FEMA COMPLIANCES AND RECENT POLICIES ON FDI

FEMA COMPLIANCES AND
RECENT POLICIES ON FDI
ICSI WIRC - PCS ANNUAL REGIONAL

CONFERENCE AT INDORE
8th JULY, 2018
By:
CA Manoj Shah
e-mail :manoj@shahmodi.com
Transition from Foreign Exchange Regulation Act,
1973 to Foreign Exchange Management Act, 1999
 Post liberalization (i.e. New Industrial policy of 1991) there

was need to remove shackles of regulatory and legal
provisions.
 Need to consolidate and amend the law relating to foreign
exchange with the objectives of facilitating external trade and
payments and for promoting the orderly development and
maintenance of foreign exchange market in India.
 Need to take various steps to make ‘New Industrial Policy’-
workable and meaningful.
 Industrial licensing was made pragmatic and objective-
oriented.
 It was decided to review provisions of Foreign Exchange
Regulation Act, 1973 (FERA).
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CHARTERED ACCOUNTANTS
Transition from Foreign Exchange Regulation Act,
1973 to Foreign Exchange Management Act, 1999
 Intention was to bring provisions of FERA in line with

emerging trends of liberalization so as to remove obstacles in
the inward flow of foreign exchange and foreign investment.
 Accordingly, on June 1, 2000, the Foreign Exchange
Management Act, 1999 (FEMA) brought in force to replace
the then existing FERA.
 It is an act to manage the foreign exchange of India as
opposed to FERA which was enacted to regulate/control the
foreign exchange.
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Structure of FEMA
 Applies to the whole of India and all branches, offices and
agencies outside India which are owned or controlled by a
person resident in India.
 FEMA has 49 sections of which 9 (section 1 to 9) are
substantive and the rest are procedural/ administrative
 Section 46 of FEMA grants power to Central Government
to make rules to carry out the provision of FEMA
 Section 47 of FEMA grants power to RBI to make
regulations to implement its provisions and the rules made
there under
 RBI is entrusted with the administration and
implementation of FEMA
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Structure of FEMA
 FEM ACT
 NOTIFICATIONS
 RULES
 MASTER DIRECTIONS
 A.P. DIR CIRCULARS
 FAQs will not prevail over Act, Notifications etc. in case of

conflict
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Substantive Provisions
Section Description
1 Application and Commencement of FEMA
2 Definitions
Provisions relating to Regulations and Management of
3 to 9
Foreign Exchange
10 to 12 Provisions relating to Authorized Person
13 to 15 Provisions relating to Contraventions and Penalties

Provisions relating to Adjudication, Appeal and
16 to 38
Directorate of Enforcement
39 to 49 Miscellaneous Provisions
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Notifications under FEMA
 RBI had initially issued 25 notifications, covering capital account
transaction prescribed in Sec 6(3) & certain miscellaneous
provisions
 15 related to capital account transactions, 1 on Export of goods and
services and 9 for other regulations
 As on date, the total number of notifications issued by RBI stand at
389.
 Since original notifications have undergone many changes, RBI has
started revising the notifications and till date has issued 15 revised
notifications [5(R), 6(R), 7(R), 9(R), 10(R), 11(R), 12(R), 13(R), 14(R),
15(R), 18(R), 20(R), 21(R), 22(R) and 23(R)] carrying suffix (R) for
easy identification along with the year in which they are published.
 https://www.rbi.org.in/Scripts/BS_viewfemanewnotification.asp
x
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Master Directions
 RBI has come up with Master Directions covering foreign
exchange transactions.
 Master Directions consolidate instructions rules and
regulations on the related subject.
 Master Directions are updated as and when there is change in
rules/regulations or change in policy.
 Existing set of Master Circulars stand withdrawn with issue
of Master Directions.
 Till date, 19 Master Directions were issued by RBI.
 https://www.rbi.org.in/scripts/FS_Notification.aspx?fn=5&
fnn=2764
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A.P. (Dir Series) Circulars
 Authorised Persons Directions issued by RBI u/s. 10(4) and
11(1) of FEMA to Authorized Persons (AP)
 These directions are called – A.P. (Dir Series) Circulars
 APs are Authorized Dealers, Money Changers and banks
who are authorized to deal in Foreign Exchange
 These Circulars are operational instructions to AP by RBI
 Legal validity of these Circulars have been upheld in the case
of Prof. Krishnaraj Goswami v. RBI, [2007 (6) Bom. CR 565]
 Court upheld the power of RBI to issue such Circulars based
on powers conferred to RBI u/s. 10(4) & 11(1) & negated the
contention that RBI has no jurisdiction to issue such Circulars
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Capital Account Transaction
Sr. Transactions Corresponding Corresponding Section of
No. Notification FEMA
1 Permissible Capital Account Transactions No. 1 Sec 6(2) read with Sec 47 (2)
2 Transfer or issue of any security or foreign No. 2 Sec 6(3)(c) read with Sec 47(2)
security by any branch, office or agency in India
of a person resident outside India
3 Any borrowing or lending in foreign exchange No. 3 Sec 6(3)(d) read with Sec 47(2)
in whatever form or by whatever name called
4 Any borrowing or lending in rupees in No. 4 Sec 6(3)(e) read with Sec 47(2)
whatever form or by whatever name called
between a person resident in India and a person
resident outside India
5 Deposits between persons resident in India and No. 5(R) dated 6(3)(f) read with Sec 47(2)
persons resident outside India 01.04.2016
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Sr. Transactions Corresponding Corresponding Section of FEMA
No. Notification
6 Export, import or holding of No. 6(R) dated 29.12.2015 Sec 6(3)(g) read with Sec 47(2)
currency or currency notes
7 Transfer of immovable property No. 7(R) dated 21.01.2016 Sec 6(3)(h) read with Sec 47(2)
outside India, other than a lease
not exceeding five years, by a
person resident in India
8 Giving of a guarantee or surety in No. 8 Sec 6(3)(j) read with Sec 47(2)
respect of any debt, obligation or
other liability incurred -
(i) by a person resident in India
and owed to a person resident
outside India
(ii) by a person resident outside
India
9 Insurance No. 12(R) dated 29.12.2015 Sec 47(2)
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Sr. Transactions Corresponding Corresponding Section
No. Notification
10 Remittance of Assets No. 13 (R) dated Sec 47

01.04.2016
11 Transfer or issue of any Foreign No. 120 dated Sec 6(3)(a) read with Sec 47
Security 07.04.2004
12 Transfer or issue of any security by No. 20 (R) dated Sec 6(3)(b) read with Sec 47
a person resident outside India 07.11.2017
13 Acquisition or transfer of No. 21 (R) dated Sec 6(3)(i) read with Sec 47(2)
immovable property in India, other 26.03.2018
than a lease not exceeding five
years, by a person resident outside
India
14 Establishment in India of Branch or No. 22 (R) dated Sec 6(6)
Office or other place of business 31.03.2016
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Crux of FEMA –
Current and Capital Account Transaction
 Capital Account transaction means a transaction which alters
assets or liabilities including contingent liabilities outside
India of person resident in India and vice-versa. It’s an
economic definition rather than an accounting or legal
definition.
 Current Account transaction is transaction other than a
capital account transaction.
Current Account transactions are freely permitted unless

prohibited - they are regulated by Central Government.
Capital Account transactions are prohibited unless
generally permitted - they are regulated by RBI.
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Crux of FEMA –
Current and Capital Account Transaction
 FEMA looks transaction from Balance of payment position of Country
 Examples -
 Import of machinery on immediate payment basis - Current A/c
transaction
 Machinery is purchased on hire - Capital A/c transaction. There is
an obligation to make future payment to the non-resident
 Consideration for goods & Services – Current A/c transaction
 Transaction represents a creation or acquisition of wealth- shares,
loans or immovable properties – Capital A/c transaction
 Subsidy received from IMF – Current A/c transaction
 Setting up Branch overseas by resident Indians – Current A/c
transaction
 Section 47 of FEMA grants power to RBI to make regulations and
Section 46 grants power to Central Government to prescribe rules
dealing with Current Account Transactions.
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RECENT POLICY CHANGES IN
FOREIGN DIRECT INVESTMENT

Recent Policies on FDI
 Revised Notification
RBI on 7th November 2017 in supersession of Notification No.
FEMA 20/2000-RB and Notification No. FEMA 24/2000-RB issued
revised regulations to regulate investment in India by a Person
resident Outside India – Notification No. FEMA 20(R)/2017-RB
dated November 07, 2017 viz. Foreign Exchange Management
(Transfer or Issue of Security by a Person Resident Outside India)
Regulations, 2017.
 Master Direction on Foreign Investment in India
RBI for the very first time after issuing revised notification, issued
Master Direction No.11 - Foreign Investment in India on 4th
January 2018.
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Recent Policies on FDI (Contd…)
 Recent Amendments to FEMA 20(R) – Notification No.

20(R)(1) dated 26th March 2018
 Regulation 16.B(5) – Foreign investment in investing companies
not registered as NBFC with RBI and in Core Investment
Companies (CICs), both engaged in activity of investing in capital
of other Indian Companies, will require prior government approval.
Foreign investment in investing companies registered as NBFC with

RBI will be under 100% automatic route.
(Previously irrespective of fact whether company is registered as

NBFC or not, foreign investment in investing companies was under
approval route).
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 There have been changes in sectoral caps of various

sectors/activities Regulation 16.B
Sector/Activity Recent Amendment Previous Guidelines

Para 9.3(a) 100% allowed. Only 49% under
Air Transport – Up to 49% automatic automatic route
Scheduled /Domestic Beyond 49% government (For NRIs/OCIs
Scheduled Passenger approval (For NRIs/OCIs automatic up to 100%)
Airline and Regional automatic up to 100%
Para 9.5(d) – New FI in Air India including Foreign Airlines were
Inserted that of foreign airlines shall not allowed to invest
Foreign Investment (FI) not exceed 49%. at all in Air India.
in Air India Substantial ownership and
effective control shall
continue to be with Indian
Nationals.
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Sector/Activity Recent Amendment Previous Guidelines
Para 10.2(7) New Note Real Estate Broking Services No mention of real
added shall be excluded from estate broking
Construction definition of Real Estate services.
Development – Real Business.
Estate Broking Services 100% foreign investment
allowed under automatic
route.
Para 15.3 100% under automatic route 100% allowed
Single Brand Retail 49% under automatic
Trading (SBRT) Few changes have also been and beyond 49%
made in conditions for government approval.
SBRT
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Amendments to Schedule 1 of FEMA 20(R)

Para 1(4) of Schedule 1 – Issue of capital instruments by Indian
Company against –
 Swap of capital instruments,
 Import of capital goods/machinery/equipment (excluding
second hand machinery)
 Pre-operative/Pre-incorporation expenses (including payments
of rent)
shall be subject to compliance with conditions prescribed by Central
Government and / or RBI and under automatic route provided
Indian Company is engaged in an automatic route sector.
Government approval shall be obtained if the Indian investee
company is engaged in a sector under Government route.
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Additional conditions for issue of shares against import of

capital goods/machinery/equipment:
 Import has to be in accordance with EXIM Policy of
Government of India as defined by DGFT/FEMA provisions
relating to imports.
 Application must clearly indicate the beneficial ownership
and identity of Importer Company as well as overseas entity.
 Application for conversion of import payables in FDI must be
made within 180 days from date of shipment.
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Additional conditions for issue of shares against pre-

operative/pre-incorporation expenses:
 FIRC for funds remitted by overseas promoters for
expenditure incurred is to be submitted.
 Pre-incorporation/pre-operative expenses are to be verified
and certified by Statutory Auditor.
 Payments should be made by foreign investor directly or
through bank account opened by foreign investor as provided
under FEMA regulations.
 Application for capitalisation complete in all respects shall be
made within 180 days from date of incorporation.
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General Conditions:
 All request of conversion should be accompanied by special
resolution of company.
 Government’s approval will be subject to RBI pricing
guidelines and appropriate tax clearance.
 Issue of share against import of capital
goods/machinery/equipment and pre-operative/pre-
incorporation expenses is to be reported to RBI in form
FCGPR as per procedure prescribed.
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Other option for pre-incorporation expenses-
Remittance to foreign company under current
account rules
 Remittances up to 5% of investment brought into India or
USD 1,00,000 whichever is higher is permissible under
automatic route for reimbursement of pre-incorporation
expenses by entity in India. Excess will require RBI approval
 However, while allowing remittance, AD banks insist on
following documents:
 Supporting documents for direct vendor payments (FIRC
copy from vendor to justify that he received amount in
foreign currency directly)
 Statutory Auditors Certificate
 Board Resolution for reimbursement
 Debit Note from parent company
 Form 15CA-CB
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Some important amendment in recent years:

 Para 1(5) of Schedule 1 – Equity shares can be issued
against any funds payable by an Indian Company to a
person resident outside India, remittance of which is
permitted under FEMA.
 Para 2(2) Schedule 1 – Capital Instruments shall be issued
within 60 days from the date or receipt of consideration.
(Previously under FEMA time period for issue of shares was
180 days. Now it has been aligned with Companies Act 2013).
 Para 1(2) Schedule 4 – Investment made by NRIs/OCIs in
capital instruments of Indian Company on non-repatriation
basis will be deemed to be domestic investment at par with
investment made by residents.
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 Para 1(1) Schedule 6 – Foreign Investment can be made in

capital contribution of LLP engaged in sectors / activities
where 100% foreign investment is allowed under automatic
route and there are no FDI Linked conditions.
 In sectors like Construction Development, Wholesale Cash
and Carry Trading etc. 100% FDI is allowed under automatic
route and they also have FDI Linked conditions.
 Thus, if a LLP is engaged in any such sector, even though
100% foreign investment is under automatic route, but
because there are FDI Linked conditions, foreign investment
will not be allowed in such LLPs.
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COMPLIANCES UNDER FEMA
Compliances for remittances under
Liberalized Remittance Scheme
 Resident Individuals are allowed to make remittances for
permissible capital and current account transactions up to
USD 2,50,000 per financial year under LRS.
 Form A2 has to be submitted with AD Bank by individual.
 PAN is mandatory for making remittances under LRS.
Previously for remittances up to USD 25,000 PAN was no
insisted. However, vide A.P. DIR Circular No. 32 dated June
19, 2018, PAN has been made mandatory for all remittances
irrespective of the amount of remittance under LRS.
 Form A2 requires individual to mention Payment Purpose
Code for remittances. Purpose Codes are given in Master
Direction on LRS.
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Compliances for remittances under
Liberalized Remittance Scheme
 AD Banks are required to submit information on remittances
under LRS to RBI every month under Online Return Filing
System (ORFS).
 Additionally AD banks are also required to furnish
transaction wise information on daily (T+1) basis.
 AD Banks have been given List of 11 Foreign Exchange
Transactions Electronic Reporting System (FETERS) Purpose
Codes for reporting transactions under LRS. While reporting
under FETERS respective purpose code for particular
transactions must be mentioned instead of reporting
transactions collective under a single code.
 For e.g. transactions of particular nature must be reported in
respective purpose code and not under S0023 which is for
“Opening of Foreign Currency Account”.
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FETERS Purpose Codes for AD Banks
Sr. No. Items under LRS FETERS Purpose Codes
1. Opening of Foreign Currency Account S0023
abroad
2. Purchase of Immovable Property S0005
3. Investment in equity, debt, JV, WOS S0001, S0002, S0003, S0004, S0021, S0022
4. Gift S1302
5. Donations S1303
6. Travel (business, pilgrimage, medical S0301, S0303, S0304, S0305, S0306
treatment, education, employment)
7. Maintenance of Close Relatives S1301
8. Medical Treatment S1108
9. Studies Abroad S1107
10. Emigration S1307
11. ‘Others’ such as loan to NRI close relative S0011, S0603
30
and health insurance
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Compliances in case of Liaison Office (LO),
Branch Office (BO) and Project Office (PO)
 Applications for opening of LO/BO/PO are considered by
AD category I bank as per guidelines given by RBI.
 Non resident entity has to submit Form FNC along with
following documents:
 Certificate of Incorporation, MOA and AOA duly attested
by notary in country of registration.
 Audited BS of applicant company for three/five years in
case of BO/LO respectively.
 Banker’s report from applicant’s bank in host country.
 Letter of Comfort (if asked for).
 For applications requiring prior RBI approval the same must
be submitted to RBI at New Delhi.
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Compliances in case of Liaison Office (LO),
Branch Office (BO) and Project Office (PO)
 UIN is allotted and approval is granted by AD.
 Validity of LO is three years. Extension of LOs granted by AD
banks must be intimated to RBI, New Delhi.
 Annual Activity Certificate (AAC) as at the 31st March end along
with audited financial statements including receipts and payments
is to be submitted with AD and copy of same to Director General of
Income Tax (International taxation), New Delhi, by LO/BO before
30 September every year.
 Entities from Bangladesh, Sri Lanka, Afghanistan, Iran, China,
Hong Kong, Macau or Pakistan which are setting up a BO/LO/PO
in India should register with the state police authorities and are
required to submit an annual report within five working days of the
BO/LO/PO becoming functional to the Director General of Police
(DGP) of the state concerned in which the BO/LO/PO has
established its office;
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Compliances in case of
Foreign Investment in India –
New Reporting Requirements
 Reporting in Entity Master Form (EMF) and Single Master
Form (SMF) – A.P. DIR Circular No. 30 dated June 07, 2018:
 With objective of integrating extant reporting structures of
various foreign investments in India, RBI will issue Single
Master Form (SMF).
 Prior to implementing SMF, RBI has provided interface at
https://firms.rbi.org.in to input data on total foreign
investment in Entity Master Form (EMF).
 This window has been provided between 28th June 2018 to
12th July 2018.
 Indian entities not complying with this pre-requisite will not
be able to receive foreign investment (including indirect
foreign investment) and will be non-compliant with FEMA
regulations.
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New Reporting Requirements
 Reporting in Entity Master Form (EMF) and Single Master
Form (SMF) – A.P. DIR Circular No. 30 dated June 07, 2018:
 The details instructions on the same have been issued by RBI
through user manual published on its website.
 Data of all foreign investment received by entity since its
incorporation has to be filled.
 Considering the User’s Manual, the view seems to be that
companies having prior FDI but NIL FDI at present, are also
required to update the details of foreign investment and
transfers in EMF
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Foreign Investment in India – Certain Issues
 Issues in case of certain transactions:
 Non-convertible, optionally or partially convertible Preference
shares or Debentures shall be considered as debt and ECB
guidelines will apply to the same {[2015] 50 taxmann.com 59
(Bom) IDBI Trusteeship Services Ltd. vs. Hubtown – High
Court of Bombay}
 Price / conversion formula for convertible instruments shall not
be determined upfront at the time of issue.
 Investment made with assured return by promoter or investee
company is prohibited.
 Extension in conversion period of CCDs/CCPs beyond original
tenure without RBI permission.
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Reporting Forms: ARF
 Advance Remittance Form (ARF) –
 Indian company receiving amount of consideration for issue of
capital instruments has to intimate RBI in ARF within 30 days from
date of receipt of such amounts. KYC of non resident investor and
FIRC is to be submitted in ARF.
 If remittance receiving AD Bank is different from AD Bank
through which FCGPR is filed, KYC check should be carried out
by the remittance receiving bank and KYC report be submitted by
the investee to the AD bank carrying the transaction along with
FCGPR.
 At times remittance is not directly received by the bank of
company receiving foreign investment. It is first received in
intermediary bank of overseas bank and later comes to bank
account of company receiving investment. In such cases, for issue
of FIRC, the bank of company has to obtain NOC from
intermediary bank and then issue FIRC to Indian Company.
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Reporting Forms: FCGPR
 Form FC-GPR – Indian Company has to file FCGPR for
reporting of allotment of capital instruments with RBI within
30 days from the date of allotment. Valuation Report, Board
Resolution, CS Certificate, FIRC are to be attached with
FCGPR.
 Allotment of shares under IPO or QIP under applicable SEBI
regulations need not be reported in Form FCGPR.
 Filing of ARF and FCGPR is to be done on
http://www.ebiz.gov.in , up to 31st July, 2018 and from 1st
August 2018 onwards under SMF (Single Master Form)
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Reporting Forms: FCGPR
 If Indian Company issues shares to non-resident other than
non-resident from whom the inward remittance is received,
following additional documents to be submitted with FCGPR:
 KYC reports of both remitter and beneficial owner
 NOC from remitter for issuing capital instruments to
beneficial owner mentioning relationship.
 Letter from beneficial owner giving reasons for remitter
making remittance on its behalf.
 Copy of agreement/Board Resolution of investee
company for issuing capital instruments to person other
than from whom remittance has been received.
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Foreign Investment in India- FLA-
Some issues in respect of LLP
 Annual Return on Foreign Liabilities and Assets (FLA) –
Indian Company or LLP having foreign investment have to
submit Annual Return on FLA on or before 15th July every year.
 In case of LLP filing FLA, dummy CIN -
‘A99999AA9999LLP999999’ is to be filled in the form. Refer A. P.
DIR Circular No. 22 dated October 21, 2015
 In the column of no shares- one may fill up percentage of profit
of Non Resident Partner
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Foreign Investment in India-
Transfer by way of Sale
 FCTRS – Form FCTRS is required for reporting of transfer of
capital instruments between:
 NR (holding on repatriation basis) and NR (holding on non
repatriation basis).
 NR (holding on repatriation basis) and R.
 Sale by NR on stock exchange.
 Indian company buying back shares in scheme of
merger/demerger/amalgamation approved by
NCLT/competent authority.
 Form FCTRS is to be filed within 60 days from date of transfer or
receipt whichever is earlier with AD Bank.
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FDI in LLP & Downstream Investment
 LLP I – LLP receiving consideration for capital contribution and
acquisition of profit shares has to intimate RBI through AD Bank in
Form LLP I within 30 days from date of receipt. KYC of non-
resident investor, FIRC and Valuation Certificate is to be submitted
along with the form.
 LLP II – Disinvestment/Transfer of Capital Contribution or profit
share between R to NR and vice-versa is to be reported in Form LLP
II within 60 days from date of receipt of funds.
 Downstream Investment (DI) – Indian entity making downstream
investment in another Indian company or LLP shall notify the same
to DIPP within 30 days of such investment.
 Late Submission Fee (LSF) – Person/entity responsible for delays
in submission of any of reports shall be liable for payment of LSF.
This shall be applicable for transactions undertaken on or after
November 07, 2017. LSF is option for regularising delays without
41 going for compounding. Shah & Modi
Certain Practical Issues
 Practical Issues while filing Forms on e-Biz Portal:
 Issues while filing Form FCGPR –
a. The amount of consideration as per UIN Letter and
amount of shares allotted should match. If there is
difference in the same, explanation for difference needs
to be attached with form.
b. Valuation Report should not be more than three
months old from the date of allotment.
c. If shares are not allotted for full amount of
consideration received, RBI is asking for refund of even
small amounts for which shares have not been allotted.
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 Issues while filing Form FCTRS –
a. Pre and Post Shareholding Pattern of company is preferred
on letter head of the Company. Further, residential status of
shareholders also should be mentioned along with %
holding.
b. At times NR seller (being FII or FVCI) has bank accounts in
India. So buyer pays consideration to seller’s bank account
in India. Even in such cases AD Banks insist on Form 15CA
and 15CB for proof of remittances.
c. The data on Form FC TRS must match with the data of Form
FC-GPR filed at the time of allotment of shares. Additionally
AD Banks also ask for RBI Letter granting registration
Number allotted while taking FCGPR on record.
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 Issues while filing Form FC-TRS –
d. Buyer and Seller consent letter along with declaration of
compliance of FEMA guidelines must be attached.
e. In case of transfer of equity shares which were allotted on
conversion of CCPS, AD Banks ask for board resolution for
conversion of CCPS to equity.
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External Commercial Borrowings
 External Commercial Borrowings (ECBs) can be raised under two
routes – Automatic Route and Approval Route. ECBs so raised
should conform with parameters such as minimum average
maturity, permitted and non-permitted end uses, maximum all in
cost ceilings etc.
 Form ECB – For applications under approval route Form ECB is to
be filed and submitted with RBI.
 Form 83 – Borrower has to submit Form 83 for obtaining Loan
Registration Number (LRN). Any draw down in respect of ECB as
well as payment of any fees/charges for raising ECB should happen
only after obtaining LRN.
 ECB 2 Returns – Borrowers have to report actual ECB transactions
through ECB 2 returns. ECB 2 returns have to be filed monthly and
same shall reach before 7th of next month.
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Overseas Direct Investments (ODI)
 Reporting of ODI – Indian Party or Individual making ODI in
JV/WOS abroad has to file Form ODI Part I within 30 days from
the date of remittance to RBI through AD Bank.
ODI Part I is to filed for both approval and automatic route. In
case of ODI under approval route, prior approval of RBI has to
be obtained post which Form ODI Part I is to be filed.
 Indian Party can make overseas investment up to 400% of its net
worth. In case of individuals, they can make ODI up to USD
2,50,000 under LRS.
 Post filing of Form ODI Part I, RBI will allot Unique
Identification Number. All subsequent remittances to JV/WOS
abroad can be made only after receipt of UIN.
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Overseas Direct Investments (ODI)
Bonafide Business Activity –
 As per regulation 6(2)(ii) of FEMA Notification No. 120 Indian
Party can make investment in JV/WOS engaged in bonafide
business activity.
 Overseas entity which is having Indian Investment in it and
wishing to make FDI in India will have to satisfy bonafide
business activity test and will require prior approval of RBI.
Other Issues – Caution Listing:
 Indian Party should not be under RBI’s exporter caution list. If
IP is under exporters caution list, it will not be allowed to make
any remittances for ODI.
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Overseas Direct Investments (ODI) –
Disinvestment involving write off
 Disinvestment involving write off (Reg 16A of FEMA 120)
Indian Party may disinvest (repatriation after disinvestment is
less than original amount invested) without prior approval of
RBI in following cases:
 In case where JV/WOS is listed on overseas stock exchange.
 In case where IP is listed on stock exchange and has net
worth of not less than Rs. 100 crore
 In case where IP is an unlisted company and investment
(financial commitment) in overseas JV/WOS does not exceed
USD 10 million.
 In case where IP is a listed company with net worth of less
than Rs. 100 crore but investment in overseas JV/WOS does
not exceed USD 10 million.
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Disinvestment involving write off
Disinvestment involving write off shall also be subject to
following conditions of Reg 16 of FEMA 120:
 Sale is effected through stock exchange where shares of
overseas JV/WOS are listed.
 If shares are not listed and disinvested through private
arrangement, the share price is not less than value certified
by CA /CPA as fair value based on latest audited financials.
 IP does not have any outstanding dues (royalty, dividend,
consultancy, commission etc.) from JV/WOS.
 Overseas concern has been in operation for at least one full
year.
 All APRs together with audited financials have been
submitted.
 IP is not under any investigation.
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Reporting Forms
 Application for allotment of UIN and reporting of further
remittances / transactions – UIN and further remittances and other
forms of financial commitments are reported by Indian Party in
Form ODI Part I. The form comprises of following sections –
Section A – Details of IP/RI
Section B – Capital Structure and Other Details of JV/WOS/SDS
Section C – Details of Transactions/Remittance/Financial
Commitment
Section D – Declaration by IP/RI
Section E – Statutory Auditors Certificate
 Form ODI should be submitted with Board Resolution for proposed
transaction, diagrammatic representation of organisational
structure indicating all subsidiaries of IP, incorporation certificate
and valuation certificate.
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Reporting Forms
 In case of investment by more than one parties, Form ODI is to
be submitted by each party and AD Bank will file online a
consolidated Form ODI with RBI and one UIN will be allotted.
 Certificate of Statutory Auditor is not required in case of
Individuals.
 Post Investment Changes have to be reported within 30 days of
such change in relevant Section of ODI Part I as under:
Type of Change Section
Change in details of IP/RI viz change in address, name, Section A
contact details
Investigation details of IP/RI Section A
Change in net worth of IP Section A
Change in capital structure of JV/WOS Section B
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Reporting Forms
Type of Change Section

Change in status of JV/WOS from operating entity to SPV Section B
or vice-versa
Change in details of JV/WOS such as change in name, Section B
address etc.
Reporting of set up / incorporation / investment / Section B
disinvestment of SDS
Conversion of loan to equity and vice versa Section C
Rollover/change in amount / validity of guarantee Section C
already reported to RBI
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Annual Performance Report
 Annual Performance Report (APR) –
 Every year on or before December 31, APR in Form ODI Part II
has to be filed with RBI through AD Bank.
 APR has to be submitted based on audited financial statements
of overseas JV/WOS unless specifically exempted by RBI.
 APRs are to be certified by Statutory Auditors of Indian Party.
CA certification should not be insisted in case of investment by
individuals.
 In case multiple IPs/RIs the obligation to submit APR shall lie
with IP/RI having maximum stake. Alternatively IPs/RIs
should mutually agree to assign responsibility to submit APR.
 If law of host country does not require mandatory audit of books
of JV/WOS APR may be submitted based on unaudited
accounts.
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FLA and Disinvestment
 In such cases statutory auditor of IP has to certify that law of
host country does not mandate compulsory audit and figures in
APR are based on un-audited accounts of JV/WOS.
 The un-audited accounts have to be adopted / ratified by board
of Indian Party.
 Annual Return on Foreign Liabilities and Assets (FLA) –
 Annual Return has to be submitted by all Indian Companies
receiving FDI and / or made ODI on or before 15th July every
year.
 Reporting of Disinvestment –
 Reporting of disinvestment/closure/winding up/voluntary
liquidation of overseas JV/WOS has to be done in Form ODI
Part III within 30 days from the date of disinvestment.
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Overseas Direct Investment –
 Practical Issues while filing Form ODI Part I, II and III:
a. In case of transfer of shares of overseas JV/WOS between two
residents, prior approval of RBI has to be obtained as no
remittance will be effected outside India. Form ODI Part I
also needs to be filed for reporting of change in shareholder.
b. Section B of Form ODI Part I has two fields in connection
with financial commitment viz. Estimated Cost/Fair Value of
overseas acquisition and Financial Commitment wrt to above
JV/WOS. For ease purposes, estimated maximum amount
can be mentioned in First field of “Estimated Cost of overseas
acquisition’ and actual financial commitment can be
mentioned in second field. In case of reporting of subsequent
investments, there would be no need to fill full Form ODI
again and only Section B, C, D and E be submitted up to the
55 amount of Estimated Cost of Overseas Investment. Shah & Modi
Overseas Direct Investment –
 Practical Issues while filing Form ODI Part I, II and III:
c. If there are more than one shareholders of overseas entity
and all are resident of India, in that case overseas entity will
be treated as WOS and not JV.
d. In case of investment by individuals, even though they are
allowed to invest up to USD 2,50,000 under LRS, AD Banks
still insist on Net worth certificate for individuals, even
though this clause is not applicable
e. In case of capitalisation of other dues viz. Royalty, technical
know how, consultancy fees etc. Form ODI is required to be
filed for reporting the same.
f. Details of FDI by JV/WOS/SDS if any into India is to be
reported in APR – Form ODI Party II.
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Compounding Application
 Compounding of Contraventions is a voluntary process by which
an applicant can seek compounding of an admitted contravention
of any provision of FEMA. Following is to be submitted:
 Application in prescribed format.
 Details of irregularities whether relating to FDI, ODI, ECB,
LO/BO/PO.
 Undertaking that applicant is not under investigation of any agency.
 ECS Mandate
 Details of Bank Account
 DD of Rs. 5,000/-
 Copy of PAN
 Latest audited Financial Statements
 Memorandum and Articles of Association (in case of company)
 Cancelled Cheque
57 Shah & Modi
THANK YOU
58
FIRST DESERVE
AND
THEN DESIRE!!
Shah & Modi


FEMA COMPLIANCES AND RECENT POLICIES ON FDI

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FEMA COMPLIANCES AND RECENT POLICIES ON FDI

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FEMA COMPLIANCES AND

RECENT POLICIES ON FDI

ICSI WIRC - PCS ANNUAL REGIONAL

 Post liberalization (i.e. New Industrial policy of 1991) there

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 Intention was to bring provisions of FERA in line with

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 FAQs will not prevail over Act, Notifications etc. in case of

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1 Application and Commencement of FEMA

13 to 15 Provisions relating to Contraventions and Penalties

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10 Remittance of Assets No. 13 (R) dated Sec 47

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Current Account transactions are freely permitted unless

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FOREIGN DIRECT INVESTMENT

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 Recent Amendments to FEMA 20(R) – Notification No.

Foreign investment in investing companies registered as NBFC with

(Previously irrespective of fact whether company is registered as

 There have been changes in sectoral caps of various

Sector/Activity Recent Amendment Previous Guidelines

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Amendments to Schedule 1 of FEMA 20(R)

Additional conditions for issue of shares against import of

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Additional conditions for issue of shares against pre-

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Some important amendment in recent years:

 Para 1(1) Schedule 6 – Foreign Investment can be made in

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Type of Change Section

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