seminar on valuation – valuation under fema - nirc@icai - fema valuation - 23 july... · seminar...
TRANSCRIPT
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: [email protected]
www.vkgnassociates.com
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