Seminar on Valuation –Valuation under FEMA

23 July 201623 July 2016

NIRC of ICAI

Vijay GuptaACMA, FCS, FCA

Inbound Investment

Outbound Investment

Contents

Swap of Shares

LLP

Case Studies

Section 1.1

Inbound Investments

� Unlisted Companies

FEM (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000: ‘FEMA 20’

Sch. 1 Foreign Direct Investment (‘FDI’) Scheme

Sch. 2& 2A

Purchase/Sale of shares or convertible debentures or warrants of an IndianCompany by Registered Foreign Portfolio Investor (RFPI) under ForeignPortfolio Investment (FPIs) Scheme (Registered FIIs under Sch. 2 subsumedwith Sch. 2A)

Sch. 3 Purchase/Sale of Shares and/or Convertible Debentures by an NRI on astock exchange in India on repatriation and/or non-repatriation basis underPortfolio Investment Scheme

Sch. 4 Purchase and Sale of Shares or Convertible Debentures or Warrants] by NRI,on Non-repatriation basis

Sch. 5 Purchase and Sale of Securities other than Shares or ConvertibleDebentures of an Indian company by a person resident outside India

Sch. 6 Investment in an Indian venture capital undertaking by a registered ForeignSch. 6 Investment in an Indian venture capital undertaking by a registered ForeignVenture Capital Investor

Sch. 7 Indian depository receipts by eligible companies resident outside IndiaSch. 8 Scheme for investment by Qualified Foreign Investors in equity shares

(Subsumed under Sch. 2A)Sch.9 Scheme for Acquisition/Transfer by a person resident outside India of

capital contribution or profit share of (LLPs)Sch. 10Sch. 11

Depository Receipts Scheme, 2014 (DRs)

Units of an Investment Vehicle - Real Estate Investment Trusts (REITs), Infrastructure

Investment Trusts (InvIts) and Alternative Investment Funds (AIFs) governed by the SEBI

(AIFs) Regulations, 2012

Composite Caps: Foreign investments, direct or indirect, under Schedule 1(FDI), 2 (FII), 2A (FPI), 3 (NRI), 6 (FVCI), 8 (QFI), 9 (LLPs) and 10 (DRs)

vide PN 8 dated 30 July 2015 by DIPP

Foreign Investment in India- Schematic Representation

Foreign Inbound Investments

Foreign Direct

Investments

Foreign

Portfolio

Investments

Foreign Venture

Capital

Investments

Other

Investments

(G-Sec, NCDs,

etc.)

Investments on

Non-Repatriable

basis

FIIs/

QFIs/

RFPIs

Sch. 2, 2A, 8

Automatic

RouteGovt.

Route

NRIs/

PIOs

Sch. 3

SEBI Regd.

FVCIs/AIFs

Sch. 6

FIIs/RFPIs, NRIs,

PIO, QFIs

Long Term Investors

Sch. 5

NRIs,

PIOs

Sch. 4

VCF, IVCUsPersons Resident Outside India

Company

Sch. 1, 10LLP

Sch. 9

Kinds of Investment

• Automatic Route – no prior approval from the RBI/ Government

• Approval Route – prior approval of the FIPB required (no separate RBI

approval)

Mode of Investment

• Greenfield: Setting up a new JV/ WOS (fresh issue of shares)

• Brownfield: Relating to existing investments/ business activities:

Foreign Direct Investment into an Indian company

Brownfield Brownfield

Investment

Share

PurchaseGift of shares Share swap

Rights/ Bonus

issue/ ESOP/

Sweat Equity

Merger/Demerger/

Amalgamation/

Reconstruction

Conversion of ECB/

pre-incorp

payables/ import

payables, royalty,

other legitimate

dues etc.

FEMA & Valuation

Price of shares shall not be less than the fair

value worked out as per any internationally

accepted pricing methodology

for valuation of shares on arm’s length basis

Price of shares shall not be more than the fair

value worked out as per any internationally

accepted pricing methodology

for valuation of shares on arm’s length basis

Market Price as per SEBI Preferential

Allotment

Internationally accepted pricing Methodology for

valuation of shares on arm’s length basis

Listed Company Unlisted Company

FDIIssue of shares Transfer of shares from

Resident to Non-ResidentTransfer of shares fromNon-Resident to Resident

Convertible instruments:Based on conversion formula which has to be determined /

Only Certificationby SEBI registered

Merchant Banker/

Chartered Accountant

Valuation & Certificationby SEBI registered Merchant Banker/

Chartered Accountant

Preferential Allotment Pricing Guideline under SEBI (ICDR) Regulations 2009:“Price not less than the higher of Avg. weekly high and low closing price over a trailing six month period, or a trailing

two week period, from the "relevant date of transaction.”

“Relevant Date” means date thirty days prior to the date of GM of shareholders

Based on conversion formula which has to be determined /

fixed upfront. Price at the time of conversion should not be

less than the fair value worked out, at the time of issuance of

these instruments.

NRIs on non-repatriation basis under Schedule4 of FEMA 20: No express provision for valuation

Pricing not applicable for transfers between two Non-Residents

SEZs against import of capital goods into equity

shares: Committee of Development Commissioner

Non-residents (including NRIs): Subscription to its Memorandum of Association: Made at face value

subject to their eligibility to invest under the FDI

scheme

RBI withdraws DCF Pricing Norms• RBI vide circular 4 dated 15 July 2014, has replaced the DCF valuation norms

with Internationally Accepted Pricing Methodology on an arm’s length

basis (e.g. unlike section 56(2)(vii) under Income-tax Act, Wealth Tax, Transfer

Pricing, CCI, SEBI for Preferential allotment, Stamp Duty)

• In spite of DCF being made non-mandatory, DCF method will continue to

remain the mainstay in all valuations

• Highly unlikely to come across an independent valuation not adopting DCF

method

Earlier pricing guidelines (prior to issue of Notification No. FEMA 205/2010- RB dated

April 7, 2010 and A.P. (Dir Series) Circular No. 49 dated May 4, 2010) for unlistedcompanies was the CCI guidelines (RBI Circular No. 16 dated October 4, 2004).companies was the CCI guidelines (RBI Circular No. 16 dated October 4, 2004).

CCI pricing guidelines did not take into account any future projections /roadmap / business plans and were based on a NAV and EPS (for the pastthree years) formulation.

Discounted cash flow (DCF) method for valuation for unlisted companies takesinto account the future business plans as well as cash flows and allows therational selection of a discount rate taking in to account the likelihood ofboth upsides and downsides of a project (all aspects of project risk) andindustry norms. DCF formulation provides a more realistic valuation (even forprojects with long gestation periods or where the break even periods arerelatively long) methodology which already accounts for ‘future performanceparameters’.

Valuation Methods

Asset Approach

• Net Asset Value

• Liquidation Value

Income Approach

• Yield/ PECV

• DCF

Market Approach

• Market Price

• Comparable Companies

Multiples

• Comparable

Transaction

• EV/EBITDA (Also

Revenue, PAT)

• Price of Recent Investment method (PORI)

• Sum of the parts valuation

• Weighted Average Method

• Any other method accepted by RBI, SEBI, Companies Act, or Income-tax

• Any other method(s) that valuer may deem fit (with justification)

• Control premium; Illiquidity discount; Minority Discount

Other Methods

When to Use Various Valuation Methodologies-Reference: ‘Merger Acquisitions and Other Restructuring Activities’ by Donald De Pamphilis - 6th Edition 2012

Discounted Cash Flow• The firm is publicly traded or private with identifiable cash flows• A start-up has some history to facilitate cash-flow forecasts• An analyst has a long-term time horizon• An analyst has confidence in forecasting the firm’s cash flows• Current or near-term earnings or cash flows are negative but are expected to turn positive in

the future• A firm’s competitive advantage is expected to be sustainable• The magnitude and timing of cash flows vary significantly

Comparable Companies• There are many firms exhibiting similar growth, return, and risk characteristics• An analyst has a short-term time horizon• Prior, current, or near-term earnings or cash flows are positive• Prior, current, or near-term earnings or cash flows are positive• An analyst has confidence that the markets are, on average, right

• Sufficient information to predict cash flows is lacking• Firms are cyclical. For P/E ratios, use normalized earnings (i.e., earnings averaged throughout

the business cycle)

• Growth rate differences among firms are large.

Comparable Transactions• Recent transactions of similar firms exist• An analyst has a short-term time horizon

• An analyst has confidence the markets are, on average, right

• Sufficient information to predict cash flows is lacking

Same or Comparable Industry• Firms within the same industry or comparable industry are substantially similar in terms of

profitability, growth, and risk

• An analyst has confidence the markets are, on average, right

• Sufficient information to predict cash flows is lacking

When to Use Various Valuation Methodologies-Reference: ‘Merger Acquisitions and Other Restructuring Activities’ by Donald De Pamphilis - 6th Edition 2012

Replacement Cost• An analyst wants to know the current cost of replicating a firm’s assets

• The firm’s assets are easily identifiable, tangible, and separable

• The firm’s earnings or cash flows are negativeTangible Book Value• The firms’ assets are highly liquid

• The firm is a financial services or product distribution business

• The firm’s earnings and cash flows are negativeBreakup Value• The sum of the value of the businesses or product lines comprising a firm are

believed to exceed its value as a going concernLiquidation ValueLiquidation Value• An analyst wants to know asset values if the assets were liquidated today

• Assets are separable, tangible, and marketable• Firms are bankrupt or subject to substantial financial distress

• An orderly liquidation is possible

Real Options (Contingent Claims)• Additional value can be created if management has a viable option to expand, delay, or

abandon an investment

• Assets not currently generating cash flows have the potential to do so

• The markets have not valued the management decision-making flexibility associated with

the option

• Assets have characteristics most resembling financial options

• The asset owner has some degree of exclusivity (e.g., a patent)

Unlisted Cos – Fresh Allotment/ Issue of shares

Equity Shares

• Allotment of fresh shares by Indian company to Non-Resident

• Valuation as per Internationally Accepted Pricing Methodology on arms length basis (Fair Value) – Minimum price (not less than fair value of shares

so determined)

• Valuation needs to be done by a Chartered Accountant or SEBI Regd.

Merchant Banker

• Compliance:

• Reporting of receipt of funds within 30 days- Advance Remittance Form (ARF) +

Know Your Customer (KYC) Form

• Shares to be allotted within 180 days from the date of receipt of funds

• Filing of Form FC-GPR with annexures within 30 days from date of allotment

• Companies Act 2013 stipulates 60 days under the Deposit Regulations - Issue

within 60 days and refund within 15 days or else classified as Deposit u/s 42

Private Placement?

Non-residents (including NRIs): By way of subscription to its Memorandum of

Association: Made at face value subject to their eligibility to invest under the FDI scheme

Unlisted Cos – Fresh Allotment

Convertible Instruments – CCPS or CCD• Conversion price or conversion formula to be fixed upfront

• Conversion price under conversion formula should be in compliance with

pricing guidelines

• Conversion price

• Conversion price > Current Fair Value

• Variable conversion ratio – Conversion price at the lower end (maximum shares

allotted) > Current Fair Value

• In any case, conversion cannot be carried at a value lower than Fair Value of the

equity shares at the time of issue of the convertible instrument

• Benefit of fall in Fair Value in future will not help in lowering the conversion price

below the Fair Value at the time of issue of the convertible instrument. This wouldbelow the Fair Value at the time of issue of the convertible instrument. This would

ensure that the upside benefits could accrue to the Indian companies.

• Valuation needs to be done by a Chartered Accountant or SEBI Regd.

Merchant Banker

• Compliance:

• Reporting of receipt of funds within 30 days

• Shares to be allotted within 180 days from the date of receipt of funds

• Filing of Form FC-GPR with annexures within 30 days from date of allotment of

convertible instruments

• Filing of Form FC-GPR also required on conversion

Pricing of FDI Instruments with Optionality

• RBI issued a Circular 86 dated 09 January 2014 w.r.t ‘Put & Call options’ in

Equity/ CCPS/ CCDs

− RBI was not earlier comfortable with these options in SSA/ SHA – takes color of debt

• Optionality clause will oblige buy-back of securities from investor at the price

prevailing/ value determined at the time of exercise of option

− RBI has further specified that there shall not be an ‘assured price/ return’ for exit

• For Listed Companies – at prevailing market prices

• For Unlisted Companies – As per RBI Pricing Norms• For Unlisted Companies – As per RBI Pricing Norms

• ROE linked exit done away with

• Minimum lock-in – 1 year

FEMA 20 - Optionality clause w.e.f 30 December 2013 –RBI Circular 86 dated 09 January 2014

Amendment to Regulation 5

“Further, shares or convertible debentures containing an optionality clause butwithout any option/right to exit at an assured price shall be reckoned as eligible

instruments to be issued to a person resident outside India by an Indian company

subject to the terms and conditions as specified in Schedule I.”

Amendment to Regulation 9

Subject to minimum lock-in period of one year or minimum lock-in period asprescribed under Annex-B of Schedule 1 whichever is higher, a person resident

outside India holding the shares or debentures of an Indian company containing an

optionality clause in accordance with these Regulations and exercising theoption/right, may exit without any assured return, subject to the following

conditions:conditions:

(i) In case of listed company, at the market price determined on the floor of the

recognised stock exchanges;

(ii) In case of equity shares, CCDs, CCPs of unlisted company, at a price worked out

as per any internationally accepted pricing methodology on arms length basisat the time of exit, duly certified by a Chartered Accountant or a SEBI registered

Merchant Banker.

The guiding principle would be that the non-resident investor is not guaranteed anyassured exit price at the time of making such investment/agreements and shall

exit at the price prevailing at the time of exit, subject to lock-in period requirement.”

SEBI permits contracts for pre-emption and options in shareholders agreements

PR No. 98/2013 October 03, 2013

SEBI permitting contracts for pre-emption including right of first refusal, tag-along or drag-along rights contained in the shareholders agreements orarticles of association of companies. SEBI has also permitted contracts

containing an option for purchase or sale of securities subject to the following:

(a) the title and ownership of the underlying securities are heldcontinuously by the selling party to such a contract for a minimum periodof one year from the date of entering into the contract;

(b) the price or consideration payable for the sale or purchase of the underlying(b) the price or consideration payable for the sale or purchase of the underlying

securities pursuant to exercise of any option contained therein, is incompliance with all the laws for the time being in force, as applicable;

and

(c) the contract has to be settled by way of actual delivery of the underlyingsecurities.

In accordance with provisions of Foreign Exchange Management Act, 1999.

Further, this notification shall not affect or validate any contract which hasbeen entered into prior to the date of this notification. Vedanta Resources’sacquisition BALCO, HZL

Issue of Partly Paid Shares and Warrants….1/2

Partly paid equity shares

• Partly paid shares now FDI compliant

• Pricing to be determined upfront – Fair Value

• 25% of consideration to be paid upfront (including share premium, if any)

(Full payment within 12 months)

• Can be received after 12 months, if issue size > 500 cr and appoint

monitoring agency

Warrants

• Warrants now FDI compliant

• Pricing of warrants and price/ conversion formula to be determined upfront –

Fair Value

• 25% of consideration to be paid upfront (balance within 18 months)

• Price for conversion not to be lower than fair value at the time of issuance of

warrants

− Investee company can receive more than pre-determined price

Issue of Partly Paid Shares and Warrants….2/2

Deferment of payment of consideration amount or shortfallin receipt of consideration amount:

Not be treated as subscription to partly paid shares and

warrants.

NRIs shall also be eligible to invest on non-repatriation basisin partly-paid shares and warrants issued by Indian

companies in accordance with the provisions of the Companiescompanies in accordance with the provisions of the CompaniesAct/SEBI guidelines/Income tax provisions, as applicable.

Investments by NRIs in partly-paid shares and warrants onnon-repatriation basis shall also be subject to terms andconditions stipulated in Schedule 4 to Notification No. FEMA.

20/2000-RB dated 3rd May 2000

Consideration can be paid by the buyer on a deferred basis

In case of transfer of shares between a resident buyer and a non-resident seller or vice-versa, not more than twenty five per cent of the total consideration can be paid bythe buyer on a deferred basis within a period not exceeding eighteen months from thedate of the transfer agreement. For this purpose, if so agreed between the buyer and the

seller, an escrow arrangement may be made between the buyer and the seller for an

amount not more than twenty five per cent of the total consideration for a period not

exceeding eighteen months from the date of the transfer agreement or if the total

consideration is paid by the buyer to the seller, the seller may furnish an indemnity for an

amount not more than twenty five per cent of the total consideration for a period not

exceeding eighteen months from the date of the payment of the full consideration:

Provided the total consideration finally paid for the shares must be compliant withProvided the total consideration finally paid for the shares must be compliant with

the applicable pricing guidelines.”

CIT v Hemel Raju Shete, High Court of Judicature at Bombay� HC held that deferred consideration, linked to future performance of the company, is

dependent upon uncertain events, which is contingent and has not accrued in the

year of execution of the agreement. No part of the deferred consideration is,therefore, chargeable to tax in the year of execution.

� HC accepted taxability of deferred consideration as capital gain income in the

respective year of accrual.

Issue of shares against lump sum technical know how/ royalty, ECB, pre-incorporation expenses/ import payables/ other legitimate dues

Conversion of External Commercial Borrowings (ECB) [i.e. other than import dues

deemed as ECB or Trade Credit as per RBI guidelines] into shares / convertibledebentures.Invocation of pledge, transfer of financial securities shall be in accordance

with the extant FDI/FPI policy including provisions relating to sectoral cap and

pricing as applicable under FEMA 20

Issue of shares / preference shares against lump-sum technical know-how fee,royalty due for payment/repayment

Issue of equity shares against Pre-operative / pre – incorporation expensesIssue of equity shares against Pre-operative / pre – incorporation expenses(including payment of rent etc.), import of capital goods/ machinery/equipment (excluding second-hand machinery), is allowed under the

Government route.

Pricing:Same as issue of shares

Liability denominated in foreign currency into Equity: Exchange rate

prevailing on the date of the agreement between the parties concerned for such

conversion. Fair value of equity shares to be issued shall be worked out with

reference to the date of conversion only.

Capitalization of legitimate dues/ Payables

• General permission has been given to issue of equity shares only against

any legitimate dues payable e.g. payments for use or acquisition of

intellectual property rights, for import of goods, payment of dividends,

interest payments, consultancy fees, etc.)

• Remittance of such dues should not require prior permission of the

Government of India or the RBI

• Dues should not be overdue

• Prior permission of the FIPB/ RBI not required for allotment of shares • Prior permission of the FIPB/ RBI not required for allotment of shares

• The equity shares issued should comply with the extant FDI guidelines on

sectoral caps, etc.

• Issue price > Fair Value

• CCPS/ CCD allotment not permitted

• Withholding tax requirements to be complied with

ISSUE OF INSTRUMENTSIssue of Right Shares – equity, preference & debentures

Pricing of Right issue

Listed Price as determined under SEBI

UnlistedNot less than price at which the offer on

right basis is made to resident

shareholders

Additional allocation of rights share by residents to non-residents

Subject to sectoral cap

Unsubscribed portion of Rights Issue

can be subscribed by Non-Resident

Issue of Bonus Shares

� Subject to sectoral cap, Companies Act & SEBI� Subject to sectoral cap, Companies Act & SEBI

� Pricing guidelines not applicable

Acquisition of shares under Scheme of Merger/Demerger/Amalgamation/Reconstruction of two or more Indian companies

� No specific methodology (subject to Order of High Court)

� Subject to sectoral cap

� Not engaged in prohibited activities

� The transferee or the new company files a report within 30 days with the

Reserve Bank giving full details of the shares held by persons resident outside

India in the transferor and the transferee or the new company, before and after

the merger/amalgamation/reconstruction, and also furnishes a confirmation

that all the terms and conditions stipulated in the scheme approved by the

Court have been complied with.

Rights shares issued by an Indian company at a discount

FAQ.22. Can a foreign investor invest in Rights sharesissued by an Indian company at a discount?

Ans. There are no restrictions under FEMA for investment in

Rights shares issued at a discount by an Indian company,

provided the rights shares so issued are being offered at the

same price to residents and non-residents. The offer on right

basis to the person’s resident outside India shall be:basis to the person’s resident outside India shall be:

(a) in the case of shares of a company listed on a recognized

stock exchange in India, at a price as determined by the

company; and

(b) in the case of shares of a company not listed on a recognized

stock exchange in India, at a price which is not less than the

price at which the offer on right basis is made to resident

shareholders.

Issue of shares under ESOP/Sweat equity

Indian company may issue “employees’ stock option” and/or “sweat equity

shares” to its employees/directors or employees/directors of its holding

company or joint venture or wholly owned overseas subsidiary/subsidiaries

who are resident outside India, provided that :

a) The scheme has been drawn either in terms of regulations issued under the

Securities Exchange Board of India Act, 1992 or the Companies (Share

Capital and Debentures) Rules, 2014 notified by the Central Government

under the Companies Act 2013, as the case may be.

b) The “employee’s stock option”/ “sweat equity shares” issued to non-resident

employees/directors under the applicable rules/regulations are in

compliance with the sectoral cap applicable to the said company.

c) Issue of “employee’s stock option”/ “sweat equity shares” in a company

where foreign investment is under the approval route shall require prior

approval of the Foreign Investment Promotion Board (FIPB) of Government

of India.

d) Issue of “employee’s stock option”/ “sweat equity shares” under the

applicable rules/regulations to an employee/director who is a citizen of

Bangladesh/Pakistan shall require prior approval of the Foreign

Investment Promotion Board (FIPB) of Government of India.

Gift of Shares

By a person resident in India for transfer of sharesto a person resident outside India by way of gift toclose relatives

In case of shares and convertible debentures, a

certificate from a Chartered Accountant on the value of

such securities according to the guidelines issued by

Securities & Exchange Board of India or fair valueSecurities & Exchange Board of India or fair value

worked out as per any internationally acceptedpricing methodology for valuation of shares for listed

companies and unlisted companies, respectively.

Not exceeding 5 per cent of the paid up capital of the

company and rupee equivalent of US$ 50,000 duringa financial year.

Transfer of shares - includesBuyback, delisting, exit, open offer/substantial

acquisition/SEBI SAST, capital reduction scheme …1/2

Transferor Transferee

Non-Resident

(other than NRI

and erstwhile

OCB)

Non-Resident

(including NRIs)

By way of sale or

gift

Pricing norms not

applicable.

Under Automatic

Route.

With FIPB

approval if sector

under approval

route.

NRIs NRIs By way of sale or Under AutomaticNRIs NRIs By way of sale or

gift

Pricing norms not

applicable.

Under Automatic

Route.

With FIPB

approval if sector

under approval

route.

Non-Resident Person resident

in India

By way of sale or

gift

Pricing norms

applicable.

Under Automatic

Route.

Transfer of shares …2/2

Transferor Transferee

NRI and

erstwhile

OCB

Non-Resident By way of sale or

gift

Pricing norms not

applicable.

Prior permission

of RBI.

With FIPB approval

if sector under

approval route.

Resident Non-Resident

including NRIs

Activities falling under Automatic

Route. With FIPB approval if sectorincluding NRIs Route. With FIPB approval if sector

under approval route.

Pricing norms applicable.

Transfer of Shares by Resident which requires Governmentapproval:(i) Companies engaged in sector falling under the Government Route. (ii)

Transfer of shares resulting in foreign investments in the Indian

company, breaching the sectoral cap applicable.

Non-Resident can sell shares on a recognized Stock Exchange in India

through a stock broker registered with stock exchange or a merchant banker

registered with SEBI.

Form FC-TRS within 60 days from the date of receipt of amount of consideration.

Onus on transferor / transferee, resident in India.

Unlisted Cos – Transfer of Shares

Transfer of Shares in Indian company by Resident to Non-Resident

• Equity Shares

• Consideration for transfer > Current Fair Value

• Convertible Instruments – CCPS or CCD

• Transfer price to be determined based on conversion ratio

• Conversion price, based on transfer price > Current Fair Value (not less

than fair value)

• Valuation needs to be done by a Chartered Accountant or SEBI• Valuation needs to be done by a Chartered Accountant or SEBIRegd. Merchant Banker

• Compliance:

• Filing of Form FC-TRS within 60 days from the date of receipt of funds.

• Indian company can record share transfer only on receiving

acknowledged Form FC-TRS

Unlisted Cos – Transfer of Shares

Transfer of Shares in Indian company by Non-Resident to Non-Resident

• Valuation guidelines are not applicable

• Technically, no reporting requirements

Unlisted Cos – Transfer of Shares

Transfer of Shares in Indian company by Non-Resident to Resident & Buy-back of Shares

• Equity Shares

• Consideration for transfer/ buy-back price < Current Fair Value

• Convertible Instruments – CCPS or CCD

• Transfer price to be determined based on conversion ratio

• Conversion price, based on transfer price < Current Fair Value

• Valuation needs to be done by a Chartered Accountant or SEBI Regd. • Valuation needs to be done by a Chartered Accountant or SEBI Regd.

Merchant Banker

• Compliance:

• Filing of Form FC-TRS within 60 days from the date of payment of funds

• Indian company can record share transfer only on receiving acknowledged Form

FC-TRS

Unlisted Cos – Downstream Investments

• Investment by Foreign ‘Owned’ and/ or ‘Controlled’ Indian company into another Indian company

• Covers fresh investment and acquisition of existing shares

• Regarded as Indirect FDI

• Pricing guidelines applicable to Direct FDI will equally apply

• Investment/ consideration for transfer > Fair

Value

• Compliance: Filing of intimation with SIA, DIPP

Foreign Co

Indian Co

> 50%

1% to 100%

• Compliance: Filing of intimation with SIA, DIPP and FIPB within 30 days from date of investment

• Downstream buy-backs also covered by pricing guidelines

• Buy-back price < Current Fair Value

• Valuation needs to be done by a Chartered Accountant or SEBI Regd. Merchant Banker

• Anomaly: Downstream investment through acquisition of shares from NR

• Indian company can record share transfer only

on receiving acknowledged Form FC-TRS

Downstream Indian Co

Prohibited Sectors ….1/2

Under Schedule 1 of FEMA 20 (FDI)FDI is prohibited in:

(a) Lottery Business, including Government/private lottery, online lotteries,

etc.

(b) Gambling and Betting, including casinos etc.

(c) Chit funds

(d) Nidhi company

(e) Trading in Transferable Development Rights (TDRs)

(f) Real Estate Business or Construction of Farm Houses

(g) Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco orof tobacco substitutes**

(h) Activities/sectors not open to private sector investment e.g. (I) Atomic (h) Activities/sectors not open to private sector investment e.g. (I) Atomic Energy and (II) Railway operations (other than permitted activities

mentioned in entry 18 of Annex B of FDI Policy).

**Wholesale cash and carry, retail trading etc. shall be governed by FDI policy

Explanation to Regulation 5(7A) of FEMA 20No class of investors under Schedule 1 (FDI), 2 (FII), 2A (FPI), 3 (NRI), 4 (NRI on

non-repatriation), 6 (FVCI) and 8 (QFI) of FEMA 20 shall make investment,

directly or indirectly, in any security issued by any company engaged or

proposes to engage in prohibited sector under FEMA 1.

Prohibited Sectors ….2/2

Under FEMA 1 Foreign investment in any form is prohibited in a

company or a partnership firm or a proprietary concern or any entity,

whether incorporated or not (such as, Trusts) which is engaged or

proposes to engage in the following activities6:

(a) Business of chit fund, or

(b) Nidhi company, or

(c) Agricultural or plantation activities, or

(d) Real estate business, or construction of farm houses, or

(e) Trading in Transferable Development Rights (TDRs).

� “Real estate business” means dealing in land and immovableproperty with a view to earning profit therefrom and does notinclude development of townships, construction of residential/commercial premises, roads or bridges, educational institutions,

recreational facilities, city and regional level infrastructure,

townships.

� Further, earning of rent/income on lease of the property, notamounting to transfer, will not amount to real estate business.

Indirect Foreign Investment

Prohibited sectors: Not permitted.

Indirect foreign investment via Indian Owned & ControlledCompany: Telecom, I&B, Print Media, Single brand retailTrading, Multi Brand Retail Trading, Media,Pharmaceuticals?

Construction and development projects/Real estate?

RBI Master Circular: The FDI recipient Indian company at theRBI Master Circular: The FDI recipient Indian company at thefirst level which is responsible for ensuring compliance with the

FDI conditionalities like no indirect foreign investment inprohibited sector, entry route, sectoral cap/conditionalities,

etc. for the downstream investment made by in thesubsidiary companies at second level and so on and so forth

would obtain a certificate to this effect from its statutory auditor

on an annual basis as regards status of compliance with the

instructions on downstream investment and compliance with

FEMA provisions.

Indirect Foreign Investment

� Downward investment by Indian foreign owned or controlled

company is not permissible in the form of ‘redeemable preference

shares’ or ‘non-convertible/redeemable debentures’ the same would

be treated as debt since such types of preference shares/debentures

i.e. non convertible, optionally convertible or partially convertible, for

issue are considered as debt.

� Transfer, by way of sale of shares of Company ‘B’, held byCompany ‘A’, which is foreign owned and controlled, toCompany ‘C”, would be treated similar to a transfer from a non-resident to a resident and hence, would be subject to RBI/ SEBIpricing guidelines, entry route, sectoral caps etc., even though it is

a rupee transaction between two resident Indian companies.

� Valuation norms not required for setting-up downstream

investments - second level and so on and so forth for IOCC?

Partnership Firm / Proprietary Firm� By NRI and PIO:

� On non-repatriation basis:

(Not engaged in any agricultural/plantation

or real estate business /print media sector)

√√√√

� On repatriation basisSubject to prior permission of RBI inconsultation with the Government of India.Generally not permitted by FIPB

� Other than NRIs/PIO:Subject to prior approval of RBI inconsultation with the Government of India.

Generally not permitted by FIPB

Schedule 4 of FEMA 20A Non-resident Indian (NRI), including a company, a trust and a partnership firm incorporated outsideIndia and owned and controlled by non-resident Indians, may acquire and hold, on non-repatriation

basis, equity shares, convertible preference shares, convertible debenture, warrants or units, which

will be deemed to be domestic investment at par with the investment made by residents. Without loss of

generality, it is stated that

a. An NRI may acquire, on non-repatriation basis, any security issued by a company without any limiteither on the stock exchange or outside it.

b. An NRI may invest, on non-repartition basis, in units issued by an investment vehicle without anylimit, either on the stock exchange or outside it.

c. An NRI may contribute, on non-repatriation basis, to the capital of a partnership firm, a proprietaryfirm or a Limited Liability Partnership without any limit.

Prohibition on purchaseNotwithstanding what has been stated in paragraph 1, an NRI shall not make any investment, under this

Schedule, in equity shares, convertible preference shares, convertible debenture, warrants or units of

a Nidhi company or a company engaged in agricultural/plantation activities or real business ora Nidhi company or a company engaged in agricultural/plantation activities or real business or

construction of firm houses or dealing in Transfer or Development Right.

Explanation: For the purpose of this paragraph, “real estate business” means dealing in land andimmovable property with a view to earning profit therefrom and does not include development oftownships, construction of residential commercial permissions, roads or bridges, educational institutions,

recreational facilities, city and regional level infrastructure, township. Further, earning of rent income onlease of the property, not amounting to transfer, will not amount to “real estate business”.Investment in units of Real Estate Investment Trust (REITs) registered and regulated under the SEBI

(REITs) regulations 2014 shall also be excluded from the definition of “real estate business”.

Method of payment for purchaseBy way if inward remittance through normal banking channel form abroad or out of funds held in

NRE/FCNR/NRO account maintained with a bank in India:

Sale/Maturity proceedsThe sale/maturity proceeds (net of applicable taxes) of the securities or units acquired under this Schedule

shall be credited only to NRO account irrespective of the type of account from which the considerations

for acquisition were paid. The amount invested under this Schedule and the capital appreciation thereon

shall not be allowed to be repatriated abroad.

SCHEDULE 6

INVESTMENT BY A REGISTERED FOREIGN VENTURE CAPITAL INVESTOR

1. Investment by Foreign Venture Capital Investor.(1) A Foreign Venture Capital Investor (FVCI) registered under the SEBI (FVCI) Regulations, 2000, may

purchase

(a) equity or equity linked instruments or debt instruments, issued by an Indian company

engaged in any sector mentioned at Annex to this Schedule and whose shares are not listed on

a recognised stock exchange at the time of issue of the said securities/instruments;

(b) equity or equity linked instruments or debt instruments issued by a startup, irrespective of the

sector in which it is engaged;

(c) units of a Venture Capital Fund (VCF) or of a Category I Alternative Investment Fund (Cat- I AIF)

or units of a scheme or of a fund set up by a VCF or by a Cat-I AIF;

subject to the terms and conditions as may be laid down by the Reserve Bank.

Note: An FVCI registered under the SEBI (FVCI) Regulations, 2000 shall not require any prior approval of

RBI for investments made under this Schedule.

(2) A registered FVCI may purchase the securities/instruments mentioned above either from the issuer of

these securities/instruments or from any person holding these securities/instruments or on a

recognized stock exchange.recognized stock exchange.

(3) The consideration for all investment by an FVCI shall be paid out of inward remittance from abroad

through normal banking channels or out of sale/maturity proceeds or income generated from

investment already made as stated earlier.

2. Maintenance of account by the registered FVCIA registered FVCI may open a foreign currency account and/or a rupee account with a designated branch

of an Authorised Dealer subject to the condition that the account will be used only and exclusively for

transactions under this Schedule.

3. Transfer of investmentsThe FVCI may acquire, by purchase or otherwise, from, or transfer, by sale or otherwise, to, any person

resident or non-resident, any security/instrument it is allowed to invest in, at a price that is mutuallyacceptable to the buyer and the seller/issuer. The FVCI may also receive the proceeds of the liquidation

of VCFs or of Cat-I AIFs or of schemes/funds set up by the VCFs or Cat-I AIFs.

4. ReportingThe actual inflow/outflow and the investments made by FVCIs may be reported in a manner as prescribed

by Reserve Bank or SEBI.

ANNEXList of sectors in which a Foreign Venture Capital Investor is allowed to invest

1. Biotechnology

2. IT related to hardware and software development

3. Nanotechnology

4. Seed research and development

5. Research and development of new chemical entities in pharmaceutical sector

6. Dairy industry

7. Poultry industry

8. Production of bio-fuels

9. Hotel-cum-convention centres with seating capacity of more than three thousand.

10.Infrastructure sector. (This will include activities included within the scope of the definition

of infrastructure under the External Commercial Borrowing guidelines/policies notifiedof infrastructure under the External Commercial Borrowing guidelines/policies notified

under the extant FEMA Regulations as amended from time to time).

Section 1.2

Inbound Investments

� Listed Companies

Listed Cos – Fresh Allotment

Equity Shares

• Pricing guidelines as per SEBI ICDR Regulations

• IPO, Offer for sale, Buy Bach tender offer – Pricing guidelines are not

applicable

• Preferential allotment – Higher of:

• Average of weekly high & low closing prices during 6 months prior to relevant date

• Average of weekly high & low closing prices during 2 weeks prior to relevant date

Relevant date – 30 days prior to GM of shareholders Relevant date – 30 days prior to GM of shareholders

• Preferential allotment to QIB (< 5 nos) – Average of weekly high & low closing

prices during 2 weeks prior to relevant date

• Rights Issue

• Pricing guidelines are not applicable

• To be determined in consultation with SE

Convertible Instruments – CCPS or CCD

• Conversion price or conversion formula to be fixed upfront

• Conversion price > Value as per SEBI guidelines

Listed Cos – Transfer of Shares

Transfer of Shares in Indian List Co by Resident to Non-Resident – Off

Market Transfers

• Equity Shares

• Pricing as per SEBI preferential allotment guidelines

• Relevant date – Date of transfer of shares

• Consideration for transfer > Value as per SEBI preferential allotment guidelines

• Convertible Instruments – CCPS or CCD

• Transfer price to be determined based on conversion ratio

• Conversion price, based on transfer price > Value as per SEBI guidelines

• Valuation needs to be certified by a Chartered Accountant or SEBI Regd.

Merchant Banker

Listed Cos – Transfer of Shares

Transfer of Shares in Indian company by Non-Resident to Non-Resident

• Valuation guidelines are not applicable

• Technically, no reporting requirements

Acquisition of shares under the FDI scheme by a non-resident on a recognized

Stock Exchange through a registered broker :

A non resident including a Non Resident Indian under FDI schemeA non resident including a Non Resident Indian under FDI scheme

provided that:

The non-resident investor has already acquired and continues to hold

the control in accordance with SEBI (Substantial Acquisition of Shares

and Takeover) Regulations .

Listed Cos – Transfer of Shares

Transfer of Shares in Indian company by Non-Resident to Resident

• Equity Shares

• Consideration for transfer < Value as per SEBI guidelines

• Convertible Instruments – CCPS or CCD

• Transfer price to be determined based on conversion ratio

• Conversion price, based on transfer price < Value as per SEBI guidelines

• Valuation needs to be done by a Chartered Accountant or SEBI Regd.• Valuation needs to be done by a Chartered Accountant or SEBI Regd.

Merchant Banker

• Buy-back of shares

• Pricing guidelines not specified under SEBI Buy-back Regulations

• Value as per SEBI preferential allotment guidelines will be applicable for tender

offer

• Pricing regulations not applicable for market purchases

• Same price needs to be offered to all shareholders

Approval of RBI is not required: Pricing Guidelines not met

Transfer of shares from a Non-Resident to Resident where pricingguidelines under FEMA, 1999 are not met:

� Pricing for the transaction is compliant with the specific/explicit, extant and

relevant SEBI regulations/guidelines (such as IPO, Book building, blockdeals, delisting, exit, open offer/substantial acquisition/SEBI SAST, buyback); and

� Chartered Accountants Certificate to the effect that compliance with the

relevant SEBI regulations/guidelines as indicated above is attached to the

form FC-TRS to be filed with the AD bank.form FC-TRS to be filed with the AD bank.

Transfer of shares from Resident to Non-Resident where pricing guidelinesunder the FEMA, 1999 are not met:

� Pricing for the transaction is compliant with the specific/explicit, extant and

relevant SEBI regulations/guidelines (such as IPO, Book building, blockdeals, delisting, exit, open offer/substantial acquisition/SEBI SAST); and

� Chartered Accountants Certificate to the effect that compliance with the

relevant SEBI regulations/guidelines as indicated above is attached to the

form FC-TRS to be filed with the AD bank.

Disclose in Balance Sheet

� An Indian company taking on record in its books any

transfer of its shares or convertible debenture by way of

sale from a resident to a non-resident and a non-

resident to a resident shall disclose in its balancesheet for the financial year, in which the transaction

took place, the details of valuation of share or

convertible debentures, the pricing methodology adoptedconvertible debentures, the pricing methodology adopted

for the same as well as the agency that has

given/certified the valuation.

If Contravened?� To bring the difference form the foreign investor to

comply with pricing guidelines and also to apply forcompounding for contravention of pricingguidelines?

Section 2

Outbound Investments

Overseas Direct InvestmentAn Indian company/Partnership Firm/ LLP/ Body Corporate that wishes to acquire or

invest in a foreign company outside India must comply with the Foreign Exchange

Management (Transfer or Issue of any Foreign Security) Regulations, 2004 (the “ODIRegulations”).

‘General permission’ to make a ‘direct investment outside India’ in bona fide business

activities.

The term ‘direct investment outside India’ has been defined as ‘investment by way of

contribution to the capital or subscription to the Memorandum of Association of a

foreign entity or by way of purchase of existing shares of a foreign entity either by

market purchase or private placement, or through stock exchange, but does not

include portfolio investment’, but includes loans, guarantee.

Direct Investment in a Joint Venture/Wholly Owned Subsidiary

Investment in company listed overseas.

Investment by mutual funds.

Swap or Exchange of Shares.

Investment by way of capitalization of exports, or fees royalties etc., due to the Indian

company.

Transfer of shares.

Investment by Individuals

Limits on individuals owning shares in foreign companies. An individual may inter-alia

invest in equity and in rated bonds / fixed income securities of overseas companies as

permitted in terms of the limits and conditions specified under the Liberalized RemittanceScheme (up to a maximum amount of US$ 250,000); and also under ODI Scheme.

-

Direct Investment outside India – Automatic route

Extent of Investment:� The total financial commitment in JV / WOS < 400% of the net worth of the Indian Party

as on the date of the last audited balance sheet + Balance in EEFC Account + ADR/GDR Proceeds.

� Any financial commitment exceeding USD in a financial year would require prior approval of Reserve Bank even when the total FC of the Indian Party is within the eligible

limit under the automatic route

Meaning of Net worth & Financial commitment :

Net worth:

� Financial commitment:

49

Paid up capital (equity + Preference

shares) Free Reserves

Contribution

to

equity/FCPref.

Shares of the

JV / WOS

Loan to the

JV/ WOS

100% of guarantee

+ 50% of

performance

guarantee to or on

behalf of JV / WOS

Bank guarantee

by Indian

resident bank +

Charge on India

assets

FEMA & Valuation

ODI(Investment in JV/WOS abroad)

Issue of shares/ Transfer of

Shares

- Investment of Funds - Investment of Funds exceeding USD 5 Mio.

- Swap of SharesIn any other case

Valuation by Category I SEBI Registered Merchant

Banker or an Investment Banker/Merchant Banker registered

outside India registered.

Chartered Accountant/Certified

Public Accountant

Specific valuation method has not been prescribed

Outbound Investment

Fresh Investment/ Additional Investment

• Covers setting-up a new co, acquisition of stake in existing co and further

investment into an existing investee co - partial / full acquisition

• Valuation requirements:

• Investment upto USD 5 mn – Valuation by a Chartered Accountant/ Certified

Public Accountant

• Investment > USD 5 mn – Valuation by a Category I Merchant Banker or

Investment Banker/ Merchant Banker outside India registered with the appropriateInvestment Banker/ Merchant Banker outside India registered with the appropriate

regulatory

• Investment consideration < Valuation as above

• Valuation required for every tranche of investment

• Valuation also required for setting-up a WOS

• In case of additional overseas direct investments by the Indian party in it’s

JV / WOS whether at premium or discount or face value, the concept of

valuation, as indicated above, shall be applicable.

• Valuation norms not required for setting-up downstream investments by JV/

WOS/ SPV - second level and so on and so forth?

Fresh Investment/ Additional Investment

Transfer of Outbound Investments from Resident to Non-Resident

Reporting of Disinvestment by way of Sale or Transfer of Shares / Closure/ Voluntary Liquidation /Winding Up/ Merger /Amalgamation of JV / WOS:

Transfer by way of sale of shares of a JV / WOS with or without involvingWrite off of the investment:

The sale is effected through a stock exchange where the shares of the overseas

JV/ WOS are listed.

If the shares are not listed on the stock exchange and the shares are

disinvested by a private arrangement, the share price is not less than thevalue certified by a Chartered Accountant / Certified Public Accountant as thevalue certified by a Chartered Accountant / Certified Public Accountant as the

fair value of the shares based on the latest audited financial statements of the

JV / WOS

Consideration for transfer > Valuation as above

• Sale proceeds have to be received within 90 days from the date sale

Transfer of Outbound Investments from Resident to Resident

• Valuation needs to be done by a Chartered Accountant/ Certified Public

Accountant, based on the latest audited financial statements from a

seller’s perspective

• Valuation required from Chartered Accountant/ Certified Public

Accountant or Merchant Banker from Buyer’s perspective

Section 3

Swap of Shares

Swap of Shares

A. Share Swap:

Valuation of the shares will have to be made by a SEBI registered Cat. I Merchant

Banker or an Investment Banker outside India registered with the appropriate regulatory

authority in the host country. No method for valuation of shares has been prescribed

ADR/ GDR Swap: Valuation by Investment Banker

Swap of shares involving fresh allotment by Indian Co

• FIPB approval not required

• Valuation needs to be done by a Merchant Banker• Valuation needs to be done by a Merchant Banker

Swap of shares of an Indian Co between two Non-Residents

• Valuation norms not applicable – Non-Resident to Non-Resident transfer

• FIPB approval also not required, since no shares are being allotted by the

Indian company

Section 4

LLP

LLPPricing

• By way of capital contribution or by way of acquisition / transfer of ‘profit

shares’, should be at Fair Value

• Transfer of capital contribution/profit share from a resident to a non-

resident, the transfer shall be for a consideration equal to or more than the

fair Value

• Fair Value as per internationally accepted/ adopted norms as per market

practicepractice

• Valuation to be carried out by Chartered Accountant or a practicing Cost

Accountant or by an approved valuer from the panel maintained by the

Central Government (Registered Valuers)

• Category I Merchant bankers left out – anomaly vis-à-vis issue of shares

by companies

LLP

Reporting Requirements

• Receipt of consideration for capital contribution

or profit share – Within 30 days

� Form Foreign Direct Investment – LLP(I)� Copies of FIRC

� KYC report of non-resident investor

� RBI will allot UIN for each remittanceRBI will allot UIN for each remittance

• Transfer of capital contribution or profit share

between Non-Resident and Resident – Within 60

days

� Form Foreign Direct Investment – LLP(II)

• Non-Resident to Non-Resident transfer

� FIPB approval required

� No specific reporting specified

Income tax provisions

56(2)(vii) An individual or a Hindu undivided

family receives any shares and

securities (other than from exempted

categories)

Without consideration or a

consideration which is less than fair

market value – Fair value is book

value/break-up value

56(2)(vii)(a) A firm or a company not being a

company in which the public are

substantially interested, receives

shares of a company not being a

company in which the public are

substantially interested (other than in

a scheme of merger, demerger etc.)

Without consideration or a

consideration which is less than fair

market value – Fair value is book

value/break-up value

a scheme of merger, demerger etc.)

56(2)(vii)(b) A company, not being a company in

which the public are substantially

interested, receives from any person

being a resident, any consideration for

issue of shares that exceeds the fair

market value of the shares (other than

by a venture capital undertaking from

a venture capital company or a venture

capital fund)

Consideration for issue of shares

that exceeds the face value as

exceeds the Fair value is:

Book value/break-up value ;

Or value as per DCF method;

Or Based on the value of its assets,

including intangible assets being

goodwill, know-how, patents,

copyrights, trademarks, licences,

franchises or any other business or

commercial rights of similar nature

International Transactions for Transfer Pricing - Explanation (i) to 92B(1)…

“(c) Capital financing, including any type of long-term or short-

term borrowing, lending or guarantee, purchase or sale of

marketable securities or any type of advance, payments or

deferred payment or receivable or any other debt arising during

the course of business;

“(e) a transaction of business restructuring or reorganisation,“(e) a transaction of business restructuring or reorganisation,

entered into by an enterprise with an associated enterprise,

irrespective of the fact that it has bearing on the profit, income,

losses or assets of such enterprises at the time of the

transaction or at any future date”

Form No. 3CEBInternational transactions of purchase or sale of marketable

securities, issue and buyback of equity shares, optionallyconvertible/ partially convertible/ compulsorily convertibledebentures/ preference shares

Bombay High Court in the case of Vodafone India Services Pvt. Ltd. v. Union of India

On August 21, 2008, VISPL issued 2,89,224 equity shares of the face value of

INR 10 each at a premium, at INR 8,509 per share to its AE as per CCI formula.

Tax Officer (TO) and Transfer Pricing Officer (TPO) valued each equity share at

INR 53,775 as per DCF methodology.

Shortfall in premium to the extent of INR 45,256 per share resulted into total

shortfall of INR 13.09 billion.

Issue of shares at a premium by Vodafone to its Hold Co does not give rise to

any income as it a capital account transaction and hence transfer pricingany income as it a capital account transaction and hence transfer pricing

provisions should not apply to such a transaction.

Income arising from an International Transaction was a condition precedent for

application of Chapter X of the Act.

Income under section 2(24) – whether includes capital receipt?

The amount received on issue of shares was admittedly a capital account

transaction not separately brought within the definition of Income, except in

cases covered section 56(2)(viib). Consciously not brought to tax amounts

received from a non-resident for issue of shares, as it would discourage capital

inflow from abroad.

Exempt under Deposit Rules2(c)(ix) of Deposit Rules: Debentures compulsorily convertible into shares of thecompany within ten years.

2(c)(vii) any amount received and held pursuant to an offer made in accordance with the

provisions of the Act towards subscription to any securities, including share applicationmoney or advance towards allotment of securities pending allotment, so long as such

amount is appropriated only against the amount due on allotment of the securities applied

for; Explanation.- For the purposes of this sub-clause, it is hereby clarified that -

(a) Without prejudice to any other liability or action, if the securities for which

application money or advance for such securities was received cannot be allotted

within sixty days from the date of receipt of the application money or advance for

such securities and such application money or advance is not refunded to thesubscribers within fifteen days from the date of completion of sixty days, suchsubscribers within fifteen days from the date of completion of sixty days, such

amount shall be treated as a deposit under these rules.

(b) any adjustment of the amount for any other purpose shall not be treated as refund.

2(c)(ii) any amount received from foreign Governments, foreign or international banks,

multilateral financial institutions (including, but not limited to, International Finance

Corporation, Asian Development Bank, Commonwealth Development Corporation and

International Bank for Industrial and Financial Reconstruction), foreign Governments

owned development financial institutions, foreign export credit agencies, foreigncollaborators, foreign bodies corporate and foreign citizens, foreign authorities orpersons resident outside India subject to the provisions of Foreign ExchangeManagement Act, 1999 (42 of 1999) and rules and regulations made there under;

Private placement under CA2013

Section 42(6): A company making an offer or invitation under this section shall allot itssecurities within sixty days from the date of receipt of the application money for such

securities and if the company is not able to allot the securities within that period, it shall

repay the application money to the subscribers within fifteen days from the date ofcompletion of sixty days and if the company fails to repay the application money within

the aforesaid period, it shall be liable to repay that money with interest at the rate oftwelve per cent. per annum from the expiry of the sixtieth day:

Provided that monies received on application under this section shall be kept in aseparate bank account in a scheduled bank and shall not be utilised for any purpose

other than—other than—

(a) for adjustment against allotment of securities; or

(b) for the repayment of monies where the company is unable to allot securities.

Guidance Note on Computation MatrixType of contravention Existing Formula

1] Reporting ContraventionsA) FEMA 20Para 9(1)(A), 9(1)(B), part B of FC(GPR),

FCTRS (Reg. 10) and taking on record

FCTRS (Reg. 4)

B) FEMA 3Non submission of ECB statements

C) FEMA 120Non reporting/delay in reporting of

acquisition/setup of subsidiaries/step down

subsidiaries /changes in the shareholding

Fixed amount : Rs10000/- (applied once for

each contravention in a compounding

application) + Variable amount as under:

Up to 10 lakhs: 1000 per year

Rs.10-40 lakhs: 2500 per year

Rs.40-100 lakhs: 7000 per year

Rs.1-10 crore 50000 per year

Rs.10 -100 Crore : 100000 per year

Above Rs.100 Crore : 200000 per year

subsidiaries /changes in the shareholding

pattern

D)Any other reporting contraventions(except those in Row 2 below)E) Reporting contraventions by LO/BO/PO As above, subject to ceiling of Rs.2 lakhs. In

case of Project Office, the amount imposed

shall be calculated on 10% of total project

cost.

2] AAC/ APR/ Share certificate delaysIn case of non-submission/ delayed

submission of APR/ share certificates

(FEMA 120) or AAC (FEMA 22) or FCGPR

(B) Returns (FEMA 20)

Rs.10000/- per AAC/APR/FCGPR (B)

Return delayed.

Delayed receipt of share certificate –

Rs.10000/- per year, the total amount being

subject to ceiling of 300% of the amount

invested.

Guidance Note on Computation MatrixType of contravention Existing Formula

3]A] Allotment/RefundsPara 8 of FEMA 20/2000-RB (non-

allotment of shares or allotment/ refund

after the stipulated 180 days)

B] LO/BO/PO(Other than reporting contraventions)

Rs.30000/- + given percentage:

1st year : 0.30% 1-2 years : 0.35%

2-3 years : 0.40%

3-4 years : 0.45%

4-5 years : 0.50%

>5 years : 0.75% (For project offices the

amount of contravention shall be deemed to be

10% of the cost of project).

4] All other contraventions exceptCorporate Guarantees

Rs.50000/- + given percentage:

1st year : 0.50%

1-2 years : 0.55%1-2 years : 0.55%

2-3 years : 0.60%

3-4 years : 0.65%

4-5 years : 0.70%

> 5 years : 0.75%

5] Issue of Corporate Guarantees without

UIN/ without permission wherever required

/open ended guarantees or any other

contravention related to issue of Corporate

Guarantees.

Rs.500000/- + given percentage:

1st year : 0.050%

1-2 years : 0.055%

2-3 years : 0.060%

3-4 years : 0.065%

4-5 years : 0.070%

>5 years : 0.075%

In case the contravention includes issue of

guarantees for raising loans which are

invested back into India, the amount imposed

may be trebled.

II. The above amounts are presently subject to the following provisos, viz.i. the amount imposed should not exceed 300% of the amount of contraventionii. In case the amount of contravention is less than Rs. One lakh, the total amount

imposed should not be more than amount of simple interest @5% p.a. calculatedon the amount of contravention and for the period of the contravention in case of

reporting contraventions and @10% p.a. in respect of all other contraventions.

iii. In case of paragraph 8 of Schedule I to FEMA 20/2000 RB contraventions, the amount

imposed will be further graded as under:

a) If the shares are allotted after 180 days without the prior approval of Reserve Bank,

1.25 times the amount calculated as per table above (subject to provisos at (i) & (ii)

above).

b) If the shares are not allotted and the amount is refunded after 180 days with theIf the shares are not allotted and the amount is refunded after 180 days with the

Bank’s permission: 1.50 times the amount calculated as per table above (subject to

provisos at (i) & (ii) above).

c) If the shares are not allotted and the amount is refunded after 180 days without the

Bank’s permission: 1.75 times the amount calculated as per table above (subject to

provisos at (i) & (ii) above).

iv. In cases where it is established that the contravenor has made undue gains, the

amount thereof may be neutralized to a reasonable extent by adding the same tothe compounding amount calculated as per chart.

v. If a party who has been compounded earlier applies for compounding again for similar

contravention, the amount calculated as above may be enhanced by 50%.

III. For calculating amount in respect of reporting contraventions under para I.1above, the period of contravention may be considered proportionately {(approx.rounded off to next higher month ÷ 12) X amount for 1 year}. The total no. of daysdoes not exclude Sundays/holidays.

Foreign Exchange (Compounding Proceedings) Rules, 2000 (the Rules) -Compounding of Contraventions under FEMA, 1999...1/2

To delegate further powers to Regional Offices (Consolidated) as under:

Sr.

No.

FEMA Regulation Brief Description of Contravention

1 Paragraph 9(1)(A) of Schedule I to

FEMA 20/2000-RB dated May 3, 2000Delay in reporting inward remittance received for issue of shares.

2 Paragraph 9(1)(B) of Schedule I to

FEMA 20/2000-RB dated May 3, 2000Delay in filing form FC(GPR) after issue of shares.

3 Paragraph 8 of Schedule I to FEMA 20/2000-RB dated May 3, 2000

Delay in issue of shares/refund of share application money beyond 180 days, mode of receipt of funds, etc.

4 Paragraph 5 of Schedule I to FEMA 20/2000-RB dated May 3, 2000

Violation of pricing guidelines for issue of shares.

5 Regulation 2(ii) read with Regulation

5(1) of FEMA 20/2000-RB dated May

Issue of ineligible instruments such as non-

convertible debentures, partly paid shares, 5(1) of FEMA 20/2000-RB dated May 3, 2000

convertible debentures, partly paid shares,

shares with optionality clause, etc.

6 Paragraph 2 or 3 of Schedule I to FEMA 20/2000-RB dated May 3, 2000

Issue of shares without approval of RBI or FIPB respectively, wherever required.

7 Regulation 10A (b)(i) read with

paragraph 10 of Schedule I to FEMA 20/2000-RB dated May 3, 2000

Delay in submission of form FC-TRS on

transfer of shares from Resident to Non-

Resident.

8 Regulation 10B (2) read with paragraph

10 of Schedule I to FEMA 20/2000-RB dated May 3, 2000

Delay in submission of form FC-TRS on

transfer of shares from Non-Resident to

Resident.

9 Regulation 4 of FEMA 20/2000-RB dated May 3, 2000

Taking on record transfer of shares by investee

company, in the absence of certified from FC- TRS.

Foreign Exchange (Compounding Proceedings) Rules, 2000 (the Rules) -Compounding of Contraventions under FEMA, 1999 ...2/2

The work of three divisions of Foreign Investment Division (FID) viz. Liaison/ Branch/ Projectoffice(LO/ BO/ PO) division, Non Resident Foreign Account Division (NRFAD) and Immovable

Property (IP) Division has been transferred to FED, CO Cell, Reserve Bank of India, 6, Sansad Marg,

New Delhi- 110001 with effect from July 15, 2014. Accordingly, the officers attached to the FED, CO

Cell, New Delhi office are now authorised to compound the contraventions as under:

Sr.No.

FEMA Notification Brief Description of Contravention

1 FEMA 7/2000-RB, dated 3-5-

2000

Contraventions relating to acquisition and transfer of

immovable property outside India

2 FEMA 21/2000-RB, dated 3-5-

2000

Contraventions relating to acquisition and transfer of

immovable property in India

3 FEMA 22/2000-RB, dated 3-5-

2000

Contraventions relating to establishment in India of

Branch office, Liaison Office or project office

4 FEMA 5/2000-RB, dated 3-5- Contraventions falling under Foreign Exchange4 FEMA 5/2000-RB, dated 3-5-

2000

Contraventions falling under Foreign Exchange

Management (Deposit) Regulations, 2000

The powers to compound the contraventions have been delegated to all Regional Offices (exceptKochi and Panaji) and FED, CO Cell, New Delhi respectively without any limit on the amountof contravention. Kochi and Panaji Regional offices can compound the above contraventions for

amount of contravention below Rupees one hundred lakh (Rs.1,00,00,000/-). The contraventions of

Rupees one hundred lakh (Rs.1,00,00,000/-) or more under the jurisdiction of Panaji and Kochi

Regional Offices and all other contraventions of FEMA will continue to be compounded at Cell for

Effective Implementation of FEMA (CEFA), Mumbai, as hitherto.

Accordingly, applications for compounding the e contraventions e, up to the amount of

contravention stated therein may be submitted by the concerned entities to the respective Regional

Offices under whose jurisdiction they fall or to FED, CO Cell, New Delhi respectively. For all othercontraventions, applications may continue to be submitted to CEFA, Foreign Exchange

Department, 5th floor, Amar Building, Sir P.M.Road, Fort, Mumbai 400001.

Vijay Gupta VKGN & Associates

Chartered Accountants311, Ansal Bhawan

16, Kasturba Gandhi Marg

New Delhi – 110001

Mobile: 9810083373vijay.gupta@vkgnassociates.com

www.vkgnassociates.com

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