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FEMA – ODI, LRS, FC A/CS

S. SathiyanarayananPartner

ICAI – Beyond the boundary23 DEC 2014

Scheme of Presentation

� Current Vs. Capital Acct Transactions

� ODI

� Statutory Basis

� ODI by Company, Firms, LLPs & Residents

� With issues

� ODI when Restructuring, Merger happens

� LRS

� FC Deposit Regulations

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Current and Capital Account Transaction

� Capital Account transaction means a transaction which alters assets orliabilities including contingent liabilities outside India of personresident in India and vice-versa. It’s an economic definition rather thanan accounting or legal definition.

� Current Account transaction is transaction other than a capital accounttransaction.

Current Account transactions are freely permitted unless prohibited -

they are regulated by Central Government.

Capital Account transactions are prohibited unless generally

permitted - they are regulated by RBI.

OVERSEAS DIRECT

INVESTMENTS (ODI)

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Significance of ODI

� Promoting global business by Indian entrepreneurs.

� Promote economic and business co-operation betweenIndia and other countries.

� Transfer of technology and skill, share R & D.

� Access to global market and promote brand image.

� Increase in exports of Plant & Machinery and goods andservices

� Source of Foreign Exchange Earnings – dividend, royalty,technical know-how and other entitlements.

ODI Statistics

6

Source: www.rbi.org.in

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Statutory Basis

� Section 6(3)(a) of FEMA, 1999 read with FEM(Permissible Capital Account Transactions), Regulations,2000.

� FEMA 120

� Master Circular

� AP (DIR Series) Circulars issued by RBI from time to time

� FAQs on ODI released by RBI (as updated from time totime)

� FAQs on Liberalised Remittance Scheme – applicable forresident individuals.

Meaning of ODI

� Investment by an Indian party, either under Automatic orApproval route, by way of contribution to capital orsubscription to the MOA of foreign entity or by way ofpurchase of existing shares of foreign entity either by

� Investment through stock exchange; or

� Private placement; or

� Market purchase; or

� Investment in a Joint Venture or Wholly OwnedSubsidiary abroad.

� But does not include Portfolio Investment.

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Eligible Investor

� An Indian Party who is

� A company incorporated in India; or

� A body created under act of Parliament: or

� A partnership firm registered under the IndianPartnership Act, 1932

� Limited Liability Partnership incorporated under LLPAct, 2008 (permitted vide Circular No. 131 dated19.05.2014/FEMA 299 dated 24.03.2014)

Eligible Investor (Contd…)

� Special Cases (primarily under approval route)

� Proprietary Firm

� Trust / Society

� Un-incorporated Entities

Issue: Resident Individual is also permitted to invest incompanies abroad under ODI scheme. But the definitionabove does not include resident individual as Indian Party.

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Financial Commitment

� Financial Commitment means the amount of directinvestments outside India by an Indian party -

� By way of contribution to equity shares or CCPS ofthe JV/WOS abroad

� Contribution to the JV/WOS as preference shares(for reporting to be treated as loan)

� As loan to its JV/WOS abroad

� 100% of the amount of corporate guarantee issuedon behalf of its overseas JV/WOS and

� 50% of the amount of performance guarantee issuedon behalf of its overseas JV/WOS

Financial Commitment (Contd…)

� Bank guarantee/standby letter of credit issued by aresident bank on behalf of an overseas JV/WOS ofthe Indian party, which is backed by counterguarantee / collateral by the Indian party

� Creation of charge (pledge/ mortgage/hypothecation) on the movable / immovable propertyor other financial assets Indian party / its groupconcern

(Note: the amount and period of guarantee should bespecified upfront).

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Routes

Automatic Route

� No prior RBI approval required for making directinvestment in JV/WOS abroad.

� Overseas JV/WOS to be engaged in bonafidebusiness.

� Investment in Financial sector should complyadditional conditions

� Indian party not on RBIs Exporters Caution list/list ofdefaulters/under investigation by an Authority suchas ED, SEBI etc.

� Submission of Form Annual Performance Report inrespect of all overseas investments.

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Automatic Route (contd…)

� 3 June ’14 onwards(Circular No. 138 of 2013)

� LRS limit enhanced to USD 1,25,000.

� 3 July ‘14 onwards (Circular No. 1 of 2014)

� Financial Commitment limit restored to 400% NetWorth of Indian Party – subject to USD 1 billionper FY.

Approval Route

� Cases Not covered under Automatic route.

� Specific application to RBI with necessary documentsin Form ODI through AD Bank.

� RBI would consider following factors:

� Prima facie viability of JV/WOS outside India

� Contribution to external trade and other benefitswhich will accrue through such investment.

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Approval Route

� Financial position and business track record ofIndian Party and foreign Entity, and

� Expertise and experience of the Indian party inthe same and related line of activity of theJV/WOS outside India.

Overseas Investment – Resident Individuals

� ODI route introduced by FEMA 263 dated05.08.2013 for resident individuals

� JV/WOS to be engaged in bonafide businessactivities except real estate / banking / financialservices

� ODI in “non-co-operative countries andterritories” as per FATF not permitted.

� Resident individual not to be on RBI cautionslist/defaulters list

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Overseas Investment – Resident Individuals

� Limit of investment in JV/WOS as per LRS limit(currently USD 1,25,000 per annum).

� Investment made by EEFC/RFC account alsoincluded in prescribed LRS limit

� JV/WOS to be operating company – No stepdown subsidiary to be acquired or set up byJV/WOS

� Valuation as applicable to ODI by companies.

Overseas Investment – Resident Individuals

� Reporting and Post investment conditions – writeoff not permitted in cases of disinvestments.

� Issue – When ODI? When LRS?

� LRS for portfolio investments – listed as well asunlisted shares /Cir No. 32 dated 04.09.2013

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Overseas Investment by LLPs

� Select Issues

� Net Worth

� Whether both current and capital account ofpartners to be considered for calculating NetWorth?

� How to apply concept of Free Reserves?

� Whether benefit of Net Worth aholding/subsidiary company available?

� RBI FAQ Qn. No. 27 – this benefit notavailable to partnership firms

Overseas Investment by LLPs

� Reasons for this exclusion? Whether alsofor LLP?

� Indian party definition includespartnership firm / LLP

� Conversion of Indian investing Company into LLP

� Implications of conversion after 7 May 2014 –ODI compliant with regulations

� Implications on conversion before 7 May 2014– ODI non compliant regulations?

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ODI in Financial Services Sector

� Indian company in Financial Service Sectors canmake investment in JV/WOS abroad in the financialservices sector only if:

� It has earned net profit during three preceding financialyears from financial services sector

� It is registered with appropriate regulatory authority inIndia

� It has obtained approval for undertaking such activities

� Has fulfilled the prudential norms relating to capitaladequacy

ODI - Core Investment Companies

� RBI DNBS Notification No. DNBS (PD) CC. No.311/03.10.001/2012-13 dated 6th December 2012

� CICs desirous of making investment in Financial Service Sector(FS) are required to obtain and hold Certificate of Registrationand comply with CIC framework for prior RBI approval (applieseven to exempted CICs)

� Exempted CICs making overseas investment in non FS sector donot require registration or prior DNBS approval. Only reportingwithin 30 days to be done.

� Whether exempted CICs are regulated FS sector or UnregulatedFS sector especially when they are investing in non FS sector –whether RBI DNBS approval required or RBI ODI approvalrequired ?

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Modes of Funding - ODI

Funding Modes

Drawal of foreign

exchange from AD

bank

Swap of shares

Capitalization of export

dues

Proceeds of ECB/FCCB

In exchange of ADR /

GDR

Balance in EEFC

account

Proceeds raised

through ADR/GDR

Compliances

• Board Resolution for Investment in overseas entityStep 1

• Valuation of shares only if it is acquisition of existingcompanyStep 2

• Reporting in Form ODI within 30 days from the remittanceStep 3

• RBI will allot UIN for investment in entity. Second remittanceto the JV/WOS cannot be made unless UIN for the firstremittance is received.

Step 4

• Filing of share certificate with AD bank within 6 monthsStep 5

• Post investment changes need to be reported within 30 daysStep 6

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Transfer of shares of JV/WOS - No Write Off

An Indian Party may transfer by way of sale to anotherIndian Party who complies with the provision of Regulation 6,or to a person resident outside India without prior RBIapproval if:

� Sale does not result in write off of investment

� Sale is through stock exchange

� In case of non listed entity, transfer is not happening at price less thandetermined by CPA/CA

� No outstanding dues from overseas entity

� Overseas entity is in operation for a period of more than one year andhas filed APR

� Indian party is not under investigation by CBI/ED/SEBI/ERDA or anyother regulatory authority.

Transfer of shares of JV/WOS - Write Off

An Indian Party may transfer by way of sale to anotherIndian Party where disinvestment is less than theinvestment amount and:

� where the JV/WOS is listed overseas

� where Indian party is listed on stock exchange in India andhas net worth less than INR 100 crore

� where Indian party is not listed and investment is less thanUSD 10 million

� where Indian party is listed with net worth less than INR100 crore but investment does not exceed USD 10 million.

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Restructuring of Balance sheet of JV/WOS

� Write off of capital (equity/preference shares) and otherreceivables such as loans, royalty, technical fee etc. upto 25% ofequity investment in JV/WOS is allowed under Automatic routeprovided:

� Indian party is listed and has set up WOS or holds 51%shares in JV

� Copy of Balance sheet showing loss in overseas JV/WOSand projections for next five years indicating benefitsaccruing to Indian party is submitted to AD.

� This needs to be reported within 30 days to RBI

� In case of unlisted Indian party holding more than 51% shares,write off to the extent of 25% of equity investment is allowedunder Approval route.

Case Study

Indian Company

merges with another

Indian company:� I Co 1. has existinginvestment in F Co.

� I Co 1. got merged withother Indian company I Co.2

� Existing investmentpercentage of new networth of merged I Co. ismore than 100%

I Co. 1

F Co.

I Co. 2Gets merged

into

Hold

s

investm

ent

in

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Case Study

Issue:I Co. 1 has validly carried on ODI process and has beenallotted UIN by the RBI. If I Co. 1 gets merged intoanother Indian company I Co. 2, do we just have tointimate RBI about the merger or a new UIN would beallotted in this case?Also, whether this intimation is to be routed throughAuthorized Dealer or we could directly submit it to theregional office?

Case Study

Procedure:I Co. 1 has to report the disinvestment (from the WOS byway of merger) in Form ODI Part IV.

I Co. 2 has to report the investment (in the WOS by wayof merger) in Form ODI Part I & II.

All the reporting to be done to RBI through thedesignated AD bank.

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Liberalized Remittance Scheme (LRS)

LRS for Resident Individuals

� A resident individual (including minors) is allowed to remit up to USD1,25,000 (w.e.f June 3, 2014) per financial year (April-March) for anypermitted current or capital account transactions or a combination ofboth.

� With effect from July 7, 2013, the scheme is available for remittancesfor acquisition of immovable property directly or indirectly outside India

� The permissible transactions under this scheme include acquisition ofshares- both listed and unlisted of an overseas company/ debtinstrument/ mutual funds/ any other asset outside India, etc.

� For undertaking transactions under this Scheme, resident individuals mayuse the prescribed application-cum-declaration form. PAN number ismandatory to make remittances under the Scheme.

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� The limit of USD 1,25,000 under the Scheme also includes remittancestowards gift and donation by a resident individual.

� A resident individual is permitted to gift in rupee to his NRI/PIO close

relative under the LRS and credit the same to his NRO A/c. [A.P.(DIR Series)Circular No.17 dated September 16, 2011]

� A.P. (DIR Series) Circular No. 90 dated March 06, 2012:

� Remittances under the facility can be consolidated in respect of family memberssubject to individual family members complying with the terms and conditions ofthe scheme;

� Remittances under the scheme can be used for purchasing objects of art subjectto the provisions of other applicable laws such as the extant Foreign Trade Policyof the Government of India.

LRS for Resident Individuals

Deposit Regulations

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What is the framework under FEMA?

• Regulations – FEMA 5/2000-RB on Foreign Exchange Management

(Deposit) regulations, 2000 amended from time to time

• Other Notifications

• Circulars issued by RBI from time to time.

What are the types of deposits accepted by AD Banks?

• Non-resident (External) Account Scheme (‘NRE account’) from a non-

resident Indian

• Foreign Currency (Non-Resident) Account Banks Scheme (‘FCNR – B

account’) from a non-resident Indian

• Non-Resident (Ordinary) Account Scheme (‘NRO account’) from any person

resident outside India

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What are the key Features of various deposit schemes

Particulars FCNR (B) Account NRE Account NRO Account

Type of

Account

Term Deposit only Savings, Current, Recurring,

Fixed Deposit

Savings, Current, Recurring, Fixed

Deposit

Who canopen?

NRIs - individuals/ entities

of Bangladesh/ Pakistan

nationality / ownership

require prior approval of

RBI

NRIs - individuals/ entities of

Bangladesh/Pakistan

nationality / ownership

require prior approval of RBI

• Any person resident outside

India (other than a person

resident in Nepal and Bhutan).

• Individuals / entities of Pakistan

nationality / ownership, entities

of Bangladesh ownership and

erstwhile Overseas Corporate

Bodies require prior approval of

the RBI.

Joint

Account?

Two or more non-resident

individuals - provided all

are persons of Indian

nationality or origin;

Two or more non-resident

individuals - provided all are

persons of Indian nationality

or origin;

May be held jointly with residents

Currency? Any freely convertible

currency

Indian Rupees Indian Rupees

Queries ?

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