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  • A discussion on Inbound structuring

    Taxation, Foreign Direct Investments and

    Exchange Control Regulations

    24 January 2010

    CA Rachana Kapadia

    CA Janhavi Sharma

  • 2

    Why Inbound Investments?

    Advantages of low cost & skilled labour

    Utilising the funds raised for growth

    Investing in Indian economy due to liberalisation of

    Foreign Direct Investment Policy

    Greater transparency & clarity in capital market


    Repatriation / Exit Strategies

    Implications on various capital structures

    Implications on acquisition of shares /

    Investment Strategy

    Tax attribute planning

    Key elements

    Business strategy

  • Caltex Gas India

    acquired by SHV Group


    minority holding to

    PE investor TA


    Coffee Day is final

    phase of talks with Temasek,

    KKR, Standard Chartered

    One Access acquires BA


    Destination India This January

  • Contents


    FEMA and exchange control


    Recent cases

  • Key Considerations



  • Decision Points.


    Jurisdiction planning

    Domestic tax


    Choice of an

    appropriate structure


  • Entry vehicles


    Liaison Office

    Can only undertake liaising / representing / promoting / communicating


    Not allowed to have any income

    Local expenses have to be met through inward remittances

    Branch Office

    Can undertake activities export / import of goods, professional / consultancy

    services, research work, technical / financial collaborations, buying / selling agent,

    IT services / development of software, technical support, foreign airline & shipping


    Cannot undertake retail trading activities, manufacturing / processing activities.

    Can acquire property but not for leasing / renting

    Project Office

    Cleared by an appropriate authority

    Company or entity in India awarding the contract has been granted Term Loan

    by a Public Financial Institution or a bank in India for the project.

    Funded directly by inward remittance / bilateral or multilateral International

    Financing Agency



    Can carry out any activity specified in the memorandum of articles (subject to

    FDI guidelines)

    Funding may be through equity, other forms of permitted capital infusion or

    internal accruals

  • Foreign Direct Investments

  • 9

    Foreign investment

    into India

    Foreign Direct

    Investment (FDI)

    Foreign Venture

    Capital Investor




    Investor (FII)

    Automatic route Approval route

    Key exchange control regulations


    Investment Scheme

  • 10

    Foreign Direct Investment

    Foreign Direct Investment

    No prior permission


    The only requirement is to

    inform the RBI within 30

    days of inflow/ issue of


    This route covers

    - Investment within sectoral

    caps listed in the FDI policy

    - Sectors that are not

    prohibited and for which

    sectoral caps are not


    Automatic Route

    Prior government approval

    is needed (from FIPB)

    The approval required for FDI

    in the following cases:

    Where the foreign investor

    has an existing joint venture

    or technology transfer/

    trademark agreement in the

    same field

    Proposals for foreign equity

    beyond 24% in the small

    scale industry reserved


    Proposals outside sectoral


    Approval Route

    Foreign investment is not

    permitted in companies

    engaged in sectors such as

    Retail trading (except

    single branded retail)

    Agriculture (permitted

    with exception)

    Lottery business

    Atomic Energy.

    Prohibited Sectors

  • Portfolio Investment Scheme

    FIIs registered with SEBI eligible to purchase shares & convertible debentures


    Investment in an Indian Company not exceed 10% of the total paid up capital or

    10% of the paid up value of the each series CCDs issued

    Total holding of FIIs not exceed 24% of the paid up capital / paid up value of each

    series of debentures

    NRIs can purchase upto 5% of the paid up capital of the ICo. Shares

    Total investment of all NRIs in a ICo. to not exceed 10% / 24% of paid up capital

    Prohibition on investments in shares of:

    Asset Reconstruction company

    Nidhi company / Chit Fund company

    Agricultural / plantation activities

    Real estate business* / construction of farm houses

    Trading in Transferable Development Rights*Real estate to exclude construction of housing / commercial premises, educational institutions, recreational facilities, city

    and regional level infrastructure, townships.

    Caution List 2% below the sectoral cap; Ban List reaches the sectoral cap

  • Foreign Venture Capital Investor

    IVCU an unlisted company incorporated in India which is not engaged in an activity under the negative list specified by SEBI

    VCF - a fund established in the form of a trust, a company including a body corporate and registered with SEBI which has a

    dedicated pool of capital raised in a manner specified under the said Regulations and which invests in Venture Capital

    Undertakings in accordance with the said Regulations.





    Investments in :

    Equity / Equity

    Linked instruments

    Debt / debt



    Price to be mutually

    acceptable by the

    buyer & seller

    Investment can be made with specific approval from RBI

    By way of

    Initial Public Offer


    Private placement

    in units of schemes

    / funds set up by a


  • 13

    Fema and Exchange Control Regulations

  • Funding for the investment


    Equity Shares / Preference shares / CCDs

    Investments can be made upto FDI limit prescribed

    - Government approval in case of investment

    exceeding sectoral cap or conversion of ECB /

    royalty / lump sum fee into shares

    Rate of dividend for preference shares not

    exceed 300 basis points over PLR of SBI as on

    board meeting date

    Shares / CCDs to be issued within 180 days from

    the receipt of inward remittance

    Pricing guidelines applicable

    - Listed company shares As per SEBI guidelines

    - Unlisted company shares At fair value as per

    CCI guidelines

    - Conversion of royalty / lump sum fee / ECB

    amount due for payment

    External commercial Borrowing (ECB)

    Eligible lenders International banks , Foreign

    equity holder

    Maximum amount USD 500 mn per company per


    Minimum maturity period 3 to 5 years with all-in-

    cost ceiling of 300 basis points (6 months over


    End-use restrictions exist for foreign currency


    - Working capital

    - General corporate purposes

    - Repayment of existing rupee loans

    - On-lending to another entity

    - Investment in capital market

    - Acquiring a company in India

    Issuance of guarantee, etc. relating to ECB by

    banks, financial institutions and NBFC not


    Prepayment up to USD 200 Mio permitted, subject

    to certain conditions being satisfied

  • Acquisition of shares

    Acquisition of

    Right shares

    The overall issue of shares to the non residents does not exceed the sectoral


    Offer price of the right shares to the non residents is not lower than the offer

    price made to resident shareholders

    Merger /

    Demerger /


    Shares are acquired pursuant to a Court approved scheme of merger / demerger

    Overall percentage of shares held by the non residents does not exceed the

    sectoral caps

    Transferor / Transferee / New Co does not engage in agriculture, plantation, real

    estate business or trading in TDRs

    ADR / GDR

    I Co. can issue rupee denominated shares to the depository for issuing ADR /


    I Co. is eligible to issue ADR / GDR or has obtained approval from MoF

    I Co. is not otherwise ineligible to issue shares to persons resident outside India

    ADR / GDR to be issued at a decided price in consultation with Lead Manager /

    as per Pricing Guidelines

  • Transfer of Shares

    Transfer by way of gift requires prior RBI


    Transfer by way of sale of shares does not

    require prior Government / RBI approval,

    subject to:

    I Co. whose shares are transferred is not

    engaged in rendering financial services;

    Transfer does not fall within the purview

    of SEBI (Substantial Acquisition of

    Shares and Takeovers) Regulation, 1997;


    Pricing guidelines, documentation and

    reporting requirements are adhered to


    No prior permission of RBI required

    Pricing guidelines, documentation and

    reporting requirements are adhered to

    Resident to Non - resident PROI to PRI

  • 17

    Press Notes 2, 3 & 4 (2009 series)

  • Press Note No 2 Guidelines for calculating total foreign