One day workshop on FEMA by CA. Sudha G. Bhushan

By CA. Sudha G. Bhushan

Workshop on FEMA
By: CA. Sudha G. Bhushan

Vccircle Training
18th Jan 2013 || 8th Feb 2013
Mumbai || Delhi


Content
 Foreign Direct Investment
 Foreign Institutional Investor
 Foreign Venture capital Investor /
SEBI(Alternate Investment Funds)
Regulations, 2012
 Qualified Foreign Investor
 General Anti Avoidance Rule
 Downstream Investment under FEMA
 Valuation
 Compounding

Section 6(3)(b) Foreign Exchange Press Notes

Department of Industrial
Foreign Exchange
Management Act,1999

Reserve Bank of India

policy and Promotion
Section 47 Management
(Transfer or issue
of security by a
Person resident
outside
India)Regulaitons,2
000
Master Circular

Ways

• Foreign Direct Investment
Schedule 1

• Foreign institutional investor under Portfolio
Schedule 2
investment Scheme

• Non resident Indian under Portfolio investment
Schedule 3
Scheme

Continued…

• NRI on non repatriation basis under the scheme
Schedule 4
other than through PIS

• NRI/FIIs can purchase securities other than the
Schedule 5
shares and debentures

• Foreign venture capital investor registered with
SEBI may make investment in a venture capital
Schedule 6 fund or an Indian Venture capital undertaking

Limits

•Approval route
Foreign Direct •Prohibited Sector
•Automatic Route [also those sectors not
investment specifically mentioned under approval route or not
specifically prohibited –Automatic Route]

Foreign Institutional
Investors under •FII- 24% of the paid up capital of the company.
portfolio investment
Scheme

Non resident Indian
under Portfolio •NRI- 10% of the paid up capital of the company
investment Scheme

NRI on non repatriation
basis under the scheme •No Limits
other than through PIS

NRI/FIIs can purchase
securities other than •Securities other than shares and debentures
the shares and
debentures

Foreign venture capital
•Investments to be in accordance with SEBI
investor registered with regulations dealing with VCF / FVCI
SEBI


Foreign SEBI
Direct registered
SEBI Qualified
Investments Foreign
registered Foreign
(FDI) into Institutional
FVCF/AIF Investor
Indian Investors
Company (FII)

Modes of Foreign
Investment


Suitable

FII
entry
mode for Suitable

FVCI /AIF Regulations
portfolio entry
mode for Individu

Investors
Qualified Foreign
/ capital
investm project al
ents and specific resident
seconda investm s of
ry ent in foreign
market unlisted National
operatio compani s
ns es / VCF


Category of Investors Typical Investment Option

Strategic Investment Foreign Direct Investment [FDI]

Private Equity FDI/ FVCI/FII

Financial Investment FII/FVCI

Institutional Investment FII

Person QFIs


FOREIGN INSTITUTION INVESTORS


Key legal / regulatory matrix for FII and FVCI

FII / FVCI

SEBI FEMA FDI Policy Income Tax
• SEBI Act, 1992 • FEMA (Transfer or • Consolidated FDI • The Income-tax
Issue of Security by a Policy (Issued half Act,1961
• FII - SEBI (FII) Person Resident yearly)
Regulations, 1995
Outside India) • Double Taxation
• Press Notes Avoidance
• SEBI (AIF) Regulation , Regulations, 2000
Agreements, as may
2012 (FEMA 20)
be applicable
• Master Circular on
• SEBI (issue of
Foreign Investments
capital and disclosure
in India
requirements)
Regulations, 2009 • Circulars/ press
releases issued from
time to time
• Securities Contracts
(Regulation) Act, 1956


FIIs - General framework

• FIIs

- An eligible institution set- up or entity incorporated outside India FII / Sub Account
which invests in Indian listed shares / securities post
registration with SEBI as per prescribed guidelines /
framework Overseas
India
• Approval

– SEBI (single window clearance) and concurrence of Reserve
Bank of India (RBI) in case the applicant is a Bank or its
subsidiary Local
Tax
Custodian/
Advisor
• FIIs registered with SEBI as: Banker

- Investor: For self investment in Indian shares / securities
Broker
- Manager: Investment is done on behalf of their eligible clients
( Clients registered as Sub-accounts of FIIs with SEBI)
Stock
• Bank Accounts permitted in India Exchange in
India
- Non-interest bearing foreign currency account; and / or

- Single non-interest bearing special non-resident rupee
account (SNRR)


FIIs - Consideration of Application by SEBI

• Track record, professional competence, financial soundness, experience, and general reputation of fairness
and integrity
• For Newly established funds - the track record of the investment manager (who are promoters) considered
• Details of Foreign Regulatory Authority governing the FII
• Fit and Proper criteria
Certified copy
• Interest of development of securities market Form A as
of
Memorandum
Audited
financial
Prescrined
prescribed in fess via
of Association, statement and
SEBI (FII) Demand draft
Article of annual report
Regulations, in favour of
Association or for the last one
1995 SEBI
Article of year
Incorporation.

In case of University fund, Endowment, Foundation, Charitable trusts or Charitable society;
- It exists at least for 5 years
- It is permitted to invest in securities outside the country of its incorporation or establishment
- It is registered with any statutory authority in the country of their incorporation or establishment
- Details of any legal proceeding initiated by any statutory authority against the Applicant
- Serving of Public Interest by the Applicant

Procedure of Registration of FII

Following entities / funds are eligible to get
registered as FII:

 Pension Funds
 Mutual Funds
 Insurance Companies
 Investment Trusts
 Banks
 University Funds
 Endowments
 Foundations
 Charitable Trusts / Charitable Societies

Further, following entities proposing to invest on
behalf of broad based funds, are also eligible to
be registered as FIIs:
 Asset Management Companies
 Institutional Portfolio Managers
 Trustees
 Power of Attorney Holders


• Investment ceiling for each FII / their each Sub-account (to be monitored by Custodian)
- Up to 10% of the total issued / paid-up capital (or each series of convertible debentures) of an Indian
company
- If sub-account registered under Foreign Corporate / Individuals category, then it can invest up to 5% of
the total paid-up capital (or each series of convertible debentures) of an Indian company

• Overall FII Investment Limits for all FIIs and their Sub-accounts (monitored by RBI)
- Up to 24% of the total paid-up capital (or each series of convertible debentures) of an Indian company
(20% in the case of public sector banks as per FDI policy)

The above ceiling can be raised by the Indian Investee Company up to the sectoral limit under FDI
guidelines if a resolution is passed by its Board of Directors followed by a special
resolution in its General Body Meeting

FIIs not allowed to invest in an Indian company engaged in Chit Fund / Nidhi Company / Agriculture and
Plantation Activity or Real Estate Business (except as defined - construction, housing, etc), Construction
of Farm Houses, Trading in TDRs and Asset Reconstruction Business (ARCs)
11


FIIs - Other points

Off-shore Derivative Instruments (ODIs) Other key benefits / features for FIIs

• FII can issue ODIs against underlying listed (or • FIIs are allowed to hedge foreign currency risks
proposed to be listed)Indian securities subject to prescribed terms and conditions

• ODIs can be issued only to persons regulated by • FIIs are permitted to cancel and rebook foreign
appropriate foreign regulatory authority after exchange forward contracts upto 10 percent of the
compliance with KYC norms such as market value of the portfolio as at the beginning of
the financial year
- person regulated/supervised and
licensed/registered by a foreign central bank • FIIs are allowed to hedge risk against default in
corporate bonds as per the Credit Default Swaps
- person registered and regulated by a (‘CDS’’) guidelines issued by RBI; FIIs can buy
securities or futures regulator in any foreign CDS contracts
country or state
• FIIs are required to file prescribed details with the
- broad-based fund or portfolio incorporated or
Competition Commission of India (‘CCI’) if their
established outside India or proprietary fund investments in an Indian Company are pursuant
of a registered FII/ university fund, to an investment agreement or loan agreement
endowment, foundation, charitable trust or
charitable society whose investments are
managed by eligible persons


Certificate from Company Secretary

RBI/2011-12/453 A.P. (DIR
Series) Circular No. 94 dated
19 March 2012
Certificate from the Company
Indian company raising the Secretary stating that all the
aggregate FII investment limit of relevant provisions of the
extant Foreign Exchange
24 per cent to the sectoral cap/ Management Act, 1999
statutory limit or the aggregate regulations and the Foreign
NRI investment limit of 10 per Direct Policy, as amended
cent to 24 per cent from time to time, have been
complied with


RBI/2011-12/423 A.P. (DIR Series) Circular No. 89

• SEBI registered FIIs/sub-accounts of FIIs are allowed invest in
primary issues of Non-Convertible Debentures (NCDs)/ bonds only if
listing of such bonds / NCDs is committed to be done within 15 days
of such investment. To be
listed debtNCDs/bonds issued to the SEBI registered FIIs / sub-
• In case the
securities
accounts of FIIs are not listed within 15 days of issuance to the SEBI
registered FIIs / sub-accounts of FIIs, for any reason, then the FII/sub-
account of FII shall immediately dispose of these bonds/NCDs either
by way of sale to a third party or to the issuer and the terms of offer to
FIIs / sub-accounts should contain a clause that the issuer of such
debt securities shall immediately redeem / buyback the said securities
from the FIIs/sub-accounts of FIIs in such an eventuality.


FOREIGN VENTURE CAPITAL INVESTORS


• A SEBI registered Foreign Venture Capital Investor (FVCI) with
specific approval from RBI under FEMA Regulations can invest in
Indian Venture Capital Undertaking (IVCU) or Indian Venture Capital
Fund (IVCF) or in a Scheme floated by such IVCFs subject to the
condition that the VCF should also be registered with SEBI.

IVCU VCF

• An Indian Venture capital undertaking [IVCU] is defined as a
company • incorporated in India • whose shares are not listed on a
recognized stock exchange in India • which is not engaged in an
activity under the negative list specified by SEBI.

• A Indian Venture capital Fund [VCF] is defined as a fund established
in the form of a trust, a company including a body corporate and
registered under the Securities and Exchange Board of India (Venture
Capital Fund) Regulations, 1996 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.


Typical FVCI Structure

• VCF Participants
- FVCI - an investor incorporated or
established outside India and registered
with SEBI (and RBI through SEBI) under
FVCI regulations for prescribed investments
in India

- DVCF - either a domestic trust or company
registered with SEBI

- VCU / Indian Unlisted Companies engaged
in specified / eligible business / sectors

- Offshore and / or Domestic Asset
Management Company (AMC)

- Offshore and / or Indian Advisory Company
(IAC)

• Domestic Venture Capital Investors generally
invest in VCUs through the DVCF


FVCI - Eligibility

Eligible entity as FVCI

• An investment company, investment trust, investment partnership, pension fund, mutual fund,
endowment fund, university fund, charitable institution or any other entity incorporated outside India.

• Asset management company, investment manager or investment management company or any other
investment vehicle incorporated outside India

Other conditions / eligibility

• Applicant’s track record, professional competence, Financial soundness, Experience, General reputation
of fairness and integrity

• Whether applicant is fit and proper [as per Schedule II of SEBI (Intermediaries) Regulations, 2008]

• Whether necessary approval are granted by RBI for making investments in India, if any

• Whether applicant authorized to invest in a Venture Capital Fund (VCF) or invest as an FVCI

• Whether applicant regulated in foreign home country/ income-tax payer (if not, can submit banker’s
certificate of self/ promoter)

• Applicant has not been rejected by SEBI in past


FVCI - Application Process

to be disclosed to SEBI
Investment strategy and duration of life cycle of the fund
• Application in Form A to be filed with SEBI along with applicable fees

• Key requirements to be furnished at the time of FVCI application to SEBI under Form A:
− Brief description of the group to which applicant belongs
− Brief description of the principal activities of the applicant
− Details of statute under which applicant incorporated
− Certificate of registration with home regulators
− Copy of income-tax return filed in home country
− Copy of banker’s certificate showing fair track record of the applicant
− Particulars of agreement entered into with domestic custodian
− Firm commitment letter from investor for Minimum contribution
− Furnishing copies of financial statements of the applicant and investors
− Manner in which applicant proposes to conduct investments in India
− Names of the client in whose behalf applicant proposes to invest in India
− Furnishing of name, address, contact, email address of all directors and investors


FVCI - Approval and General Obligations

• SEBI shall grant certificate of registration in Form B

• General obligations/ reporting

− Any change in the information submitted at the
time of filing of application, to be intimated to
SEBI in writing

− Maintenance of books of accounts, records,
documents for a period of 8 years

− FVCI to enter into an agreement with the
domestic custodian to act as a custodian of
securities for the FVCI

− Online quarterly reporting by FVCI within 7 days
from the end of each calendar quarter in the
given format disclosing the following:

• Sector in which the investments have been
made

• Amount of investments in each sector


FVCI - SEBI Investment Framework

• FVCI can invest its total funds committed in a single VCF

- VCF defined to mean a trust/ company registered under SEBI (VCF) regulations and which raises/
invests funds in accordance with the aforesaid regulations

• Shall make Investments as under:

- At least 66.67% of ‘investible funds’ in unlisted equity shares/ equity linked instruments of VCU

Investible funds = Committed funds for investment - Administration and fund management expenses

• VCU means an unlisted Indian company and engaged in the business of manufacturing/ providing
services and sectors except those in Negative list activities/ sectors (like NBFC, gold-financing )

- Not more than 33.33% of investible funds may be invested by way of:

• Subscription to Initial Public Offer of a VCU

• Debt or debt instrument of VCU in which the FVCI has made investments

• Preferential allotment of equity shares of listed company; subject to lock-in period of 1 year

• Special Purpose Vehicles created for facilitating/ promoting investments

• Equity shares / Equity linked instruments of a financially weak or sick listed company


FVCI - FEMA Investment Framework (FEMA 20 / Schedule 6)
• Registered FVCI to invest in VCU/ VCF or scheme floated Current FVCI registration permits
by SEBI Registered DVCF under Automatic Route investments as an FVCI in the below 9
sectors
- Sectoral caps as per FDI policy applicable
• Nanotechnology
- FEMA regulations silent on restrictions imposed on
investments by FVCI in certain sectors by RBI
• IT relating to hardware and software
development
- Restriction by way of letter while granting permission;
• Seed Research and Development
• FVCI can purchase / sale equity/ equity linked instruments/ • Bio-technology
debt/ debt instruments, debentures of a VCU/ VCF/
Schemes of VCF through IPO/ Private placement at • R&D of new chemical entities in the
mutually agreed prices pharmaceutical sector

• RBI may permit FVCIs with in principle registration from • Hotel-cum-convention centre with
SEBI to open non-interest bearing Foreign currency seating capacity > 3000
Account/ rupee account with designated branch of
• Production of bio-fuels
Authorized dealer (AD)
• Dairy and poultry industry
• AD Category I banks can offer forward cover to FVCIs to
the extent of inward remittance; original cost of liquidated • Infrastructure sector (As defined in
investments to be deducted from eligible cover ECB regulations)


FVCI - FDI related aspects

• As per the Consolidated FDI policy read with Schedule I of FEMA 20
• FVCIs to invest in VCU under FDI scheme as non-resident entities; subject to norms of the Consolidated
FDI policy and FEMA regulations
• FDI in VCF in form of company under automatic route and subject to minimum capitalization norms; in
form of Trust, permitted only with prior FIPB approval


• The funds registered as venture
capital fund under SEBI shall
continue to be regulated by the
said regulations till the existing
fund or scheme managed by the
funs is wound up and such funds
shall not launch any new scheme
after notification of these
regulations.

However, re registration under SEBI(AIF) Regulations possible.


SEBI (ALTERNATE INVESTMENT FUND)REGULATIONS,
2012


Regulation 2 (1) (b) Alternate Investment Fund means any
fund established or incorporated in India in the form of a
trust or a company or a limited liability partnership or a
body corporate which

 is a privately pooled investment vehicle which collects funds from
investors, whether Indian or foreign, for investing it in accordance
with a defined investment policy for the benefit of its investors; and
is not covered under the Securities and Exchange Board of India
(Mutual Funds) Regulations, 1996, Securities and Exchange Board
of India (Collective Investment Schemes) Regulations, 1999 or any
other regulations of the Board to regulate fund management
activities”


Out of the purview of AIF

• Family trusts set up for the benefit of ‘relatives’ as defined under
Companies Act, 1956;
• ESOP Trusts;
• Employee welfare trusts or gratuity trusts;
• “Holding Companies” within the meaning of Section 4 of the
Companies Act, 1956;
• Other special purpose vehicles not established by fund
managers, including securitization trusts, regulated under a
specific regulatory framework;
• Funds managed by securitisation company or reconstruction
company which is registered with the Reserve Bank of India; and
• Any such pool of funds which is directly regulated by any other
regulator in India.


Categories
• Category I AIF which may be further sub-categorized as-
Socially or
• economically
• AIF – Venture Capital Fund (which may invest funds in start-up or early
ventures) desirable and
• AIF – Social Venture Funds (which may invest funds for promoting social positive spill
welfare) over effect on
• AIF – SME Funds (which may invest in SME sector) the economy
• AIF – Infrastructure Funds (which may invest in Infrastructure sector)
• AIF – Others (other sector or area, which the government or regulators
consider as socially or economically desirable)

• Category II AIF other than AIF-I or AIF-III which does not undertake
leverage or borrowing other than to meet day-to-day operational
requirements. An AIF such as private equity or debt fund for which no
specific incentive is given by the government/Regulator will be included
in this category.
•
• Category III AIF Hedge funds and other funds which employ diverse or
complex trading strategies and may employ leverage through
investment in listed or unlisted derivatives and for which no specific
incentive is given by the government/Regulator.
•


Other salient features
The AIF shall not accept from an investor an investment of value less than rupees one crore. Further, the AIF shall have a
minimum corpus of Rs. 20 crore.

The fund or any scheme of the fund shall not have more than 1000 investors.

The manager or sponsor for a Category I and II AIF shall have a continuing interest in the AIF of not less than 2.5% of the
initial corpus or Rs.5 crore whichever is lower and such interest shall not be through the waiver of management fees.

For Category III AIF, the continuing interest shall be not less that 5% of the corpus or rupees ten crore, whichever is lower.

Category I and II AIFs shall be close-ended and shall have a minimum tenure of 3 years. However, Category III AIF may
either be close-ended or open-ended.

Schemes may be launched under an AIF subject to filing of information memorandum with the Board along with applicable
fees.

Units of AIF may be listed on stock exchange subject to a minimum tradable lot of rupees one crore. However, AIF shall not
raise funds through Stock Exchange mechanism.

Category I and II AIFs shall not be permitted to invest more than 25% of the investible funds in one Investee Company.
Category III AIFs shall invest not more than 10% of the corpus in one Investee Company.

AIF shall not invest in associates except with the approval of 75% of investors by value of their investment in the AIF.


QUALIFIED FOREIGN INVESTORS


• Definition
• Difference between FIIs and QFIs
• Eligible Transactions by QFIs
• QDPs


Definition
QFI shall mean a person who fulfills the following criteria:
• Resident in a country that is a member of Financial Action Task Force (FATF) or a
member of a group which is a member of FATF; and
• Resident in a country that is a signatory to IOSCO's MMOU (Appendix A Signatories)
or a signatory of a bilateral MOU with SEBI

• Provided that the person is not resident in a country listed in the public statements issued by
FATF from time to time on:
• Provided that such person is not resident in India,
• And provided further that such person is not registered with SEBI as Foreign Institutional
Investor or Sub-account.


Comparison of FII and QFI Investment Routes
QFI
Particulars FIIs Mutual Fund regulations Equity Shares

Only QFIs from Only QFIs from
jurisdictions which are jurisdictions which are
Institutional Investors viz asset FATF compliant and with FATF compliant and with
management company, investment which SEBI has signed which SEBI has signed
manager, mutual fund, Pension MOUs under the IOSCO MOUs under the IOSCO
Eligible investors fund etc. framework framework
SEBI registration Required Not required Not required

Securities in primary and
secondary markets including Equity shares listed on the
shares, debentures and warrants. recognised stock
Units of domestic mutual funds exchanges and Equity
Type of securities schemes derivative traded on Equity and debt schemes shares offered to public in
/Investment recognised stock exchnage etc of mutual funds India

Issue of offshore
derivative instruments Permitted not permitted Not permitted

Applicable tax to be
No deduction of tax at source from deducted at source by
dividend and capital gain on Mutual funds out of Applicable tax to be
Income Tax transfer of securties redemption proceeds deducted at source by DP


Investment Limits
Instrument Limit Investor Conditions Remarks

Government securities USD 10 FIIs No conditions -
billion

Government dated USD 15 FIIs and SWF, Investments in short No residual
securities billion Multilateral Agencies, term paper like maturity
Pension/ Insurance/ Treasury Bills not requirement
Endowment Funds, permitted
Foreign Central Banks


Instrument Limit Investor Conditions Remarks
(A) Non-Infrastructure Sector
(i) Listed NCDs/ bonds, USD 20 billion FII s Investment in CDsNo lock-in period
CPs not permitted. requirement;
No residual maturity
restriction;
No original maturity
restriction.
(ii) Listed NCDs/ bonds USD 5 billion FIIs, SWFs, Investments in CPs No lock-in period
Multilateral Agencies, and CDs not requirement; No
Pension/ Insurance/ permitted residual maturity
Endowment Funds, restriction;
Foreign Central No original maturity
Banks restriction.

(iii) Security Receipts, Within the total FIIs - No Lock-in period,
Perpetual debt limit of USD 25 No residual maturity
instruments, units of billion for non- requirements;
domestic mutual funds; “to infrastrcuture No original maturity
be listed corporate bonds” sector restriction.

(B) Non-Infrastructure limit for Qualified Foreign Investors (QFIs)
Listed NCDs, listed bonds, USD 1 billion QFIs - No lock-in period and
listed units of mutual funds no residual maturity
debt schemes, “to be listed requirements;
corporate bonds” No original maturity
restriction.


C) Infrastructure Sector
Listed NCDs/ bonds, NCDs/ USD12 FIIs Indian companies in No lock-in period
bonds of NBFC-IFC and billion infrastructure sector – requirement;
unlisted NCDs/ bond in (within the total limit infrastructure as defined Residual maturity at the
infrastructure sector of USD 25 billion) in the ECB guidelines time of first purchase
and fifteen months;
Non Banking Financial No original maturity
Companies (NBFCs) restriction.
defined as IFCs

Corporate debt – non- USD 3 billion QFIs NBFCs defined as IFCs - No lock in period
convertible debentures/ bonds, (within the total limit MF schemes that hold at requirement.
non- convertible debentures/ of USD 25 billion) least 25% of debt or Original maturity of 3
bonds of NBFCs-IFC, Units of equity or both in mutual years;
Domestic Mutual fund Debt funds in infra
schemes

IDF – Rupee bonds/units USD 10 billion FIIs, NRIs, SWFs, Infrastructure as defined No lock-in period
registered as NBFC or Mutual (within the total limit Multilateral Agencies, in the ECB guidelines requirement ;
Funds of USD 25 billion) Pension/ Insurance/ IDFs set up as NBFCs Residual maturity at the
[investment by NRI Endowment Funds, HNIs may invest in debt time of first purchase
not subject to this registered with SEBI, securities of PPP infra fifteen months;
limit] sub-account of FII or IDF projects and should have No original maturity
completed one year of restriction.
commercial operations;
IDFs set up as Mutual
Funds would invest 90%
in debt securities of infra
companies/ SPV

1 billion = 100 crore


General Anti Avoidance Rules
• (i) An arrangement whose main purpose or one of the “impermissible avoidance
main purposes is to obtain a tax benefit and which arrangements”
also satisfies at least one of the four tests, can be
declared as an “impermissible avoidance
arrangements”. An arrangement will be deemed to lack
commercial substance if –
• (ii) The four tests referred to in (i) are– (a) the substance or effect of the arrangement
 The arrangement creates rights and obligations, as a whole, is inconsistent with, or differs
which are not normally created between parties significantly from, the form of its individual
dealing at arm’s length. steps or a part; or
 It results in misuse or abuse of provisions of tax
(b) it involves or includes -
laws.
round trip financing;
 It lacks commercial substance or is deemed to
an accommodating party ;
lack commercial substance.
elements that have effect of offsetting or
 Is carried out in a manner, which is normally not
employed for bonafide purpose. cancelling each other; or
a transaction which is conducted through one
• iii) It shall be presumed that obtaining of tax benefit is
or more persons and disguises the value,
the main purpose of an arrangement unless otherwise location, source, ownership or control of fund
proved by the taxpayer. which is subject matter of such transaction; or
(c) it involves the location of an asset or of a
transaction or of the place of residence of any
party which would not have been so located for
any substantial commercial purpose other than
obtaining tax benefit for a party.

Limited Liability Partnerships (LLPs)

 FDI in LLPs:
 Prior approval from FIPB
 Sectors/activities where 100% FDI allowed
 No FDI-linked performance related conditions (such as ‘Non Banking Finance Companies’ or ‘Development of
Townships, Housing, Built-up infrastructure and Construction-development projects’ etc.)
 Only by way of cash consideration
 Indian company having FDI, permitted to make downstream investment in LLP only if both the company as well
as the LLP is operating in sectors where 100% FDI allowed, through automatic route.

 Restrictions to LLPs with FDI:
 Not in agricultural/plantation activity, print media or real estate business
 Not eligible to make any downstream investment
 Not permitted to avail ECBs
 FIIs and FVCIs not permitted to invest in LLPs

 Conversion of a company with FDI, into an LLP, allowed only if above stipulations are met and with the prior approval
of FIPB


DOWNSTREAM INVESTMENT

Direct Foreign Investment

Non resident entity
Outside India

In India
Indian Company

Indirect Foreign Investment

Non Resident Entity
Outside India Direct Foreign Investment

In India Indian Company

Indian Company

• Foreign Investment in Indian company shall include all types of foreign
investments i.e. FDI, investment by FIIs(holding as on March 31), NRIs, ADRs,
GDRs, Foreign Currency Convertible Bonds (FCCB) and convertible preference
shares, convertible Currency Debentures regardless of whether the said
investments have been made under Schedule 1, 2, 3 and 6 of FEMA (Transfer or
Issue of Security by Persons Resident Outside India) Regulations[For the purpose
of computation of indirect Foreign investment].

 ‘Resident Indian Citizen’ (RICs) shall be interpreted in line with the definition of
‘person resident in India’ as per FEMA, 1999, read in conjunction with the Indian
Citizenship Act.

 “Non resident entity” (NREs) means a ‘person resident outside India’ as defined
under FEMA 1999.

 ‘Indian Company’ means a company registered or incorporated in India as per
the Indian Companies Act, 1956.

 “Investing Company” means an Indian Company making
equity/preference/CCD investment into another Indian Company.

 “Holding Company” would have the same meaning as defined in Indian
Companies Act 1956.

By RICs and Indian companies, which are
owned and controlled by RICs

owned Controlled
• More than 50% of the • The RICs and Indian
equity interest in it is companies, which are
beneficially owned by owned and controlled by
RICs and Indian RICs, have the power to
companies, which are appoint a majority of its
owned and controlled directors
ultimately by RICs

By Non Resident Entities

owned Controlled
• More than 50% of the Non-residents have the
equity interest in it is power to appoint a
beneficially owned by non- majority of its directors
residents

COUNTING OF FOREIGN INVESTMENT

Counting the Direct Foreign Investment

• All investment directly by a non resident entity into the
Indian company would be counted towards foreign
investment

Counting the Direct Foreign Investment

Non resident entity
Outside India Foreign Investment

In India
Indian Company

Counting of Indirect Foreign Investment

Not counted as Indirect Foreign Investment

Counted as Indirect Foreign Investment

Not counted

Investing Indian Company

Indian Company

if the investing Indian company is “owned and
controlled” by RICs and/or by Indian companies
which are owned and controlled by RICs

Counted


Indian Company

if the above conditions are not satisfied or if the
investing Company is owned or controlled by
NREs

NREs

74%
Investing Indian
Company 30%

51%

Indian Company

Total Foreign Investment in subject Indian Company
Direct (51%) + Indirect (30%)=81%

1. Ownership and control with Indian entity
Non resident entity
Outside India Foreign Investment 49%

In India



Indian Company

2. Ownership with Non resident entity
Non resident entity

In India



Indian Company

3. Control with Non resident entity
Non resident entity

In India



Indian Company

4.
Non resident entity

In India

26%
26%

Indian Company

Exception

Non resident entity

In India

Operating Cum Investing/Investing Indian
Company
100%
75%

Indian Company (100% subsidiary)

Policy

Non resident entity
Relevant sectoral conditions w.r.t.
the sector in which the company is
operating

Operating cum Investing Indian Company

Relevant sectoral conditions w.r.t. the
sector in which subject company is
Indian Company operating

Investing companies

• Foreign Investment in Investing Companies - prior
Government/FIPB approval, regardless of the amount or
extent of foreign investment
• The Indian companies into which downstream investments
are made by such investing companies would have to
comply with the relevant sectoral conditions on entry route,
conditions and caps in regard of the sector in which the
subject Indian companies are operating

Policy

Non resident entity
Prior Government/FIPB Approval


Relevant sectoral conditions w.r.t. the
sector in which subject company is
Indian Company operating

issue/transfer/pricing/valuation
SIA, DIPP and FIPB to be
of shares shall be in
notified within 30 days of Resolution of Board of Directors
accordance with applicable
investment
SEBI/RBI guidelines;

The balance equity in case
of sectoral caps would
Operating companies can take
Investing companies to bring in specifically be beneficially
the debt from the domestic
requisite funds from abroad
market as well owned by RICs and Indian
companies, owned and
controlled by RICs


VALUATION


Resident to Non resident Non resident to Resident

• DCF valuation • DCF valuation
• DCF valuation to be • DCF valuation to be
minimum maximum

FREE CASH FLOWS – A FEW POINTERS
Pointers

Projections primarily belong to the Management, should be corroborated with
past data / industry data / research reports.

Exclusion of non recurring items of income and expenditure relevant from a
Terminal Value Calculation.

Interest / investment income on surplus funds should be excluded from the profits to
be considered for cash flows as the investments will generally be separately
considered in the valuation.

Nominal / real (nominal – Inflation)

Accounting IFRS consistency – past and projected

CA. Sudha G. Bhushan 77

Whether the assumptions consider realistic
Whether the company intends to venture into
growth of the industry and the company’s
new lines of businesses?
market share?

Forecasting Free
Whether growth in different
Cash Flows – heads of expenses is
Whether the company The Valuers reasonable and correlated
intends to venture into new
Questions to the growth in revenues /
lines of businesses?
operations where
applicable?

Are the assumptions sketched:
Reasonable?
Comparable in relation with the past trend of
the company / industry / peer group?

THE VALUER’S COUNTER
• Discuss issues to make necessary adjustments in order to make projections more reasonable.
• Different scenarios are built up to study the sensitivity and changes in income & expense &
profitability.

DCF 78

Discrete Period – a few pointers
Pointers

Discrete Period – usually several years since the
Valuation Date

Length of discrete period – determining factors
• Steady state performance
• Generally covers a business cycle of 3 to 5 years
• Project businesses / agreement based business - the entire
period of the life of the project / agreement.
• Depleting resources (Mines) – the entire period of the life of the
resources available for extraction.
• Commodity cycle – 5 to 7 years – discreet period should cover
the entire average length of the commodity cycle.

Presentation by CA. Sudha G. Bhushan 79

Terminal Period
• Businesses potentially have an infinite life. The value of a Business is the present
value of cash flows forever

• Since we cannot estimate cash flows forever, we estimate cash flows for the
discrete period and then estimate a terminal value, to capture the value at the end
of the discrete period

• The period beginning at the end of the discrete period and continuing to infinity is
the terminal period

• Once the business reaches a steady state – determines the beginning of the
terminal period

 Business / Company grows at a constant rate
 Reinvests a constant proportion of its operating
profits into business
 Earns a constant return on it base level of
invested capital

Presentation by CA. Sudha G. Bhushan 80

Conclusions
DCF - Disadvantages
• Projections – biased
perception (Subjectivity)
DCF - Advantages
• Achievability of projections
• Considers Cashflow
• Discount rate
• Considers Present value
• Terminal Value
• Considers additional capex,
working capital

• Permits sensitivity /
scenarios

Final recommendation – common sense & reasonableness


COMPOUNDING


• As per Section 13 – “If any person contravenes any provision of this Act, or
contravenes any rule, regulation, notification, direction or order issued in
exercise of the powers under this Act, or contravenes any condition subject to
which an authorization s issued by the Reserve Bank, he shall, upon
adjudication, be liable to a penalty”.

Amount of
• Thrice the sum involved in such
contravention is contravention
Quantifiable

Amount is not • Two Lakh Rupees
quantifiable

• Rs. 5000 per day for every day
Continuing during which the default continues


• Contravention is a breach of the provisions of the Foreign
Exchange Management Act (FEMA), 1999 and rules/
regulations/ notification/ orders/ directions/ circulars
issued there under. Compounding refers to the process of
voluntarily admitting the contravention, pleading guilty and
seeking redressal.


• As per Master circular dated 01 July 2012 - Willful, malafid
Compounding of contraventions under FEMA is a e and
fraudulent
voluntary process by which an applicant can seek transactions
compounding of an admitted contravention of any are, however,
provision of FEMA under Section 13(1) of the FEMA, viewed
1999. seriously,
which will not
• It is a voluntary process in which an individual or a be
corporate seeks compounding of an admitted compounded
contravention. It provides comfort to any person who
contravenes any provisions of FEMA, 1999 [except
section 3(a) of the Act] by minimizing transaction costs.


Compounding Powers
• Reserve Bank of India – All the Sections of FEMA except
Section 3(a) of the Act
• Directorate of Enforcement – Section 3(a) of the Act
(essentially dealing with Hawala Transactions)


Enforcement under FEMA
 Section 36
 Section 37

 Officers of Enforcement

 Directors of enforcement
 Special Directorate of Enforcement
 Additional Director of Enforcement
 Deputy Directors of Enforcement
 Deputy Legal Adviser
 Assistant Director of Enforcement
 Assistant Legal Adviser


Adjudicating authority
• Following has been appointed as the Adjudicating
Authority under FEMA [under section 16 of the Act vide
S.O 535(E), dated 1-6-2000 to hold an enquiry under
Section 13 of the Act]
• Directors of Enforcement
• Special Directorate of Enforcement
• Additional Director of Enforcement
• Deputy Directors of Enforcement


Special Director
(Appeals)
Appeal against
Order passed by
Adjudicating
Authority
Appellate
Tribunal


Appellate
Tribunal
• Adjudicating authority
Special Director not being Assistant
(Appeals) Director /Deputy
• Adjudicating authority Director of
being Assistant enforcement
Director of
Enforcement or a
Deputy Director of
enforcement


Special Director (Appeals)

Appellate Tribunal

High Court


Compounding authority

Persons authorized by the Central
Government under sub-section (1)
of section 15 of the Act

An officer of the
Enforcement An officer of the Reserve
Directorate not below Bank of India not below
the rank of Deputy the rank of the Assistant
Director or Deputy General Manager
Legal Adviser (DLA)


Process of compounding
• A duly completed application (in duplicate) for compounding of a contravention under
FEMA, 1999 may be submitted to the Compounding Authority (CA) on being advised of
a contravention under FEMA, 1999, either through a memorandum or suo moto on
being made or on becoming aware of the contravention. The format “Form” of the
application is appended to the Foreign Exchange (Compounding Proceedings) Rules,
2000.

• The application for compounding has to be submitted together with relevant facts and
supporting documents and a copy of the memorandum, wherever applicable.

• Prescribed fee of Rs.5000/- is payable by way of a demand draft drawn in favour of
“Reserve Bank of India” and payable at the centre where the application shall be
processed/was processed and the compounding order was issued.

• The application may be submitted with to:
• The Compounding Authority, [Cell for Effective implementation of FEMA (CEFA)], Foreign Exchange
Department,
• 3rd floor, Amar Building, Sir P.M. Road,
• Fort, Mumbai- 400001
• or as advised in the memorandum issued by the office of the Reserve Bank.


• Following information about the authorized person of the entity who
would be handling the complete process of the compounding to be
mentioned :
• Name and Designation of the authorized person for the contravener
• Telephone/Fax/Email of the authorized person.
• Details of the contravener e.g. date of incorporation, ownership pattern, activity,
transaction etc. may be provided.( In column-6 of the Form (Brief facts of the case).


• The contravener/applicant shall specify the details of the contraventions sought to be compounded
[according to sub-section (1) of Section 13] explicitly and expressly i.e. the provision of the FEMA,
or Rule, Regulation, Direction or order issued in exercise of the powers under the FEMA, or
condition subject to which an authorization was issued by the Reserve Bank.

• The contravener/applicant shall also specify / describe in the application the details/facts (e.g. date,
amount (in Indian Rupees), parties involved etc.) of the transaction for which the contravention has
occurred.

• Incomplete applications shall be liable to rejection by the Reserve Bank and appropriate
action for the contravention of the FEMA shall be taken accordingly.

• The gravity and nature of the contravention would be assessed by the compounding authority on the
basis of information/document submitted together with the application.

• Non-submission of relevant information/document during the processing of the compounding
application would be considered as willful and intentional suppression of the material fact and the
compounding application would be liable for rejection and appropriate action for contravention under
the FEMA.


• Communications and orders issued under the compounding process shall be served on the
authorised person in any of the following manners, which are to say by fax/Courier/Registered Post
by sending it to the address/information given in the compounding application.

• The sum for which the contravention is compounded as specified in the order of compounding is
payable by way of a demand draft in favour of the “Reserve Bank of India” within fifteen days from
the date of the order of compounding of such contravention. The demand draft has to be deposited
in the manner as directed in the compounding order.

• On realization of the sum for which contravention is compounded a certificate is issued by the
Reserve Bank subject to the specified conditions, if any, in the order.

• Contraventions relating to any transaction where proper approvals or permission from the
Government or statutory authority concerned, as the case may be, have not been obtained, such
contraventions would not be compounded unless the required approvals are obtained from the
authorities concerned.

• On receipt of the application for compounding, the proceedings would be concluded and order
issued by the CA within 180 days from the date of the receipt of the application. The order of CA has
to be speaking order and an opportunity of being heard is required to be given to the applicant. The
application once made cannot be withdrawn.


• Case studies on compounding


Specific details as per regulations in the following cases

Non Compliance in Foreign Direct Investment in India

Non Compliance in Overseas Investment

Non Compliance in External Commercial Borrowings

Non compliance in Export /import obligations


THANKS..
Taxpert Professionals Private Limited
sudha@taxpertpro.com
www.taxpertpro.com
09769134554 || 07738892291

One day workshop on FEMA by CA. Sudha G. Bhushan

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