One day workshop on FEMA by CA. Sudha G.

Bhushan
1. 1. By CA. Sudha G. BhushanWorkshop on FEMABy: CA. Sudha G. BhushanVccircle Training18th Jan 2013 || 8th Feb 2013Mumbai || Delhi
2. 2. Compoundingv Valuationv Downstream Investment under FEMAv General Anti Avoidance Rulev Qualified Foreign Investorv Foreign
Venture capital Investor / SEBI(Alternate Investment Funds) Regulations, 2012v Foreign Institutional Investorv Foreign Direct
InvestmentvBy CA. Sudha G. BhushanContent
3. 3. By CA. Sudha G. Bhushan
4. 4. REGULATORY FRAMEWORK
5. 5. Section 6(3)(b) Foreign Exchange Press Notes Department of Industrial Foreign ExchangeManagement 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
6. 6. Ways Foreign Direct InvestmentSchedule 1 Foreign institutional investor under PortfolioSchedule 2 investment Scheme Non
resident Indian under Portfolio investmentSchedule 3 Scheme
7. 7. Continued NRI on non repatriation basis under the schemeSchedule 4 other than through PIS NRI/FIIs can purchase securities
other than theSchedule 5 shares and debentures Foreign venture capital investor registered with SEBI may make investment in a venture
capitalSchedule 6 fund or an Indian Venture capital undertaking
8. 8. 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 SchemeNon resident Indian under Portfolio NRI- 10% of the paid up capital of the companyinvestment
Scheme
9. 9. NRI on non repatriationbasis under the scheme No Limitsother than through PISNRI/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 SEBIinvestor
registered with regulations dealing with VCF / FVCI SEBI
10. 10. By CA. Sudha G. Bhushan Foreign SEBI Direct registered SEBI QualifiedInvestments Foreign registered Foreign (FDI) into Institutional
FVCF/AIF Investor Indian Investors Company (FII) Modes of Foreign Investment
11. 11. By CA. Sudha G. BhushanSuitable FIIentrymode for Suitable FVCI /AIF Regulationsportfolio entry mode for Individu Investors Qualified
Foreign/ capitalinvestm project alents and specific residentseconda investm s ofry ent in foreignmarket unlisted Nationaloperatio compani
sns es / VCF
12. 12. By CA. Sudha G. Bhushan Category of Investors Typical Investment OptionStrategic Investment Foreign Direct Investment [FDI]Private
Equity FDI/ FVCI/FIIFinancial Investment FII/FVCIInstitutional Investment FIIPerson QFIs
13. 13. By CA. Sudha G. BhushanFOREIGN INSTITUTION INVESTORS
14. 14. By CA. Sudha G. BhushanKey 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 may2012 (FEMA 20) be applicable Master Circular on SEBI (issue of Foreign Investmentscapital and disclosure in
Indiarequirements) Regulations, 2009 Circulars/ press releases issued from time to time Securities Contracts (Regulation) Act, 1956
15. 15. By CA. Sudha G. BhushanFIIs - 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)
16. 16. By CA. Sudha G. BhushanFIIs - Consideration of Application by SEBI Track record, professional competence, financial soundness,
experience, and general reputation of fairnessand 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
17. 17. Power of Attorney Holders Trustees Institutional Portfolio Managers Asset Management Companies Charitable Trusts /
Charitable Societies Further, following entities proposing to invest on behalf of broad based funds, are also eligible to be registered as FIIs:
v Foundations v Endowments v University Funds v Banks v Investment Trusts v Insurance Companies v Mutual Funds v Pension
Funds vBy CA. Sudha G. BhushanProcedure of Registration of FII Following entities / funds are eligible to get registered as FII:
18. 18. By CA. Sudha G. Bhushan 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
19. 19. By CA. Sudha G. BhushanFIIs - 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
20. 20. By CA. Sudha G. BhushanCertificate from Company SecretaryRBI/2011-12/453 A.P. (DIRSeries) Circular No. 94 dated19 March 2012
Certificate from the CompanyIndian company raising the Secretary stating that all theaggregate FII investment limit of relevant provisions of
the extant Foreign Exchange24 per cent to the sectoral cap/ Management Act, 1999statutory limit or the aggregate regulations and the
ForeignNRI investment limit of 10 per Direct Policy, as amendedcent to 24 per cent from time to time, have been complied with
21. 21. By CA. Sudha G. Bhushan 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 belisted 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.
22. 22. By CA. Sudha G. BhushanFOREIGN VENTURE CAPITAL INVESTORS
23. 23. By CA. Sudha G. Bhushan 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.
24. 24. By CA. Sudha G. BhushanTypical 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
25. 25. By CA. Sudha G. BhushanFVCI - 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 Applicants 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 bankers
certificate of self/ promoter) Applicant has not been rejected by SEBI in past
26. 26. By CA. Sudha G. BhushanFVCI - 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 bankers 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
27. 27. By CA. Sudha G. BhushanFVCI - 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
28. 28. By CA. Sudha G. BhushanFVCI - 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
29. 29. By CA. Sudha G. BhushanFVCI - 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)
30. 30. By CA. Sudha G. BhushanFVCI - 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
31. 31. By CA. Sudha G. Bhushan 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.
32. 32. By CA. Sudha G. BhushanSEBI (ALTERNATE INVESTMENT FUND)REGULATIONS,2012
33. 33. 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 activitiesq 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 qBy CA. Sudha G. BhushanRegulation 2 (1) (b) Alternate Investment Fund
means anyfund established or incorporated in India in the form of atrust or a company or a limited liability partnership or abody corporate
which
34. 34. By CA. Sudha G. BhushanOut 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.
35. 35. By CA. Sudha G. BhushanCategories 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.
36. 36. By CA. Sudha G. Bhushan Other salient featuresThe AIF shall not accept from an investor an investment of value less than rupees one
crore. Further, the AIF shall have aminimum 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 theinitial
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 mayeither be close-ended or open-ended.Schemes may be
launched under an AIF subject to filing of information memorandum with the Board along with applicablefees.Units of AIF may be listed on
stock exchange subject to a minimum tradable lot of rupees one crore. However, AIF shall notraise 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.
37. 37. By CA. Sudha G. BhushanQUALIFIED FOREIGN INVESTORS
38. 38. By CA. Sudha G. Bhushan Definition Difference between FIIs and QFIs Eligible Transactions by QFIs QDPs
39. 39. By CA. Sudha G. Bhushan DefinitionQFI 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 IOSCOs 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.
40. 40. By CA. Sudha G. Bhushan Comparison of FII and QFI Investment Routes QFIParticulars 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 IOSCOEligible investors fund etc. framework frameworkSEBI 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 IndiaIssue of offshorederivative
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 beIncome Tax transfer of securties redemption proceeds deducted at source by
DP
41. 41. By CA. Sudha G. Bhushan
42. 42. By CA. Sudha G. BhushanInvestment Limits Instrument Limit Investor Conditions RemarksGovernment 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
43. 43. By CA. Sudha G. Bhushan 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 maturitybe 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 andlisted units of mutual funds no residual maturitydebt schemes, to be listed requirements; corporate bonds No original maturity
restriction.
44. 44. By CA. Sudha G. BhushanC) Infrastructure SectorListed NCDs/ bonds, NCDs/ USD12 FIIs Indian companies in No lock-in periodbonds
of NBFC-IFC and billion infrastructure sector requirement;unlisted NCDs/ bond in (within the total limit infrastructure as defined Residual
maturity at theinfrastructure 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 IFCsCorporate debt non- USD 3 billion QFIs NBFCs defined as IFCs - No
lock in periodconvertible 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 3bonds of NBFCs-IFC, Units of equity or both in mutual years;Domestic Mutual
fund Debt funds in infraschemesIDF Rupee bonds/units USD 10 billion FIIs, NRIs, SWFs, Infrastructure as defined No lock-in
periodregistered 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
45. 45. 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.v It lacks commercial substance or is deemed
to an accommodating party ; lack commercial substance. elements that have effect of offsetting or v It results in misuse or abuse of
provisions of tax (b) it involves or includes - laws. round trip financing; v 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 arms
length. steps or a part; or vBy CA. Sudha G. BhushanGeneral 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
46. 46. Conversion of a company with FDI, into an LLP, allowed only if above stipulations are met and with the prior approval of FIPB FIIs
and FVCIs not permitted to invest in LLPs
Not permitted to avail ECBs
Not eligible to make any downstream investment
Not in
agricultural/plantation activity, print media or real estate business
Restrictions to LLPs with FDI: 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.
Only by way of cash consideration
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.)

Sectors/activities where 100% FDI allowed
Prior approval from FIPB
FDI in LLPs: Limited Liability Partnerships (LLPs)
47. 47. By CA. Sudha G. BhushanDOWNSTREAM INVESTMENT
48. 48. Direct Foreign Investment Non resident entity Outside India In India Indian Company
49. 49. Indirect Foreign Investment Non Resident Entity Outside India Direct Foreign Investment In India Indian Company Indirect Foreign
Investment Indian Company
50. 50. DEFINITIONS
51. 51. Holding Company would have the sameq Investing Company means an Indian Company making equity/preference/CCD investment
into another Indian Company.q Indian Company means a company registered or incorporated in India as per the Indian Companies Act,
1956.q Non resident entity (NREs) means a person resident outside India as defined under FEMA 1999.q 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.q 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]. meaning
as defined in Indian Companies Act 1956.
52. 52. OWNED AND CONTROLLED
53. 53. By RICs and Indian companies, which areowned 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
54. 54. Non-residents have the equity interest in it is power to appoint a beneficially owned by non- majority of its directors residentsqBy Non
Resident Entities owned Controlled More than 50% of the
55. 55. COUNTING OF FOREIGN INVESTMENT
56. 56. Counting the Direct Foreign Investment All investment directly by a non resident entity into the Indian company would be counted
towards foreign investment
57. 57. Counting the Direct Foreign Investment Non resident entity Outside India Foreign Investment In India Indian Company
58. 58. Counting of Indirect Foreign InvestmentNot counted as Indirect Foreign InvestmentCounted as Indirect Foreign Investment
59. 59. Not counted Investing Indian Company Indirect Foreign Investment 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
60. 60. Counted Investing Indian Company Indirect Foreign Investment Indian Company if the above conditions are not satisfied or if the
investing Company is owned or controlled by NREs
61. 61. TOTAL INVESTMENT
62. 62. NREs 74% Investing Indian Company 30% 51% Indian CompanyTotal Foreign Investment in subject Indian Company Direct (51%) +
Indirect (30%)=81%
63. 63. EXAMPLES
64. 64. 1. Ownership and control with Indian entity Non resident entity Outside India Foreign Investment 49% In India Investing Indian
Company Indirect Foreign Investment Indian Company
65. 65. 2. Ownership with Non resident entity Non resident entity Outside India Foreign Investment 75% In India Investing Indian Company
Indirect Foreign Investment Indian Company
66. 66. 3. Control with Non resident entity Non resident entity Outside India Foreign Investment 25% In India Investing Indian Company Indirect
Foreign Investment Indian Company
67. 67. 4. Non resident entity Outside India Foreign Investment 75% In India Investing Indian Company 26% Indirect Foreign Investment 26%
Indian Company
68. 68. Exception Non resident entity Outside India Foreign Investment 75% In India Operating Cum Investing/Investing Indian Company 100%
Indirect Foreign Investment 75% Indian Company (100% subsidiary)
69. 69. 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
70. 70. 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
71. 71. Policy Non resident entity Prior Government/FIPB Approval Investing Indian Company Relevant sectoral conditions w.r.t. the sector in
which subject company is Indian Company operating
72. 72. ADDITIONAL CONDITIONS
73. 73. 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 takeInvesting 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
74. 74. By CA. Sudha G. BhushanVALUATION
75. 75. By CA. Sudha G. Bhushan Resident to Non resident Non resident to Resident DCF valuation DCF valuation DCF valuation to be
DCF valuation to be minimum maximum
76. 76. 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
77. 77. CA. Sudha G. Bhushan 77 Whether the assumptions consider realistic Whether the company intends to venture into growth of the
industry and the companys 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 correlatedintends 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 VALUERS 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.
78. 78. DCF 78Discrete 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.
79. 79. Earns a constant return on it base level of invested capitalF Reinvests a constant proportion of its operating profits into business F
Business / Company grows at a constant rate FPresentation by CA. Sudha G. Bhushan 79Terminal 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
80. 80. Presentation by CA. Sudha G. Bhushan 80Conclusions 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
81. 81. By CA. Sudha G. BhushanCOMPOUNDING
82. 82. By CA. Sudha G. Bhushan 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
83. 83. By CA. Sudha G. Bhushan 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.
84. 84. By CA. Sudha G. Bhushan 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.
85. 85. By CA. Sudha G. BhushanCompounding 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)
86. 86. Assistant Legal Adviser Assistant Director of Enforcement Deputy Legal Adviser Deputy Directors of Enforcement Additional
Director of Enforcement Special Directorate of Enforcement Directors of enforcement Officers of Enforcement Section 37 Section
36By CA. Sudha G. BhushanEnforcement under FEMA
87. 87. By CA. Sudha G. BhushanAdjudicating 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
88. 88. By CA. Sudha G. Bhushan Special Director (Appeals)Appeal againstOrder passed by Adjudicating Authority Appellate Tribunal
89. 89. By CA. Sudha G. Bhushan Appellate Tribunal Adjudicating authoritySpecial Director not being Assistant(Appeals) Director /Deputy
Adjudicating authority Director of being Assistant enforcement Director of Enforcement or a Deputy Director of enforcement
90. 90. By CA. Sudha G. BhushanSpecial Director (Appeals) Appellate Tribunal High Court
91. 91. By CA. Sudha G. BhushanCompounding authorityPersons authorized by the CentralGovernment under sub-section (1) of section 15 of
the Act An officer of the Enforcement An officer of the ReserveDirectorate not below Bank of India not below the rank of Deputy the rank of
the Assistant Director or Deputy General ManagerLegal Adviser (DLA)
92. 92. By CA. Sudha G. BhushanProcess 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.
93. 93. By CA. Sudha G. Bhushan 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).
94. 94. By CA. Sudha G. Bhushan 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.
95. 95. By CA. Sudha G. Bhushan 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.
96. 96. By CA. Sudha G. Bhushan Case studies on compounding
97. 97. By CA. Sudha G. BhushanSpecific 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
98. 98. By CA. Sudha G. BhushanTHANKS..Taxpert Professionals Private Limitedsudha@taxpertpro.comwww.taxpertpro.com09769134554 ||
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