Rajkot Branch of WIRC of ICAI

Rajkot Branch of WIRC of ICAI INBOUND INVESTMENTS Presented by: Mr. Chetan M Shah Mehta Chokshi & Shah Chartered Accountants Email: chetanshah@camcs.in 12th May 2018 MEHTA CHOKSHI & SHAH

Forms of Investment by Foreigners Investment in/through Partnership/Proprietary Concern Start-ups Companies/LLPs BO/LO/PO etc. NBFC Automatic Route Approval Route MEHTA CHOKSHI & SHAH

Set-up of a Partnership/ Proprietorship concern Foreigners • Investment in Partnership or Proprietorship NRI Others Allowed on non-repatriation basis Not Allowed All foreign investments are repatriable (net of applicable taxes) except in cases where the investment is made or held on non-repatriation basis MEHTA CHOKSHI & SHAH

Establishment of BO/LO/PO Establishment Branch Office Liaison Office Any Other Place Project Office Defence, Telecom, Private Security or Information and Broadcasting Approval of RBI is not required in cases where Govt approval or license/permission by the concerned Ministry/Regulator has already been granted. MEHTA CHOKSHI & SHAH

Schemes for Inbound Investment – FEMA 20 MEHTA CHOKSHI & SHAH

Advantages: • Both Host and home get benefit from FDI • Host country - use this for its economic development • Home country - supply its abundance resources and widen its market MEHTA CHOKSHI & SHAH

Advantages (Contd): • Economic Development Stimulation. • Easy International trade • Employment and economic boost • Development of human capital resources • Tax incentives • Resource transfer • Increased productivity, etc……. MEHTA CHOKSHI & SHAH

Disadvantages • Hindrance to Domestic Trade • Risk from Political changes • Negative Influence on Exchange Rates • Economic Non-viability • Negative impact on the country’s investment • Modern-Day Economic Colonialism • Expropriation. etc.…… MEHTA CHOKSHI & SHAH

FDI- Inflows in INDIA MEHTA CHOKSHI & SHAH

FDI – Legal Regime • FEMA, 1999 (Related FEMA regulations including FEMA 20) • The consolidated FDI Policy released by the DIPP every year, the most recent being FDI Policy 2017. The FDI Policy subsumes and supersedes all Press Notes/Press Releases/Clarifications/Circulars issued by DIPP as of August 27, 2017. • The policy pronouncement are made by the DIPP through press notes/press releases - notified by the RBI as amendments to FEMA 20. • However, since FEMA 20 constitutes legal regulation, in case of any conflict with the FDI Policy, the provisions of FEMA 20 shall prevail. • Most recently, the RBI has notified the newly amended Foreign Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2017 (notification no. FEMA 20(R)/2017-RB) MEHTA CHOKSHI & SHAH

FDI – Legal Regime APPLICABLE PROVISIONS: • Regulation 5 (1) of FEMA 20 provides for instruments in capital instruments and states that the same is subject to conditions specified in Schedule I. • The Annual FDI Policy and FEMA 20 mirror each other MEHTA CHOKSHI & SHAH

FDI - Key Concepts MEHTA CHOKSHI & SHAH

Instruments for receiving foreign investment in an Indian company Indian Co Equity Shares Partly paid equity shares and warrants Fully and mandatorily convertible pref. shares/ Deb “FDI compliant instruments” are subject to a minimum lock-in period of one year or as prescribed for the specific sector, whichever is higher, but without any option or right to exit at an assured price. MEHTA CHOKSHI & SHAH

Non / optionally / partially convertible preference shares issued as on and up to April 30, 2007 And Optionally / partially convertible debentures issued up to June 7, 2007 till their original maturity Non/ optionally / partially convertible pref. shares issued after April 30, 2007 And Optionally / partially convertible debentures issued after June 7, 2007 FDI compliant instruments Debt MEHTA CHOKSHI & SHAH

Regulatory framework for FDI MEHTA CHOKSHI & SHAH

MEHTA CHOKSHI & SHAH

Chapter has been replaced due to abolition of FIPB. Issue of SOP by DIPP for processing of FDI proposals Approval Process MEHTA CHOKSHI & SHAH

Modes Of Payment receiving FDIin an Indian company including start-ups. inward remittance through normal banking channels M O P debit to NRE/ FCNR (B) account of a person concerned maintained with an AD Category I bank debit to non-interest bearing Escrow account in Indian Rupees in India which is opened with the approval from AD Category – I bank conversion of royalty/lumpsum/technical know-how fee due for payment or conversion of ECB conversion of pre-incorporation/ pre-operative expenses incurred by the a non-resident entity up to a limit of five percent of its capital or USD 500,000 whichever is less conversion of import payables/ pre incorporation expenses/ can be treated as consideration for issue of shares with the approval of FIPB against any other funds payable to a person resident outside India, the remittance of which does not require the prior approval of the Reserve Bank or the Government of India: and Swap of capital instruments, provided where the Indian investee company is engaged in a Government route sector, prior Government approval shall be required MEHTA CHOKSHI & SHAH

Reporting Requirements (Regulation 13 of FEMA) • Advance Remittance Form (ARF) – • Form Foreign Currency-Gross Provisional Return (FC-GPR) – For FDI • Annual Return on Foreign Liabilities and Assets (FLA) MEHTA CHOKSHI & SHAH

Reporting Requirements (Regulation 13 of FEMA) • Form Foreign Currency – Transfer of Shares (FC-TRS) – Applicable to a transfer of capital instruments to a foreign resident • Form Employees’ Stock Option – Applicable to an Indian Company issuing employees’ stock option to persons resident outside India who are its employees/directors • Form Depository Receipt Return (DRR) - Domestic Custodian to report in Form DRR • Form LLP (I) – LLP receiving amount of consideration for capital contribution and acquisition of profit shares shall submit Form LLP(I) MEHTA CHOKSHI & SHAH

Reporting Requirements (Regulation 13 of FEMA) • Form LLP(II) – Disinvestment/transfer of capital contribution or profit share between a resident and a non-resident shall be reported in Form LLP (II) • Form LEC (FII) – AD Banks shall report to the RBI in Form LEC (FII) the purchase/transfer of capital instruments by FPIs on the stock exchanges in India • LEC (NRI) – Applicable to AD Banks for the purchase/transfer by NRI/OCI • Form Convertible Note – Indian Startup Company to report to AD Bank MEHTA CHOKSHI & SHAH

FDI-Prohibited Sectors • Lottery Business including Government/private lottery, online lotteries, etc. • Gambling and Betting including casinos etc. • Chit funds • Nidhi company • Trading in Transferable Development Rights (TDRs) • Real Estate Business or Construction of Farm Houses MEHTA CHOKSHI & SHAH

FDI-Prohibited Sectors • ‘Real estate business’ shall not include development of townships, construction of residential /commercial premises, roads or bridges and Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) Regulations 2014. • Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes • Activities/sectors not open to private sector investment e.g.(I) Atomic Energy and (II) Railway operations (other than permitted activities mentioned in para 5.2). • Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities. MEHTA CHOKSHI & SHAH

Sector specific conditions on FDI MEHTA CHOKSHI & SHAH

Sectorial Caps- FDI in NBFC • Foreign Investment in NBFC is allowed under automatic route in only 18 activities which are as follows: MEHTA CHOKSHI & SHAH

Other Conditions • Investment would be subject to following minimum capitalisation norms: • US $ 0.5 million for foreign capital up to 51% to be brought upfront • US $ 5million for foreign capital more than 51% and upto 75% to be brought upfront • US $ 50 million for foreign capital more than 75% out of which US $ 7.5 million to be brought upfront and the balance in 24 months. • NBFCs • having foreign investment more than 75% and up to 100% and • With a minimum capitalisation of US $ 50 million, can set up step down subsidiaries for specific NBFC activities, without any restriction on the number of operating subsidiaries and without bringing in additional capital, MEHTA CHOKSHI & SHAH

Who can invest in a Start-ups? Non-Resident Others Person who is citizen/resident of Pakistan or Bangladesh Through CN Can invest for an amount of Rs. 25 lacs or more in a single tranche Cannot invest Amount should be recd through banking channels only Subj to approval of Govt if applicable MEHTA CHOKSHI & SHAH

What is a Convertible Note(CN)? • repayable at the option of the holder, or which is convertible into such number of equity shares of such startup company • within a period not exceeding five years from the date of issue instrument issued by a start-up company • evidencing receipt of money initially as debt MEHTA CHOKSHI & SHAH

Downstream Investment • Means indirect foreign investment by an eligible Indian entity, into another Indian Company/LLP. • Indirect foreign investment means when downstream investment is received from: • an entity which is not owned or controlled by an Indian citizen or is owned or controlled by a person resident outside India • an investment vehicle whose sponsor or manager is not owned or controlled by an Indian citizen or is owned or controlled by a person resident outside India MEHTA CHOKSHI & SHAH

Downstream Investment • Ownership refers to holding more than 50% share instruments while control refers to the right to appoint majority of the directors or to control the management or policy decisions • Such investment is subject to sectoral caps Downstream investment made in accordance with the guidelines in existence prior to February 13, 2009would not require any modification to conform to these regulations. All other investments, after the said date, would come under the ambit of these regulations. Downstream investments made between February 13, 2009 and June 21, 2013 which is not in conformity with these regulations should have been intimated to the Reserve Bank by October 3, 2013 for treating such cases as compliant with these regulations. MEHTA CHOKSHI & SHAH

Downstream Investment Indian Company (Owned and controlled by Non-residents) investing in non-FDI compliant instruments issued by another Indian Company will not be considered as indirect foreign investment for the investee company. MEHTA CHOKSHI & SHAH

Non-Resident acquiring shares on Stock Exchange Mode of Payments - by way of normal banking channels, or - by way of debit to the NRE/ FCNR account; - by debit to non-interest bearing Escrow account (in Indian Rupees) maintained in India with the AD bank; - the consideration amount may also be paid out of the dividend payable by Indian investee company, in which the said non-resident holds control Foreigners Others • FPIs and FIIs • NRIs • A non-resident, other than portfolio investor, is eligible to acquire shares on stock exchange through a registered broker subject to certain condition Not Allowed Allowed MEHTA CHOKSHI & SHAH

Regulation regarding portfolio investments by registered FPIs & NRIs MEHTA CHOKSHI & SHAH

Transfer of existing shares from NRs to residents or vise versa • Transfer by way of sale or gift between a person resident outside India (not being a NRI or an OCB) and any person resident outside India; • Transfer of shares by way of sale or gift by a NRI to any NRI; • Transfer by way of gift by a person resident outside India to a resident; • Transfer by way of sale on a recognized stock exchange by a person resident outside India; • Transfer by way of sale or gift by a resident to a person outside India subject to conditions prescribed in Regulation 10 of FEMA 20; Prior Government approval shall be obtained for any transfer in case the company is engaged in a sector which requires Government approval. MEHTA CHOKSHI & SHAH

Transfer of shares from Resident to NR does not fall under above category • The cases have to be approved by the Government of India or the Reserve Bank • Transfer of shares by Resident which requires Govt Approval • Transfer of shares of companies engaged in sector falling under the Govt Route • Transfer of shares resulting in foreign investments in the Indian company, breaching the sectoral cap applicable • Transfer of shares requiring prior permission of the Reserve Bank • A person resident in India, who intends to transfer any security, by way of gift to a person resident outside India, has to obtain prior approval from Reserve Bank • Any other case not covered by General Permission. MEHTA CHOKSHI & SHAH

FDI investment – Merger/Demerger/ Amalgamation • Acquisition of shares under Scheme of Merger/ Demerger/ Amalgamation • As per Court approved process • Transferee company or new company is allowed to issue shares to the shareholders of the transferor company resident outside India, subject to the conditions that: • percentage of shareholding of PROI in transferee or new company does not exceed the sectoral cap, and • transferor company or the transferee or the new company is not engaged in activities which are prohibited under the FDI policy • Approval required if not under automatic route or exceeds sectoral cap MEHTA CHOKSHI & SHAH

Whether extension of CCPs or CCDs requires RBI approval? • Tenor of convertible instruments will be guided by the instructions framed under the Companies Act, 2013 and the rules framed thereunder. • However, the investee company should ensure that the price/ conversion formula of convertible capital instruments is determined upfront at the time of issue of the instruments. • The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the extant FEMA regulations MEHTA CHOKSHI & SHAH

Penalties – Contravention of FDI MEHTA CHOKSHI & SHAH

Recent Amendments in FDI policy MEHTA CHOKSHI & SHAH

Share Holders Agreement – Salient Features • Nomination of Directors etc: The agreement may allocate the rights to certain stakeholders to be a director on board as well as decide the composition of the Board. • Roles and obligations of each shareholder. • Financing requirements, quorum requirements and veto rights. • Representation & Warranties from the Company. • Restrictions on transfer of shares (right of first refusal, right of first offer). • Forced transfer of shares (tag-along rights, drag-along rights) and curtailing of further issue of shares. • Defining Shareholding Threshold: There can be a minimum shareholding a party must have to enjoy the rights as under the Shareholding Agreement. • Determining and allocating special rights to certain shareholders: For instance if a venture capital or private equity invests in an enterprise, they would seek preferential treatment MEHTA CHOKSHI & SHAH

Rajkot Branch of WIRC of ICAI