NIRC - ICAI PRESENTATION ON FEMA BY CA.

NIRC - ICAI PRESENTATION ON FEMA BY CA.

NIRC - ICAI PRESENTATION ON FEMA BY CA. SUNIL JAIN FCA DISA [email protected] [email protected] www.kcaconsultancy.com 1 FEMA: TOPICS OVERVIEW Liberalized remittance Scheme (LRS) for Residents Immovable property outside India by

Residents Immovable property by Non-Residents in India Overseas Direct Investment 2 FOREIGN EXCHANGE MANAGEMENT ACT 1999 FEMA Introduction and Basic Structure The Act The regulation/ The rules

Master Circulars Master Directions AP DIR Circulars Notifications Press notes Respective ministry Guidelines 3

FOREIGN EXCHANGE MANAGEMENT ACT 1999 Case study: 1. Under LRS Acquisition/incorp. of a company having immovable let out property and mortgage loan which is served from rental income. 2. Gift of foreign equity acquired as NRI by resident individual to another resident individual. 3. Sale of property by NRI and remittance

of sale proceeds- 4 Remittances facilities for ResidentsThe statute: Section 4: Save as otherwise provided in this Act, no person resident in India shall acquire, hold, own, posses, or transfer any Foreign exchange, Foreign Security, or any Immovable property outside India

5 FEMA Remittances facilities for Residents-The statute: Section 6 RBI in consultation with Central Govt to make regulations for capital account transactions 6 FEMA Remittances facilities for ResidentsThe statute: Section 8 Save as otherwise provided in this Act where any amount of foreign exchange is due or

has accrued to any person resident in India such person shall take all reasonable steps to realize and repatriate to India such Foreign Exchange within such period and in such manner as may be specified by RBI 7 Liberalized Remittance Scheme(LRS)

Liberalised scheme of remittance up to 2.5 Lac USD per FY by individuals (only) including minors( PAN Mandatory ) Eligible for current account/capital account transactions Immovable property, shares, donations, gifts and other permissible transactions Opening of bank account outside India To Pak, Bhutan, Nepal not permitted 8

Liberalized Remittance Scheme(LRS) The limit is subsumed with other permitted current account transactions listed in schedule III of rules Transactions otherwise prohibited under FEMA not available under the scheme. Banks not to extend credit facility for remittance under this scheme.

9 Liberalized Remittance Scheme Permitted capital account transactions: -Bank A/c -Purchase of property

-Investment in listed/unlisted shares -Debt Instruments, MF etc -WOS/JV -Loan to NRI relatives 10 Liberalized Remittance Scheme *Remittance can be consolidated among family members for all current account transactions

*Consolidation for capital account transaction possible only if asset acquired in joint name. 11 Liberalized Remittance Scheme

Remittance procedure: > Identify designated AD > Application cum Declaration in prescribed format cum Form A2 > PAN Card for remittance >25000 USD > KYC norms to be complied > AD to ensure compliance 12 Liberalized Remittances Scheme

Income and sale proceeds of assets held abroad through remittances under the scheme need not be repatriated except in case of ODI Rent, dividend, interest, capital gain, Exception to the general rule that all funds be Repatriated 13 Liberalized Remittances Scheme Loan to NRI relative

Interest free with minimum maturity of 1 year Within the overall limit under LRS Borrowers personal / business requirements in India Not to be utilized for prohibited purposes Loan to be credited to NRO account Cannot be remitted outside India Repayment out of NRO / NRE / FCNR 14 ODI UNDER LRS BY INDIVIDUALS

Individuals can avail LRS to make capital account transaction in the shape of overseas investment JV/WOS should be engaged in bona-fide business activity Real estate, banking and Financial services business are prohibited. 15 ODI UNDER LRS BY INDIVIDUALS

"Real estate business" means buying and selling of real estate or trading in Transferable Development Rights (TDRs) but does not include development of townships, construction of residential/commercial premises, roads or bridges; 16 ODI UNDER LRS BY INDIVIDUALS As

per master circ. FDI It is clarified that FDI is not permitted in an entity which is engaged or proposes to engage in real estate business, construction of farm houses and trading in transferable development rights (TDRs) "Real estate business dealing in land and immovable property with a view to earning profit or earning income there from and does not include 17 ODI UNDER LRS BY

INDIVIDUALS Individuals can avail LRS to make capital account transaction only up to limit available under LRS thus net of other capital/current account transactions It should be an operating entity only and cannot have any step down subsidiary In form of equity or compulsory convertible preference shares 18 ODI UNDER LRS BY

INDIVIDUALS ODI needs to be submitted for such investment Any change in the shareholding pattern should be intimated within 30 days. APR is required to be filed Disinvestment to be reported within 30 days 19 IMMOVABLE PROP. ABROAD BY RES.

Section 6(4): A person resident in India may hold, own, transfer or invest in foreign currency, foreign security, or any immovable property situated outside India if such asset was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India 20 IMMOVABLE PROP. ABROAD BY RES. FEM( Acquisition and Transfer of Imm. Prop.

outside India) regulation 2000 Residents can hold property acquired as non-resident Can acquire property out of RFC account Out of liberalized 2.5 Lac USD scheme Can inherit/receive as gift Can resident borrow outside? 21 IMMOVABLE PROP. Cont.. Such property can be transferred by way of gift to relative resident.

Resident but national of a foreign state permitted to acquire/hold/transfer Corporate having branches can acquire within the monetary limits set for branch expenses Other acquisitions by RBI approval 22 IMMOVABLE PROP. Cont.. Case Study: Resident individual acquiring shares under LRS of a foreign company having immovable property which is let out and earning rental income

The property is under mortgage and loan is served out of rental income. 23 Foreign Investment in India in Immovable Property Section 6(5) A person resident outside India may hold, own, transfer or invest in Indian currency, security, or any immovable property situated in India if such asset was acquired, held or owned by such person when he was resident in India or inherited from a person

who was resident in India 24 Foreign Investment in India in Immovable Property a. b. c. d. Investment by NRI:

General Permission to acquire Agriculture land/plantation/farm house not permitted Payment through inward remittance/ NRE/NRO Traveler's Cheque /Foreign Currency not permitted as mode of payment 25 Foreign Investment in India in Immovable Property a. b.

c. Transfer by NRI: Allowed to another NRI or to a resident Transfer not allowed to other non-residents Transfer includes sale, purchase, mortgage, exchange, pledge, gift, loan or any other form of transfer of right, title, possession or lien. 26 Foreign Investment in India in Immovable Property

a. b. c. d. Repatriation of sale proceeds: Repatriation for non residential properties freely allowed Repatriation for residential properties restricted to two properties Repatriation restricted to original investment

Balance can be repatriated under nonresidents remittance scheme of 1 million USD per year 27 Foreign Investment in India in Immovable Property Repatriation of sale proceeds: Practical difficulties Form 15 CB / Form 15 CA NRO to NRE transfer Withholding Tax by purchaser u/s 195 28

Section 195 Instruction no. 2/2014 dt. 26/02/2014. CBDT advises the field officers to ascertain and determine only the appropriate portion of the sum chargeable to tax u/s 195. 29 Foreign Investment in India in Immovable Property

a. b. c. d. Acquisition by a branch office or other place of business of a foreign company: General permission if acquisition incidental to carrying on main business activity Declaration in Form-IPI to be filed with RBI within 90 days of acquisition Liaison office not entitled to acquire property

Foreign embassies, consulates to take prior permission of MEA 30 Foreign Investment in India in Immovable Property Acquisition by a branch office or other place of business of a foreign company:

Entities of Pakistan or Bangladesh or Sri Lanka or Afghanistan or China or Iran or Hong Kong or Macau or Nepal or Bhutan origin/ nationality/ ownership requires the prior approval of the Reserve Bank. Acquisition by foreign nationals of non-Indian origin not permitted. Lease exceeding 5 years is also prohibited 31 Foreign Investment in India in Immovable Property a.

Construction & Development by NRs -FDI: Development of service plots, construction of residential premises, business centre, offices, townships, roads, bridges, allowed through FDI up to 100% under automatic route. 32 Foreign Investment in India in Immovable Property a. b.

c. Investment by Non-Residents in Real Estate: Minimum areas specified Minimum investments specified Adherence to time schedule 33 DIRECT INVESTMENTS IN JV/WOS ABROAD Foreign Exchange Management (Transfer or issue of any foreign security) Regulations 2004

Read together with Master Circular Master directions FAQs of RBI 34 DIRECT INVESTMENTS IN JV/WOS ABROAD "Direct investment outside India" means investment by way of contribution to the capital or subscription to the Memorandum of Association of a foreign entity or by way of purchase of existing shares of a foreign entity

either by market purchase or private placement or through stock exchange, but does not include portfolio investment; 35 DIRECT INVESTMENTS IN JV/WOS ABROAD "Financial Commitment" means the amount of direct investment by way of contribution to equity, loan and 100 per cent of the amount of guarantees and 50 per cent of the performance guarantees issued by an Indian Party to or on behalf of its overseas Joint Venture Company or Wholly Owned

Subsidiary; 36 DIRECT INVESTMENTS IN JV/WOS ABROAD AUTOMATIC ROUTE Eligible Investor: Companies Partnerships registered under Indian Partnership Act 1932 Limited Liability Partnership Body created under act of parliament 37

DIRECT INVESTMENTS IN JV/WOS ABROAD "Joint Venture (JV)/WOS" means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country in which the Indian Party makes a direct investment; "Net Worth" means paid up capital and free reserves; 38 DIRECT INVESTMENTS IN JV/WOS ABROAD AUTOMATIC ROUTE

Financial commitment Limit: Up to 400% of the net worth as on the date of the last audited balance sheet. Investment to be in the shape of capital, loan &/or guarantees issued to or on behalf of JV/ WOS 39 DIRECT INVESTMENTS IN JV/WOS ABROAD AUTOMATIC ROUTE Form ODA to be submitted to designated

branch of authorised dealer For all transactions one branch of authorised dealer to be designated Indian Investor should not be on RBIs caution list or defaulters list Auto route not available for Pakistan 40 DIRECT INVESTMENTS IN JV/WOS ABROAD AUTOMATIC ROUTE Partial/Full acquisition of an existing foreign

company permissible Valuation of shares in such cases upto investment of USD 5m to be certified by CA/ CPA Otherwise by category I merchant banker 41 DIRECT INVESTMENTS IN JV/WOS ABROAD AUTOMATIC ROUTE Method of Funding: EEFC account

Drawl of Forex from authorised dealers ADR/GDR Proceeds of ECB Capitalization of exports Swap of shares 42 DIRECT INVESTMENTS IN JV/WOS ABROAD AUTOMATIC ROUTE Procedure: Selection of AD I bank ODI form CA Certificate in prescribed format

Certificate of Incorporation and MA/AA of foreign entity Bank particulars of Foreign entity. 43 DIRECT INVESTMENTS IN JV/WOS ABROAD AUTOMATIC ROUTE General Permission for Resident Individuals: As gift from any person resident outside India Cashless employees stock option scheme By inheritance from resident or NR ESOP offered by foreign company to employees

of its branch/subsidiary Qualification shares up to LRS limit In lieu of professional services 44 DIRECT INVESTMENTS IN JV/WOS ABROAD AUTOMATIC ROUTE General Permission for Resident Individuals: Right shares against eligible holding Bonus shares against existing shareholding Out of Funds held in RFC account.

45 DIRECT INVESTMENTS IN JV/WOS ABROAD APPROVAL ROUTE Form ODI Factors considered by RBI: Viability of project Benefit which will accrue to India Financial position & track record Expertise of Indian party 46

DIRECT INVESTMENTS IN JV/WOS ABROAD APPROVAL ROUTE ODI exceeding USD 1 (one) billion (or its equivalent) in a financial year would require prior approval of the Reserve Bank even when the total FC of the Indian Party is within the eligible limit under the automatic route (i.e., within 400% of the net worth as per the last audited balance sheet). 47

DIRECT INVESTMENTS IN JV/WOS ABROAD APPROVAL ROUTE Proprietary concern/unregistered partnership Only who are status holder exporters Having proven track record Unrealised exports <10% Limited to 10% of average of last 3 years realised export turnover or 200% of net owned Funds which ever is lower Trusts and societies: subject to eligibility criteria 48 DIRECT INVESTMENTS IN JV/WOS ABROAD

Reporting: APR by 30th June Annual return of Foreign Liabilities and Assets by 15th July Post investment Changes like diversification, step down subsidiary, shareholding pattern within 30 days 49 DIRECT INVESTMENTS IN JV/WOS ABROAD Other Obligations of Indian Party:

Receive share certificates or instruments Repatriation of all dues from JV/WOS within 60 days ESOP reporting by Indian party 50 DISINVESTMENTS IN JV/WOS ABROAD An Indian Party, without approval of RBI transfer by way of sale to another Indian Party or to a person resident outside India provided: the sale does not result in any write off If listed through stock exch. if unlisted the share price is not less than the value

certified by a CA / CPA the Indian Party does not have any outstanding dues from the JV or WOS; the overseas concern has been in operation for at least one full year and APR filed. 51 DISINVESTMENTS IN JV/WOS ABROAD Without approval of RBI at less than the original amount invested: where the JV / WOS is listed in the overseas stock exchange; where the Indian Party is listed on a stock exchange in India and has a net worth of not less than 100 crore; 100 crore;

where the Indian Party is an unlisted company and the investment (or financial commitment) in the overseas venture does not exceed USD 10 million. and where the Indian Party is a listed company with net worth of less than 100 crore; 100 crore but investment (or financial commitment) in an overseas JV/WOS does not exceed USD 10 million. 52 Thank you E-mail: [email protected] [email protected]

www.kcaconsultancy.com 53 54

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