The Foreign Exchange Management Act, 1999

1. The Foreign Exchange Management Act, 1999 An Overview Puneet Gupta June 2014

2. Overview of FEMA Section 1 Section 2 Establishment of BO/LO in India OverseasDirect Investment Section 3 Agenda

3. Section 1 Overview of Foreign Exchange Management Act, 1999

4. New era under FEMA The Foreign Exchange Regulation Act, 1973 (‘FERA’) The Foreign Exchange Management Act, 1999 (‘FEMA’) • Object • “Conservation of foreign Exchange” • Severe penal provisions • All acts controlled and regulated • Applied to Indian Citizens in/outside India and Foreign Citizens in India. • Blanket powers of search, seizure, imprisonment, etc. • Presumption of Mens-rea • Object • “facilitating external trade and payment and promoting orderly development and maintenance of foreign exchange market” • Contravention attracts penalty / fine and not imprisonment (except in some cases) / compounding • Only specified acts regulated • Citizenship - not relevant / Residence - Emphasized • Restricted power of search, seizure, etc. • No Presumption of Mens Rea…….. Prosecution to prove • Provision for compounding

5. Broad Framework • FEMA 1999 • FERA replaced by FEMA on June 1, 2000. • Aims of FEMA • Facilitate external trade and payments • Promotion of orderly development of foreign exchange markets • FEMA Rules / Regulations • Rules notified by Central Government…(Current account ) • Regulations notified the Reserve Bank of India (RBI) …. (Capital account) • Consultation between RBI and the Central Government. • RBI • A.P. (Dir Series) – issued from time to time • Master Circulars – one in a year (July) • F.A.Qs (updated available on http://www.rbi.org.in)

6. Substantive Provisions

7. Extent, Application and Commencement Extends to whole of India. Applies to all branches, offices and agencies outside India, of person resident in India. Applies to contravention committed outside India by any person to whom the Act applies. Section 1 of FEMA – Scope Section 2(u) – Person Includes • An individual, • HUF, • Company, • Firm, • AOP or a BOI, whether incorporated or not, • Every artificial juridical person, not falling within any of the preceding sub-clauses, and • Any agency, office or branch owned or controlled by such persons 6

8. Important Definitions Person residing in India > 182 days during preceding financial year but does not include: – Person who has gone out of India or who stays outside India, in either case For/on taking up employment outside India, or Carrying on outside India a business or vocation outside India, or For any purpose, indicating intention to stay outside India for an uncertain period. Person who has come to or stays in India, otherwise than For/on taking up employment in India, or Carrying on in India a business or vocation in India, or For any other purpose, indicating intention to stay in India for an uncertain period. Any Person or body corporate registered or incorporated in India. An office, branch or agency in India owned or controlled by a person resident outside India. An office, branch or agency outside India owned or controlled by a person resident in India. Section 2(v) Person resident in India (PRI) means Section 2(w) - Person resident outside India (PROI) • Person resident outside India means a person who is not resident in India. 7

9. Important Definitions NRI has been defined under FEMA Regulation 2(vi) of the FEMA - 5 (Deposit) Regulations 2000 as follows: “An NRI is a person resident outside India who is a citizen of India or is a Person of Indian Origin” It is possible that you may be an NRI under FEMA, yet you may be a resident under the Income tax laws. Non Resident Indian (NRI) Person of Indian Origin (PIO) • PIO is defined differently in: • Regulation 2 of FEMA 5 (Deposit) Regulations, 2000 • Regulation 2(c) of FEMA- 21 (Acquisition and Transfer of Immovable Property in India) Regulations, 2000 • Regulation 2 of FEMA 24 ( Investment in a Firm or Proprietary concern in India) • Most other notifications follow the FEMA 5 …. (Deposit) definition of PIO 8

10. Important Definitions • A transaction which alters the assets or liabilities • Outside India of persons resident in India, (including Contingent Liabilities); • In India of persons resident outside India; and • Includes transactions specified in Section 6(3). • Foreign security by resident; • Any Security by non-resident; • Transfer or issue of any security or foreign security by any branch, office or agency in India of a non-resident; • Borrowing / Lending in Foreign Exchange; • Borrowing / Lending in rupees between residents and non-residents; • Deposits between residents and non residents; • Holding of currency or currency notes; • Acquisition / transfer of immoveable property in India / outside India (except those on lease for less than five years); • Giving of guarantee / surety by resident / non-residents. Section 2(e) – Capital Account Transaction • A transaction other than a capital account transaction which include: • Payments due in connection with foreign trade, other current business, services, short- term banking and credit facilities in the ordinary course of business; • Payments due as interest on loans and as net income from investments; • Remittances for living expenses of parents, spouse and children residing abroad; and • Expenses on foreign travel, education and medical care of parents, spouse and children. Section 2(j) – Current Account Transaction 9

11. General or Special permission of RBI required to: Deal in or transfer of foreign exchange or foreign securities to person other than authorized person;. Make any payment to or for the credit of a non-resident; Receive otherwise than through authorized person any payment by order or on behalf of a non-resident without a corresponding inward remittance; Enter into a financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire any asset outside India. Extent, Application and Commencement (contd….) Section 3- Dealing in Foreign Exchange, etc. Section 4- Holding of Foreign Exchange, etc. • Restricts person resident in India to hold, own or possess or transfer any foreign exchange, foreign security or immovable property situated outside India. Section 5- Current Account Transactions Section 6- Capital Account Transactions 10

12. Exporter of goods/services under obligation to furnish to RBI or specified authority prescribed declaration. Common form called ‘Export Declaration Form’ devised to declare all exports from Non-EDI ports and common ‘Softex’ forms for single/bulk exports. Directions by RBI to Exporter of goods for ensuring receipt of export proceeds. Extent, Application and Commencement (contd….) Section 7 – Export of goods and services Section 8 – Realization and repatriation of foreign exchange • Person resident in India obliged to take all reasonable steps to realize and repatriate to India all foreign exchange due or accrued. Section 9 – Exemption from realization and repatriation in certain cases • Possession of foreign currency or coins up to limits prescribed by RBI; • Foreign currency accounts up to specified limits by specified persons; • Foreign exchange acquired before 8th July, 1947; • Foreign exchange acquired from employment, business, trade, vocation, services, honorarium, gifts, inheritance or other legitimate means up to limits prescribed; and • Any other foreign exchange receipt specified by RBI. 11

13. RBI to authorize persons to act as authorized dealer, money changer or off-shore banking unit or in any other manner. Extent, Application and Commencement (contd….) Section 10 – Authorized Person (AP) Section 11 – Control / Penalty on Authorized Person • AP to comply with provisions of Act, Rules, Regulations, Notifications, etc. • Inspection by RBI. • Penalty for contravention of any direction by the authorized person or failure to file any return with RBI up to Rs 10,000 plus Rs 2,000 per day. Section 12– 19- Penalties/Adjucating Authorities • Section 12 - Power of RBI to inspect AP • Section 13 - Penalties • Section 14 - Orders of Adjudicating Authority • Section 15 - Power to compound contravention • Section 16 - Appointment of Adjudicating Authority • Section 17 - Appeal to Special Director • Section 19 - Appeal to Appellate Tribunal 12

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

15. Current Account Transactions Transactions Expressly Prohibited (Schedule I read with Rule 3) Prior approval of Government of India – (Schedule II read with Rule 4) • Remittance out of lottery winnings; • Remittance of income from racing / riding or any other hobby; • Remittance for purchase of lottery tickets, banned/prescribed products; • Payment of commission on exports made towards equity investment in Joint Venture / Wholly Owned Subsidiary abroad of Indian companies; • Remittance of dividend by any company where dividend balancing is applicable; • Payment of commission on exports under Rupee state credit route, except commission up to 10 percent of invoice value of exports of tea and tobacco; • Payment related to ‘Call Back Services’ of telephones; • Remittance of interest income on funds held in Non – Resident Special Rupee ( Account ) Scheme. Cultural Tours Advertisement in foreign print media exceeding USD 10,000 except for promotion of tourism, foreign investments and international bidding Remittance of freight of vessel chartered by a Public Sector Unit Payment for import by a Government Department on C.I.F. basis Multi- modal transport operators making remittance to their agents abroad Remittance of hiring charges of transponders by TV channels, Internet service providers Remittance of container detention charges exceeding the rate prescribed Remittance of prize money / sponsorship of sports activity abroad exceeding USD 1,00,000 by person other than International / National / State Level sports bodies Remittance for membership of P & I club

16. Current Account Transactions – Illustrative Transactions--Schedule III read with Rule 5 * Remittance of gift and donation are subsumed under the LRS scheme

17. Liberalized Remittance Scheme (‘LRS’) • LRS available to all Resident individuals (RI) including minors (singularly or jointly). • RI can remit overseas up to USD 1, 25,000 per financial year for any permissible current / capital account transaction. • Acquisition of immovable property, directly or indirectly, outside India by resident individual is no longer permitted under LRS. • RI can acquire and hold shares or any other asset outside India without prior approval of RBI using the LRS. • RI’s are now permitted to acquire or set up Joint Ventures (‘JV’) or Wholly Owned Subsidiaries (‘WOS’) outside India engaged in bonafide operating business activities only (except for real estate business, banking business, business of financial services activity or holding of a step down JV or WOS – which are prohibited) within the overall remittance limit of USD 125,000. • RI can open, hold and maintain foreign currency accounts with a bank outside India for remittances under the scheme without the prior approval of RBI. • Income and sum remitted need not be brought back into India and can be reinvested overseas. • Remittances inter alia not permitted for: • Remittance directly or indirectly to Bhutan, Nepal, Mauritius or Pakistan; • Remittances to specified non- cooperative countries / territories or those identified by the Financial Action Task Force as ‘non-co-operative Countries or Territories; and 16

18. Schemes for Inbound Investment 17

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

20. Routes of Investment 19

21. Section 2- Establishment of Liaison Office/Branch Office in India

22. Entry Strategies for Foreign Entity ENTRY STRATEGIES FOR A FOREIGN ENTITY AS A FOREIGN COMPANY AS A LIMITED LIABILITY PARTNERSHIP AS AN INDIAN COMPA NY LIAISON OFFICE (‘LO’) BRANCH OFFICE(‘BO’) PROJECT OFFICE (‘PO’) WHOLLY OWNED SUBSIDIARY (‘WOS’) JOINT VENTURE (‘JV’) 21

23. Background • Provisions for establishment of LO/BO are regulated by Notification No. FEMA 22/ 2000-RB dated 3rd May 2000. • Available Routes: • Reserve Bank Route • Principal business of the foreign entity falls under sectors where FDI is permissible under 100% automatic route. • Government Route — Business other than above. • Applications from entities falling under this category and those from NGOs/ NPOs/ Government Bodies/ Departments are considered by RBI in consultation with the Ministry of Finance, Government. • RBI has freely permitted establishment of a branch/unit in SEZs to undertake manufacturing and service activities and banking company, subject to certain conditions. • No person, being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China, without prior permission of RBI, shall establish in India, a BO/LO/PO or any other place of business by whatever name called. • Applications from entities registered in / resident of Hong Kong and Macau, for establishment of BO/LO/PO or any other place of business by whatever name called shall also require prior approval from Reserve Bank of India. [A.P.(DIR Series) Circular No.93 dated 15th January,2014] • Application shall be made in Form FNC. BO/LO established with the RBI's approval will be allotted a Unique Identification Number (UIN) post which BOs / LOs shall obtain PAN in India. 22

24. Conditions Additional Criteria Track Record Net Worth* For BO >> A profit making track record during the immediately preceding 5 FY’s in the home country. For BO >> >USD 100,000 or its equivalent. For LO >> A profit making track record during the immediately preceding 3 FY’s in the home country. For LO >> USD 50,000 or its equivalent * Net Worth= Total paid up capital+ free reserves – less intangible assets, as per the latest Audited Balance Sheet or Account Statement certifies by CPA or any registered Accounts Practitioner by whatever name. 23

25. Permissible Activities for LO’s • LOs can undertake the following activities in India: • Representing in India the parent company / group companies. • Promoting export / import from / to India. • Promoting technical/financial collaborations between parent/group companies and companies in India. • Acting as a communication channel between the parent company and Indian companies. • Prohibited activities for LO: • Cannot undertake any commercial/business activity directly or indirectly • Cannot earn any income in India • All expenses are to be met by way of Inward remittances from Head Office(‘HO) outside India • Cannot have signing/commitment powers on behalf of HO 24

26. Permissible Activities for BO’s • Companies incorporated outside India and engaged in manufacturing or trading activities are allowed to set up BO’s in India with specific approval of RBI. Such BO’s are permitted to represent the parent/ group companies and undertake the following activities in India: • Export / Import of goods. • Rendering professional or consultancy services. • Carrying out research work in areas in which the parent company is engaged. • Promoting technical or financial collaborations between Indian companies and parent or overseas group company. • Representing the parent company in India and acting as buying / selling agent in India. • Rendering services in information technology and development of software in India. • Rendering technical support to the products supplied by parent/group companies. • Foreign airline / shipping company • Normally, the BO should be engaged in the activity in which the parent company is engaged. • Prohibited Activities for BOs: • Retail trading activities of any nature. • Manufacturing or processing activities in India, directly or indirectly. • Profits earned by the BOs are freely remittable from India, subject to payment of applicable taxes. 25

27. Section 3- Overseas Direct Investment

28. Overseas Direct Investment (‘ODI’)- Background • Investment by an Indian Party by way of contribution to the capital or subscription to the Memorandum of Association (‘MOA’) of a foreign entity or by way of purchase of existing shares of a foreign entity by: • Investment through stock exchange; or • Private placement in that entity; or • Market purchase; or • Investment in a Joint Venture or Wholly Owned Subsidiary abroad; . • But does not include Portfolio Investment 27

29. Possible Routes for Investment Automatic Route Approval Route • Cases not covered under Automatic route • Specific application to RBI with necessary documents in Form ODI through the AD (Category I Bank) along with prescribed supporting and documents • RBI would inter alia consider the following factors: • Prima facie viability of JV/WOS outside India • Contribution to external trade and other benefits • which will accrue to India through such investment • Financial position and business track record of the • Indian party and foreign entity • Expertise and experience of the Indian party in the • same or related line of activity of the JV/WOS outside India. • Overseas JV/WOS to be engaged in bonafide • business activity except real estate and banking; • Investment in Financial Sector should comply with • additional conditions • Indian party not on RBI’s Exporters’ Caution List/list of defaulters/under investigation by an Authority such as ED, SEBI etc. • Overall ceiling of financial commitment in all JV/WOS is 100% of net worth as on last audited Balance Sheet • Submission of Form Annual Performance Report in respect of all its overseas investment 28

30. Overseas Offices • Opening of Branch Office (BO) or Representative Office (RO) overseas is allowed • AD banks in India are permitted to remit funds for • Initial Expenses • Remittance up to fifteen per cent of the average annual sales/income or turnover during the last two financial years or up to twenty-five per cent of the net worth, whichever is higher • Recurring Expenses • Remittance up to ten per cent of the average annual sales/income or turnover during the last two financial • years • Opening up of such BO/RO is allowed subject to following conditions: • BO/RO should be conducting normal business activities of the Indian company • Overseas branch shall not enter into any contract or agreement in contravention of the FEMA (Act, rules or • regulations. ) • Overseas office (trading/non-trading)/branch should not create any financial liabilities, contingent or otherwise, • for the head office in India and also not invest surplus funds abroad without prior approval of RBI. • Any funds rendered surplus should be repatriated to India • Audited financials of BO/RO needs to be submitted to AD bank 29

31. Disclaimer • The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although I have endeavored to provide accurate and timely information, there can be no guarantee that such information is accurate as it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. • The views presented by means of this presentation are presenter’s own and should not construed as position taken by any organization or any former employer of the author

32. & Answers Questions 31

33. Thank You