FEMA regulations on Inward & Outward Investment - overview

Cross Border Investments

111110th June 2015 HDS & Co. Chartered Accountants

Inward Investment in India

Foreign Investments in India

Direct PortfolioVenture Capital

Non-Repatriable

Other instruments

Real Estate

Company

Automatic Route

Approval Route

LLPShares,

MFsPartnership / Proprietorship

By NRIs, PIOs

G-Secs, NCDs

Except trading


FDI – Prohibited sectors

� Chit fund or Nidhi company,

� Agricultural or plantation activities,

� Real estate business or Construction of farm houses,

� Trading in TDRs,

� Lottery including government / private / online lotteries,

� Gambling and betting,� Gambling and betting,

� Manufacturing of cigars, cigarettes, etc. of tobacco or tobacco substitutes,

� Activities not open to private sector investment

� Partnership firms /proprietorship concerns having foreign investments are not allowed

to engage in print media sector

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Real estate business means dealing in land and immovable property to earn profit or

income but excludes development of townships, construction of residential /

commercial premises, roads or bridges, etc.


FDI - Automatic vs. Approval Route

Automatic Route

Fully Automatic – 100% investment

without any conditions

Approval / Govt. Route

Prior Approval

Extension of Automatic – Investment Sectoral cap – Maximum limit of

foreign investment specified

Automatic provided certain conditions

are satisfied

Extension of Automatic – Investment

beyond sectoral caps or without

satisfying conditions

Fully Approval – Irrespective of % or

quantum of investment

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Any sector, which is not covered under the prohibited route and also not mentioned

in the sectoral policy, is under 100% automatic route, i.e., FDI is freely permissible


FDI – Sectoral Caps

No.No.No.No. SectorSectorSectorSector Cap (%)Cap (%)Cap (%)Cap (%) RouteRouteRouteRoute ConditionsConditionsConditionsConditions

1 Manufacturing of items

reserved for MSME sector

100% Govt. route above 24% Other conditions relating to

Industrial license prescribed.

2 Print media – news and

current affairs

26% Govt. route Guidelines issued by I&B

Ministry also to be followed

3 Print media – others 100% Govt. route

4 Construction Development 100% Automatic Several performance linked 4 Construction Development 100% Automatic Several performance linked

conditions prescribed

5 Telecom services & Telecom

infrastructure providers

100% Govt. route above 49% Subject to conditions notified

by DoT

6 Cash & carry wholesale

trading

100% Automatic Additional conditions

prescribed

7 E-commerce 100% Automatic Only B2B e-commerce

8 Single brand retail trading 100% Govt. route above 49% Additional conditions

prescribed9 Multi brand retail trading 51% Govt. route


FDI – Sectoral Caps

No.No.No.No. SectorSectorSectorSector Cap (%)Cap (%)Cap (%)Cap (%) RouteRouteRouteRoute ConditionsConditionsConditionsConditions

1 Asset Reconstruction

companies

100% Govt. route above 49% Other conditions prescribed

2 Banking – private sector 74% Govt. route above 49%

but upto 74%

Other conditions prescribed

3 Banking – public sector 20% Govt. route Subject to Banking Acquisition

& Transfer law& Transfer law

4 Insurance companies and

support services

49% Govt. route above 26%

but upto 49%

Other conditions prescribed

5 NBFCs (fund based and non-

fund based)

100% Automatic Other conditions prescribed

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Above list is only illustrative. For complete list and conditions, please refer to latest FDI policy on the

website of RBI or DIPP.


FDI in Company

Non-Resident

Equity Shares / CCPS /

CCDs / Warrants

Pricing GuidelinesAutomatic route

Instrument

Approval route

Fresh Shares –

• Inward remittance or

conversion of liabilities or ECB

•Reporting in Annex 6 within 30

days of receipt

•Allotment within 180 days of

Reporting

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Indian Company

SEBI guidelines, or

Valuation by Merchant Banker

or Chartered Accountant

Subscription shares at face

value

FIPB Approval

•Allotment within 180 days of

receipt (subject to Companies

Act 2013)

•Form FC-GPR within 30 days of

allotment or 7 days from end

of the month of conversion of

ECB into equity

Transfer from NR to R or vice

versa –

•Form FC-TRS within 60 days of

receipt of consideration

•Onus of filing on the resident


FDI in LLP

Non-Resident Cannot be FII, FVCI, QFI or RFPI

FIPB approval

Compliances

Fair price of capital contribution /

transfer of profit share as per

valuation by Chartered / Cost

Accountant / approved valuer

Indian Company

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Indian LLP

Only sectors where 100% FDI is

permitted under automatic

route without any performance

linked conditions

FIPB approval

Remittance through normal

banking channels or debit to NRE

/ FCNR(B) account only

•On fresh investment, Form FDI-

LLP(I) within 30 days of receipt of

consideration

•On transfer from NR to R or vice

versa, Form FDI-LLP(II) within 60

days of receipt of funds

Indian entity

Downstream investments into

any entity are not permissible


Portfolio Investment Scheme

One-time permission from AD to invest under PIS

Shares / Convertible

debentures / warrantsSEBI approved Exchange

Traded Derivatives

Non-Resident Indian Permissible Credits

• Inward remittance in foreign

exchange

•Transfer from other NRE /

FCNR(B) / NRO* accounts

•Net sale proceeds (after tax) of

PIS investments

•Dividend or income on PIS

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Repatriation basis Non-Repatriation basis

NRO AccountNRE Account

Special sub-accounts

opened for PIS scheme only

•Dividend or income on PIS

investments

•Sale proceeds of other

investments not to be credited

Permissible Debits

•Repatriation of dividend / income

•Purchase of PIS investments

through registered stock broker

•Charges on sale / purchase of

PIS investments


Portfolio Investment Scheme

� Investment not allowed in prohibited sectors

� Maximum investment of 5% of paid up capital / paid up value of each series of

convertible debentures of the company by each NRI and 10% by all NRIs together

� Ceiling can be increased to 24% by Company through Board resolution and special

resolution of shareholders , which needs to be submitted to RBI immediately

� Delivery based transactions only – short selling not permitted� Delivery based transactions only – short selling not permitted

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Sale /

Transfer

On RSE through reg. broker

Gift to Relative

Charitable Trust

Private Placement / Other Gifts

Without lock-in period

With prior approval of AD

Pledge against loan to third party

With prior approval of RBI


Other investments by NRI

Inward remittance / funds in

NRE / FCNR(B) / NRO acc.

Non-Resident Indian

On non-repatriation

basis, without any limit

Rupee Investment in NCDs of

Indian company -

•On repatriation / non-

repatriation basis

• Issue of NCDs should be by

public offer

•Rate of Interest ≤ SBI PLR + 3%

•Period of redemption ≥ 3 years

•Borrower should not carry on

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NRE / FCNR(B) / NRO acc.

Shares / Convertible

debentures / warrants of

Indian company

Dated G-Sec, T-Bills, Domestic MFs,

Money Market MFs

Small savings incl. PPF not allowed

Sale proceeds credited to NRO acc.

•Borrower should not carry on

activity in prohibited sector

• Investment through inward

remittance / NRE / FCNR(B) /

NRO* account

• If on repatriation basis, the FDI

ceiling shall also apply to each

series of NCDs

Non-convertible debentures /

preference shares can also be

acquired as bonus under Court

approved Scheme of Arrangement


Other investments by NRI

•Dated G-secs, T-bills (other

than bearer securities)

Non-Resident Indian

On repatriation basis

IDRs issued as per

FEMA regulations

Perpetual Debt

(Tier I) instruments

Debt Capital (Tier

II) instruments

12121212

than bearer securities)

•Units of domestic MF

•Bonds issued by PSU

•Shares of PSU disinvested

by Government

FEMA regulations (Tier I) instruments II) instruments

Without any limit

Maximum 5% of

each issue by each

NRI and 24% by all

NRIs aggregate

As per policy for

investment in other

debt instruments

Not redeemable

into equity shares

upto 1 year from

date of issue


FDI in Partnership / Proprietary Concern

� On Non-repatriable basis:

� NRIs / PIOs are allowed to invest under Automatic Route

� Cannot engage in agricultural / plantation / real estate business or print media

sector

� On Repatriable basis:

� NRI / PIO can invest under Approval Route

� Other Non-residents

� Non-residents other than NRI / PIO can apply for prior approval under Approval

Route

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All investments, which are not specifically on non-repatriable basis, are fully

repatriable along with profits thereon


Investment in Immovable Property

NRI / PIOPurchase / receive

as gift / inherit

Residential /

commercial property

Can be acquired

jointly with another

NRI / PIO / Resident

Agricultural property

can only be inherited

No limit on no. of

properties

No. of properties and

frequency of transactions

should be reasonable – not

amounting to business

Non-resident foreign

citizens of non-

Indian origin can

acquire property only

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Inward remittance /

NRE / FCNR / NRO

amounting to businessacquire property only

by inheritance

•Trading is not permitted

•Leasing is permitted but

should not amount to

business

Citizens of Pakistan,

Bangladesh, Sri

Lanka, Afghanistan,

China, Iran, Nepal

and Bhutan cannot

acquire property

without RBI approval


Sale of Immovable Property

Transfer of Property

Agricultural propertyOther than

Agricultural property

NRI NRIPIO PIO

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Sell / gift to any NRI

/ PIO / resident

NRI NRIPIO PIO

Sell only to resident

Gift to any NRI / PIO

/ resident

Sell / gift to any

resident

Sell / gift to a resident

who is a citizen of India

Only funds originally remitted from abroad / paid from NRE / FCNR account for

purchase of 2 residential properties can be remitted back, profits cannot be repatriated

USD 1 mn. scheme can be availed to remit profits


Overseas Direct Investment

Indian Party

(Company, Firm, LLP)

Investment in JV / WOS abroad

Total Financial Commitment = 400% of Net

General permission to residents for purchase /

acquisition of securities out of –

•Funds in RFC account, or

•As bonus shares on existing holding, or

•Out of foreign currency resources outside India

when not permanently resident in India

Mode of funding –

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Total Financial Commitment = 400% of Net

worth as per last audited B/s

Commitment > USD 1 Bn. in a financial year

requires prior approval of RBI

• Investment in real estate business or

trading in TDR not permitted

•Banking business not permitted

•Additional conditions for financial services

sector

Mode of funding –

•Drawal of forex from AD

•Capitalisation of exports – RBI approval for

overdue exports

•Swap of shares

•ECB / FCCB proceeds

• In exchange of ADR / GDR issued

•Balances in EEFC account

•Foreign currency proceeds raised through ADR /

GDR issue.

EEFC balances and ADR/GDR proceeds are not

considered for calculating limit of financial

commitment


Overseas Direct Investment

Financial Commitment

=

Equity

Shares

Preference

Shares+ Loan+ Guarantee+

Charge on assets of

Indian party+

Corporate Guarantee

Including by group

company, sister concern,

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Guarantee

Corporate Guarantee company, sister concern,

or associate in India

Personal GuaranteeBy resident individual

promoters of Indian party

Bank GuaranteeIf backed by Corporate

guarantee / collateral

Performance Guarantee50% included in

financial commitment

•No open-ended guarantee

•Guarantee for 1st gen.

step-down JV/WOS

permitted under automatic

route

•Guarantee for 2nd gen. /

subsequent level step-

down subsidiary permitted

under approval route,

subject to ≥ 51% stake in

that subsidiary.


Overseas Investment - Portfolio

Portfolio Investments

By SEBI registered

VCF / AIF

By listed Indian

companies

By SEBI reg. MFs By qualified MFs

In shares and bonds

•ADR / GDR

•Listed shares of foreign co.

IPO / FPO

In overseas Exchange

Traded Funds as

permitted by SEBIIn equity and equity

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In shares and bonds

/ fixed income

securities issued by

listed overseas

companies

Upto 50% of the

networth as per last

audited balance sheet

Listed shares of foreign co.

• IPO / FPO

•Short & long term debt sec.

•Money market instruments

•Repos, not involving

borrowing of funds

•G-Secs

•Exchange traded Derivatives

for hedging & balancing only

•Short term bank deposits

•Units of MFs / Unit Trusts

Overall cap of USD 7 bn

Traded Funds as

permitted by SEBI

Cumulative upto USD

1 bn

In equity and equity

linked instruments of

offshore VCUs, after

permission from SEBI

Overall limit of USD

500 mn

All investments / investees to have rating

not below investment grade by accredited

/ registered credit rating agencies


General permission for Investment

Permission to acquire foreign security

Resident Individual Any Resident

•As a gift from any non-resident

•Under cashless ESOP by a company

outside India

•As qualification shares for director of a

foreign company, to the extent prescribed

by the law of that country, subject to LRS

19191919

outside India

•As inheritance from a resident or

non-resident

•Equity shares offered as ESOP by a

foreign company to employee /

director of Indian branch / office /

subsidiary / JV, provided the offer is

given globally on a uniform basis

Can be sold anytime, provided sale

proceeds are repatriated in maximum

90 days

by the law of that country, subject to LRS

•As part/full fee for professional services

rendered or in lieu of director’s

remuneration , subject to LRS

•Right shares offered on the basis of

existing holding

•Purchase of shares of JV / WOS of Indian

software company by its employees,

subject to conditions

•Under ADR / GDR linked stock options by

resident employees of Indian company in

knowledge based sector


Overseas Investment by others

Proprietorship /

Unregistered Partnership

• Classified as ‘Status holder’

as per the prevailing Foreign

Trade Policy

• Track record of export

Registered Trust / Society

• Engaged in mfg /

educational / hospital sector

• Investment in same sector in

JV / WOS

• Registered under Indian

Approval Route

Others

• Financial commitment without

equity participation in JV / WOS

• Financial commitment

exceeding USD 1 Bn.

• Remitting funds in excess of

20202020

• Track record of export

outstanding ≤ 10% of avg.

export realisation of last 3

years and consistently high

export performance

• AD is satisfied that turnover

is as indicated

• Proposed investment ≤ 10%

of avg. of last 3 years’ export

realisation or 200% of net

owned funds, whichever is

lower

• Registered under Indian

Trust Act / Societies Reg. Act

• Overseas investment

permitted by trust deed /

memorandum and approved

by trustees / governing body

• In existence for ≥ 3 years

• Special license/ permission,

if any, is taken

• Remitting funds in excess of

400% of net worth against

performance guarantee invoked

• Investment in Pakistan

• Capitalisation of overdue export

receivables and software

exports to overseas software

start-up company

• Write-off of investment by

unlisted Indian companies

• Disinvestment other than that

permitted under automatic route


Overseas Investments – Compliances

Transactions

LRSInvestment –

automatic route

Investment – approval

route

Modification / Write-

off / Transfer

• Report investment in

Form ODI within 30

• Apply to RBI in Form

ODI – Part I

• Report to RBI within

30 days of event

• Report in Form ODI

within 30 days of

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Form ODI within 30

days of transaction

• Valuation in case of

acquisition of

existing foreign co.

• Valuation and FIPB

approval for inward

leg of share swap

• Valuation of shares

acquired against

ADR / GDR issue

ODI – Part I

• File Form ODI – Part

II upon remittance

after approval

30 days of event within 30 days of

investment / sale /

transfer / changes

• Valuation

• UIN allotted by RBI for each JV / WOS on submission of Form ODI

• Further investments can be made only after allotment of UIN

• Obtain share certificate / any other document as evidence of

investment and submit original to AD

• Submit APR (Form ODI – Part III) by 30th June every year

• Submit FLA Return by 15th July every year

• Report in Form ODI – Part IV on closure / disinvestment


Liberalised Remittance Scheme

Resident Individuals

Upto USD 2,50,000 per

financial year

•From Net worth, not borrowed

funds

• Includes remittances from EEFC

and RFC account

Without prior approval

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Open FC accounts with

banks outside India for

carrying out permitted

transactions

Acquire shares Debt instruments Any other assets

including property

outside IndiaOperating company only,

no step down subsidiary

•Prohibited sectors for ODI

•Remittance for margin or margin calls

•Secondary market purchase of FCCBs

•Trading in foreign exchange


THANK YOUTHANK YOUTHANK YOUTHANK YOU

CA Namrata CA Namrata CA Namrata CA Namrata DedhiaDedhiaDedhiaDedhiaCA Namrata CA Namrata CA Namrata CA Namrata DedhiaDedhiaDedhiaDedhia

HDS & Co. Chartered Accountants

[email protected]

+91 99871 23626

10th June 2015 HDS & Co. Chartered Accountants 23232323

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FEMA regulations on Inward & Outward Investment - overview