The Foreign Exchange Management Act, 1999 An Overview of Rules and Regulations with respect to Current and Capital Account Transactions

The Foreign Exchange Management Act, 1999 An Overview

Establishment of BO/LO in India Section 2Overseas Direct Investment Section 3 Overview of FEMA Section 1 Agenda12

Section 1Overview of Foreign Exchange Management Act, 1999Objectfacilitating external trade and payment and promoting orderly development and maintenance of foreign exchange marketContravention attracts penalty / fine and not imprisonment (except in some cases) / compoundingOnly specified acts regulatedCitizenship - not relevant / Residence - EmphasizedRestricted power of search, seizure, etc. No Presumption of Mens Rea.. Prosecution to prove Provision for compounding3New era under FEMAThe Foreign Exchange Regulation Act, 1973 (FERA)The Foreign Exchange Management Act, 1999 (FEMA)Object Conservation of foreign ExchangeSevere penal provisionsAll acts controlled and regulatedApplied to Indian Citizens in/outside India and Foreign Citizens in India.Blanket powers of search, seizure, imprisonment, etc.Presumption of Mens-rea

FEMA 1999FERA replaced by FEMA on June 1, 2000.

Aims of FEMAFacilitate external trade and paymentsPromotion of orderly development of foreign exchange markets

FEMA Rules / RegulationsRules notified by Central Government(Current account )Regulations notified the Reserve Bank of India (RBI) . (Capital account)Consultation between RBI and the Central Government.

RBIA.P. (Dir Series) issued from time to timeMaster Circulars one in a year (July)F.A.Qs (updated available on http://www.rbi.org.in) 4Broad Framework5Substantive ProvisionsSection Description 1Application and Commencement of FEMA 2Definitions

3 to 9Provisions relating to Regulations and Management of Foreign Exchange

10 to 12Provisions relating to Authorized Person

13 to 15Provisions relating to Contraventions and Penalties

16 to 38Provisions relating to Adjudication, Appeal and Directorate of Enforcement 39 to 49 Miscellaneous Provisions 6Extent, Application and CommencementExtends to whole of India. Applies to all branches, offices and agencies outside India, of person resident in India. Applies to contravention committed outside India by any person to whom the Act applies.

Section 1 of FEMA Scope

Section 2(u) Person Includes An individual,HUF,Company,Firm,AOP or a BOI, whether incorporated or not,Every artificial juridical person, not falling within any of the preceding sub-clauses, andAny agency, office or branch owned or controlled by such persons

7Important DefinitionsPerson residing in India > 182 days during preceding financial year but does not include:

Person who has gone out of India or who stays outside India, in either caseFor/on taking up employment outside India, orCarrying on outside India a business or vocation outside India, orFor any purpose, indicating intention to stay outside India for an uncertain period.

Person who has come to or stays in India, otherwise thanFor/on taking up employment in India, or Carrying on in India a business or vocation in India, orFor any other purpose, indicating intention to stay in India for an uncertain period. Any Person or body corporate registered or incorporated in India.

An office, branch or agency in India owned or controlled by a person resident outside India.

An office, branch or agency outside India owned or controlled by a person resident in India.

Section 2(v) Person resident in India (PRI) meansSection 2(w) - Person resident outside India (PROI)Person resident outside India means a person who is not resident in India.

8Important DefinitionsNRI has been defined under FEMA Regulation 2(vi) of the FEMA - 5 (Deposit) Regulations 2000 as follows:

An NRI is a person resident outside India who is a citizen of India or is a Person of Indian Origin It is possible that you may be an NRI under FEMA, yet you may be a resident under the Income tax laws.

Non Resident Indian (NRI)Person of Indian Origin (PIO)PIO is defined differently in:Regulation 2 of FEMA 5 (Deposit) Regulations, 2000Regulation 2(c) of FEMA- 21 (Acquisition and Transfer of Immovable Property in India) Regulations, 2000 Regulation 2 of FEMA 24 ( Investment in a Firm or Proprietary concern in India)Most other notifications follow the FEMA 5 . (Deposit) definition of PIO A transaction which alters the assets or liabilities

Outside India of persons resident in India, (including Contingent Liabilities);

In India of persons resident outside India; and

Includes transactions specified in Section 6(3).Foreign security by resident;Any Security by non-resident;Transfer or issue of any security or foreign security by any branch, office or agency in India of a non-resident;Borrowing / Lending in Foreign Exchange;Borrowing / Lending in rupees between residents and non-residents;Deposits between residents and non residents;Holding of currency or currency notes;Acquisition / transfer of immoveable property in India / outside India (except those on lease for less than five years);Giving of guarantee / surety by resident / non-residents.

9Important DefinitionsA transaction other than a capital account transaction which include:

Payments due in connection with foreign trade, other current business, services, short- term banking and credit facilities in the ordinary course of business;

Payments due as interest on loans and as net income from investments;

Remittances for living expenses of parents, spouse and children residing abroad; and

Expenses on foreign travel, education and medical care of parents, spouse and children.

Section 2(e) Capital Account TransactionSection 2(j) Current Account Transaction10 General or Special permission of RBI required to: Deal in or transfer of foreign exchange or foreign securities to person other than authorized person;.Make any payment to or for the credit of a non-resident; Receive otherwise than through authorized person any payment by order or on behalf of a non-resident without a corresponding inward remittance; Enter into a financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire any asset outside India.

Section 3- Dealing in Foreign Exchange, etc. Section 4- Holding of Foreign Exchange, etc. Restricts person resident in India to hold, own or possess or transfer any foreign exchange, foreign security or immovable property situated outside India.

Section 5- Current Account TransactionsSection 6- Capital Account TransactionsExtent, Application and Commencement (contd.)11Exporter of goods/services under obligation to furnish to RBI or specified authority prescribed declaration. Common form called Export Declaration Form devised to declare all exports from Non-EDI ports and common Softex forms for single/bulk exports. Directions by RBI to Exporter of goods for ensuring receipt of export proceeds.

Section 7 Export of goods and services Section 8 Realization and repatriation of foreign exchangePerson resident in India obliged to take all reasonable steps to realize and repatriate to India all foreign exchange due or accrued.

Section 9 Exemption from realization and repatriation in certain casesPossession of foreign currency or coins up to limits prescribed by RBI; Foreign currency accounts up to specified limits by specified persons; Foreign exchange acquired before 8th July, 1947;Foreign exchange acquired from employment, business, trade, vocation, services, honorarium, gifts, inheritance or other legitimate means up to limits prescribed; and Any other foreign exchange receipt specified by RBI. Extent, Application and Commencement (contd.)12 RBI to authorize persons to act as authorized dealer, money changer or off-shore banking unit or in any other manner. Section 10 Authorized Person (AP)Section 11 Control / Penalty on Authorized PersonAP to comply with provisions of Act, Rules, Regulations, Notifications, etc.Inspection by RBI. Penalty for contravention of any direction by the authorized person or failure to file any return with RBI up to Rs 10,000 plus Rs 2,000 per day.

Section 12 19- Penalties/Adjucating Authorities Section 12 - Power of RBI to inspect APSection 13 - Penalties Section 14 - Orders of Adjudicating Authority Section 15 - Power to compound contraventionSection 16 - Appointment of Adjudicating AuthoritySection 17 - Appeal to Special DirectorSection 19 - Appeal to Appellate Tribunal

Extent, Application and Commencement (contd.)FEMA - Current Account Transactions Rules, 2000Transactions expressly prohibited Schedule I read with Rule 3 Transactions which require prior approval of Government of India Schedule II read with Rule 4 Transactions which require prior approval of RBI Schedule III read with Rule 5 Relaxations from Rule 4 and 5 for many items paid from Resident Foreign Currency (RFC) Account and Exchange Earners Foreign Currency (EEFC) Accounts. FEMA Current Account Transaction Rules

#1314 Current Account Transactions Remittance out of lottery winnings;Remittance of income from racing / riding or any other hobby;Remittance for purchase of lottery tickets, banned/prescribed products;Payment of commission on exports made towards equity investment in Joint Venture / Wholly Owned Subsidiary abroad of Indian companies;Remittance of dividend by any company where dividend balancing is applicable; Payment of commission on exports under Rupee state credit route, except commission up to 10 percent of invoice value of exports of tea and tobacco;Payment related to Call Back Services of telephones;Remittance of interest income on funds held in Non Resident Special Rupee ( Account ) Scheme.

Transactions Expressly Prohibited (Schedule I read with Rule 3) Cultural ToursAdvertisement in foreign print media exceeding USD 10,000 except for promotion of tourism, foreign investments and international biddingRemittance of freight of vessel chartered by a Public Sector Unit Payment for import by a Government Department on C.I.F. basis Multi- modal transport operators making remittance to their agents abroad Remittance of hiring charges of transponders by TV channels, Internet service providersRemittance of container detention charges exceeding the rate prescribedRemittance of prize money / sponsorship of sports activity abroad exceeding USD 1,00,000 by person other than International / National / State Level sports bodiesRemittance for membership of P & I club

Prior approval of Government of India (Schedule II read with Rule 4)15Current Account Transactions Illustrative Transactions--Schedule III read with Rule 5Sr. No.TransactionLimits without any RBI approval1Private Visit (except Nepal & Bhutan)USD 10,000 per Financial Year (FY)2Gift Remittance USD 5000 per FY per remitter or donor *3DonationsUSD 5000 per donor*2Exchange facilities for employment abroadUSD 100,0003Medical Treatment abroadEstimate from doctor in India or doctor / hospital abroad4Consultancy servicesFor Infrastructure Projects - USD 10,000,000 per projectFor other services USD 1,000,000 per project5Re-imbursement of pre-incorporation expensesExceeding higher of:

USD 1,00,000 5 % of investment brought into India* Remittance of gift and donation are subsumed under the LRS schemeLRS available to all Resident individuals (RI) including minors (singularly or jointly).

RI can remit overseas up to USD 1, 25,000 per financial year for any permissible current / capital account transaction.

Acquisition of immovable property, directly or indirectly, outside India by resident individual is no longer permitted under LRS.

RI can acquire and hold shares or any other asset outside India without prior approval of RBI using the LRS.

RIs are now permitted to acquire or set up Joint Ventures (JV) or Wholly Owned Subsidiaries (WOS) outside India engaged in bonafide operating business activities only (except for real estate business, banking business, business of financial services activity or holding of a step down JV or WOS which are prohibited) within the overall remittance limit of USD 125,000.

RI can open, hold and maintain foreign currency accounts with a bank outside India for remittances under the scheme without the prior approval of RBI.

Income and sum remitted need not be brought back into India and can be reinvested overseas.

Remittances inter alia not permitted for: Remittance directly or indirectly to Bhutan, Nepal, Mauritius or Pakistan; Remittances to specified non- cooperative countries / territories or those identified by the Financial Action Task Force as non-co-operative Countries or Territories; and

16Liberalized Remittance Scheme (LRS)17Schemes for Inbound Investment ScheduleParticulars Schedule 1FDI Scheme Schedule 2Purchase/Sale of Shares and/or Convertible Debentures of an Indian Company by a registered Foreign Institutional Investor under Portfolio Investment Scheme Schedule 3 Purchase/Sale of Shares and/or Convertible Debentures by a NRI on a Stock Exchange in India on repatriation and/or non-repatriation basis under Portfolio Investment Scheme Schedule 4 Purchase and Sale of Shares/Convertible Debentures by NRI, on Non-Repatriation basis Schedule 5 Purchase and Sale of Securities other than Shares or Convertible Debentures of an Indian Company by a Person Resident Outside India Schedule 6 Investment in an Indian Venture Capital Undertaking by a Registered Foreign Venture Capital Investor Schedule 7 Indian Depository Receipts by eligible companies resident outside India

Schedule 8 Scheme for investment by Qualified Foreign Investors in Equity Shares

18Inbound Investment Process * A citizen or entities of Bangladesh/Pakistan can invest with prior approval of Foreign Investment Promotion Board (FIPB) in sectors/activities other than those expressly prohibited in the Foreign Direct Investment (FDI)Policy19Routes of Investment

20Section 2- Establishment of Liaison Office/Branch Office in India #21Entry Strategies for Foreign Entity ENTRY STRATEGIES FOR A FOREIGN ENTITY AS A FOREIGN COMPANY

AS A LIMITED LIABILITY PARTNERSHIPAS AN INDIAN COMPA NY

LIAISON OFFICE (LO)

BRANCH OFFICE(BO)

PROJECT OFFICE (PO)

WHOLLY OWNED SUBSIDIARY(WOS)JOINT VENTURE(JV)Provisions for establishment of LO/BO are regulated by Notification No. FEMA 22/ 2000-RB dated 3rd May 2000.

Available Routes:

Reserve Bank Route Principal business of the foreign entity falls under sectors where FDI is permissible under 100% automatic route.Government Route Business other than above. Applications from entities falling under this category and those from NGOs/ NPOs/ Government Bodies/ Departments are considered by RBI in consultation with the Ministry of Finance, Government.

RBI has freely permitted establishment of a branch/unit in SEZs to undertake manufacturing and service activities and banking company, subject to certain conditions.

No person, being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China, without prior permission of RBI, shall establish in India, a BO/LO/PO or any other place of business by whatever name called.

Applications from entities registered in / resident of Hong Kong and Macau, for establishment of BO/LO/PO or any other place of business by whatever name called shall also require prior approval from Reserve Bank of India. [A.P.(DIR Series) Circular No.93 dated 15th January,2014]

Application shall be made in Form FNC. BO/LO established with the RBI's approval will be allotted a Unique Identification Number (UIN) post which BOs / LOs shall obtain PAN in India. 22BackgroundAdditional Criteria 23ConditionsFor BO >>A profit making track record during the immediately preceding 5 FYs in the home country. For LO >>A profit making track record during the immediately preceding 3 FYs in the home country.

Track Record For BO >>

>USD 100,000 or its equivalent.

For LO >>

USD 50,000 or its equivalent

Net Worth* * Net Worth= Total paid up capital+ free reserves less intangible assets, as per the latest Audited Balance Sheet or Account Statement certifies by CPA or any registered Accounts Practitioner by whatever name. LOs can undertake the following activities in India:

Representing in India the parent company / group companies. Promoting export / import from / to India. Promoting technical/financial collaborations between parent/group companies and companies in India. Acting as a communication channel between the parent company and Indian companies.

Prohibited activities for LO:

Cannot undertake any commercial/business activity directly or indirectly Cannot earn any income in India All expenses are to be met by way of Inward remittances from Head Office(HO) outside India Cannot have signing/commitment powers on behalf of HO 24Permissible Activities for LOs Companies incorporated outside India and engaged in manufacturing or trading activities are allowed to set up BOs in India with specific approval of RBI. Such BOs are permitted to represent the parent/ group companies and undertake the following activities in India:

Export / Import of goods. Rendering professional or consultancy services. Carrying out research work in areas in which the parent company is engaged. Promoting technical or financial collaborations between Indian companies and parent or overseas group company. Representing the parent company in India and acting as buying / selling agent in India. Rendering services in information technology and development of software in India. Rendering technical support to the products supplied by parent/group companies. Foreign airline / shipping company

Normally, the BO should be engaged in the activity in which the parent company is engaged.

Prohibited Activities for BOs:

Retail trading activities of any nature. Manufacturing or processing activities in India, directly or indirectly.

Profits earned by the BOs are freely remittable from India, subject to payment of applicable taxes.

25Permissible Activities for BOs

26Section 3- Overseas Direct Investment Investment by an Indian Party by way of contribution to the capital or subscription to the Memorandum of Association (MOA) of a foreign entity or by way of purchase of existing shares of a foreign entity by:

Investment through stock exchange; or Private placement in that entity; or Market purchase; or Investment in a Joint Venture or Wholly Owned Subsidiary abroad; . But does not include Portfolio Investment27Overseas Direct Investment (ODI)- Background 28Possible Routes for Investment Automatic Route Approval RouteOverseas JV/WOS to be engaged in bonafide business activity except real estate and banking;

Investment in Financial Sector should comply with additional conditions

Indian party not on RBIs Exporters Caution List/list of defaulters/under investigation by an Authority such as ED, SEBI etc.

Overall ceiling of financial commitment in all JV/WOS is 100% of net worth as on last audited Balance Sheet

Submission of Form Annual Performance Report in respect of all its overseas investment

Cases not covered under Automatic route

Specific application to RBI with necessary documents in Form ODI through the AD (Category I Bank) along with prescribed supporting and documents

RBI would inter alia consider the following factors:

Prima facie viability of JV/WOS outside IndiaContribution to external trade and other benefits which will accrue to India through such investmentFinancial position and business track record of the Indian party and foreign entityExpertise and experience of the Indian party in the same or related line of activity of the JV/WOS outside India.

Opening of Branch Office (BO) or Representative Office (RO) overseas is allowed

AD banks in India are permitted to remit funds for

Initial ExpensesRemittance up to fifteen per cent of the average annual sales/income or turnover during the last two financial years or up to twenty-five per cent of the net worth, whichever is higher

Recurring ExpensesRemittance up to ten per cent of the average annual sales/income or turnover during the last two financial years Opening up of such BO/RO is allowed subject to following conditions:

BO/RO should be conducting normal business activities of the Indian company Overseas branch shall not enter into any contract or agreement in contravention of the FEMA (Act, rules or regulations. ) Overseas office (trading/non-trading)/branch should not create any financial liabilities, contingent or otherwise, for the head office in India and also not invest surplus funds abroad without prior approval of RBI. Any funds rendered surplus should be repatriated to India Audited financials of BO/RO needs to be submitted to AD bank

29Overseas Offices 30The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although I have endeavored to provide accurate and timely information, there can be no guarantee that such information is accurate as it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

The views presented by means of this presentation are presenters own and should not construed as position taken by any organization or any former employer of the author

Disclaimer &QuestionsAnswers

31#31Thank You