. The aggregate limit of 24% can be increased by the Indian Company concerned upto the sectoral cap/ statutory ceiling as applicable The aggregate limit of 10% can be increased by the Indian Company concerned upto 24% MEHTA CHOKSHI & SHAH

Transfer of existing shares from NRs to residents or vise versa
Transfer by way of sale or gift between a person resident outside India (not being a NRI or an OCB) and any person resident outside India; Transfer of shares by way of sale or gift by a NRI to any NRI; Transfer by way of gift by a person resident outside India to a resident; Transfer by way of sale on a recognized stock exchange by a person resident outside India; Transfer by way of sale or gift by a resident to a person outside India subject to conditions prescribed in Regulation 10 of FEMA 20; Prior Government approval shall be obtained for any transfer in case the company is engaged in a sector which requires Government approval. MEHTA CHOKSHI & SHAH

Transfer of shares from Resident to NR does not fall under above category
The cases have to be approved by the Government of India or the Reserve Bank Transfer of shares by Resident which requires Govt Approval Transfer of shares of companies engaged in sector falling under the Govt Route Transfer of shares resulting in foreign investments in the Indian company, breaching the sectoral cap applicable Transfer of shares requiring prior permission of the Reserve Bank A person resident in India, who intends to transfer any security, by way of gift to a person resident outside India, has to obtain prior approval from Reserve Bank Any other case not covered by General Permission. MEHTA CHOKSHI & SHAH

FDI investment – Merger/Demerger/ Amalgamation
Acquisition of shares under Scheme of Merger/ Demerger/ Amalgamation As per Court approved process Transferee company or new company is allowed to issue shares to the shareholders of the transferor company resident outside India, subject to the conditions that: percentage of shareholding of PROI in transferee or new company does not exceed the sectoral cap, and transferor company or the transferee or the new company is not engaged in activities which are prohibited under the FDI policy Approval required if not under automatic route or exceeds sectoral cap MEHTA CHOKSHI & SHAH

Whether extension of CCPs or CCDs requires RBI approval?
Tenor of convertible instruments will be guided by the instructions framed under the Companies Act, 2013 and the rules framed thereunder. However, the investee company should ensure that the price/ conversion formula of convertible capital instruments is determined upfront at the time of issue of the instruments. The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the extant FEMA regulations MEHTA CHOKSHI & SHAH

Penalties – Contravention of FDI
1. 2. Violates/contravenes any FDI regulation by way of breach/non-adhereance, etc. Compounding Penalty upto thrice the sum involved where such amount is quantifiable or upto rupees two lakhs if not quantifiable Continuing breach – Rs. 5000/- per day after the first day during which the contravention continues Only for quantifiable contravention Three years of cooling period MEHTA CHOKSHI & SHAH

Recent Amendments in FDI policy
Sr. No. Sector Recent Provision 1. Single Brand Retail Trading (SBRT) Extant FDI policy on SBRT allows 49% FDI under automatic route, and FDI beyond 49% through Government approval route. “Now, it has been decided to permit 100% FDI under automatic route for SBRT” It has been decided to permit single brand retail trading entity to set off its incremental sourcing of goods (in terms of value of such global sourcing from India for that single brand in terms of INR in a particular FY over preceeding FY) from India for global operations during initial 5yrs, beginning 1st April of the year of the opening of first store against the mandatory sourcing requirement of 30% of purchases from India. After Completion of this 5yrs, the SBRT entity shall require to meet the 30% sourcing norms directly towards its India’s operation, on an annual basis. MEHTA CHOKSHI & SHAH

Sr. No. Sector Recent Provisions Single Brand Retail Trading (SBRT) A non-resident entity whether owner of the brand or otherwise, is permitted to undertake ‘single brand’ product retail trading in the country for the specific brand, either directly by the brand owner or through a legally tenable agreement executed between the Indian entity undertaking single brand retail trading and the brand owner. 2. Civil Aviation Till date there was restriction for investment in Air India. Now the restriction has been removed and foreigners are allowed upto 49% under approval route: Foreign investment(s) in Air India including that of Foreign Airlines(s) shall not exceed 49% either directly or indirectly Substantial ownership and effective control of Air India shall continue to be vested in Indian National. MEHTA CHOKSHI & SHAH

Sr. No. Sector Recent Provision 3. Construction Development Clarified that real-estate broking services does not amount to real estate business and is therefore, eligible for 100% FDI under automatic route. 4. Power Exchanges The investment to the extent of 49% under automatic route was restricted to secondary market only. Now, FIIs/FPIs are allowed to invest in Power Exchanges through primary market as well to the extent of 49% under automatic route. Other Liberalization 5. Approval requirements under FDI Policy Earlier issue of equity shares for non-cash considerations like pre-incorporation expenses, import of machinery etc was permitted under Government approval route. It has now been decided that issue of shares against non-cash considerations shall be permitted under automatic route in case of sectors under automatic route. MEHTA CHOKSHI & SHAH

Sr. No. Particulars Recent Provisions 6. Foreign Investment into an Indian Company investing in the Capital of other Company Foreign investment into an Indian company, engaged only in the activity of investing in the capital of other Indian company/ies/LLP and in the Core Investing Companies were allowed upto 100% with prior Government approval. If the above activities are regulated by any financial sector regulator than the foreign investment upto 100% can be done under automatic route, subject to conditions including minimum capitalization requirement, as may be decided by the government 7. Competent Authority Earlier, FDI applications involving investments from Countries of Concern, requiring security clearance as per the extant FEMA 20, FDI Policy and security guidelines, amended from time to time, are to be processed by the MHA for investment under automatic route while by the respective departments for cases under Govt approval route. MEHTA CHOKSHI & SHAH

Sr. No. Particulars Recent Provisions 7. Competent Authority (Contd) Now, for investments in automatic route sectors, require approval only the matter of investment being from country of concern, FDI applications would be processed by Dept of Industrial Policy & Promotion (DIPP) for Govt Approval. 8. Pharmaceuticals Decided to amend the definition of ‘medical devices’ as contained in the FDI policy. 9. Prohibition of restrictive conditions regarding audit firms It has been decided to provide in FDI policy that wherever the foreign investor wishes to specify a particular auditor/audit firm having international network for the Indian investee company, the audit of such investee companies should be carried out as joint audit wherein one of the auditors should not be party of the same network. MEHTA CHOKSHI & SHAH

Share Holders Agreement – Salient Features
Nomination of Directors etc: The agreement may allocate the rights to certain stakeholders to be a director on board as well as decide the composition of the Board. Roles and obligations of each shareholder. Financing requirements, quorum requirements and veto rights. Representation & Warranties from the Company. Restrictions on transfer of shares (right of first refusal, right of first offer). Forced transfer of shares (tag-along rights, drag-along rights) and curtailing of further issue of shares. Defining Shareholding Threshold: There can be a minimum shareholding a party must have to enjoy the rights as under the Shareholding Agreement. Determining and allocating special rights to certain shareholders: For instance if a venture capital or private equity invests in an enterprise, they would seek preferential treatment MEHTA CHOKSHI & SHAH

MEHTA CHOKSHI & SHAH

Rajkot Branch of WIRC of ICAI

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