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Lesson 1 Foreign Exchange Management Section I LESSON OUTLINE Objective of FEMA 1999 Foreign Exchange Foreign Securities FDI Policy Current Account Transactions Capital Account Transactions Foreign Direct Investment in India Direct Investment outside India Acquisition Transfer of immovable property in India Acquisition Transfer of immovable property outside India Establishment of Branch office in India Export of Goods and services Realisation Repatriation of foreign exchange Authorised Person Compounding of offences Penalties and Enforcement Adjudication and Appeal Appointment of Adjudicating Authority Appeal to Special Director Establishment of Appellate Tribunal Appeal to High Court Directorate of Enforcement LEARNING OBJECTIVES As per Article 246 of the Constitution of India the Parliament has exclusive power to make laws with respect to any of the matters enumerated in the Union List in the Seventh Schedule The Foreign Exchange Management Act 1999 can be traced to various entries in the Union List Entry 16 of the Union List deals with Foreign jurisdiction Entry 36 of the Union List deals with Currency coinage and legal tender foreign exchange Entry 37 of the Union List deals with Foreign loans and Entry 41 of the Union List deals with Trade and commerce with foreign countries import and export across customs frontiers definition of customs frontiers When a business enterprise imports goods from other countries exports its products to them or makes investments abroad it deals in foreign exchange Foreign exchange means foreign currency and includes deposits credits and balances payable in any foreign currency drafts travellers cheques letters of credit or bills of exchange expressed or drawn in Indian currency but payable in any foreign currency and drafts travellers cheques letters of credit or bills of exchange drawn by banks institutions or persons outside India but payable in Indian currency The management of foreign exchange is very important in the present day business This lesson deals with how FEMA facilitates external trade and payments and promotes the orderly development and maintenance of foreign exchange market The Act has assigned an important role to the Reserve Bank of India RBI in the administration of FEMA The rules regulations and norms pertaining to several sections of the Act are laid down by the Reserve Bank of India in consultation with the Central Government Foreign Exchange Management Act 1999 is an Act to facilitate external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India
2 EP ECL INTRODUCTION The Foreign Exchange Regulation Act 1973 which was enacted to consolidate and amend the law in several respects encompassing the experience gained over few decades of implementation of the earlier enactment of 1947 outlived its purpose in the light of the liberalization policies introduced in 1991 The Foreign Exchange Regulation Act since then had been reviewed and amendments were made as part of the on going process of economic liberalization relating to foreign investment and foreign trade for closer interaction with the world economy During the subsequent period the Central Government decided further review of the Foreign Exchange Regulation Act in the light of developments and experience in relation to foreign trade and investment It was at that time felt that a better course would be to repeal the Foreign Exchange Regulation Act and enact a new legislation Taking into consideration the developments such as substantial increase in foreign exchanges reserves growth in foreign trade rationalization of tariffs current account convertibility etc the Foreign Exchange Management Bill to repeal and replace the Foreign Exchange Regulation Act was introduced in the Lok Sabha But before the Bill came up for discussion and approval the Lok Sabha was dissolved Subsequently certain modifications were made to the original Bill and a modified Bill was presented and passed by both the Houses of Parliament The Foreign Exchange Management Act received the assent of the President on 9th December 1999 and brought into force with effect from 1 6 2000 DEFINITIONS Section 2 of the Foreign Exchange Management Act defines various terms used in the Act as given below Adjudicating Authority Section 2 a According to clause a of Section 2 Adjudicating Authority means an officer authorised under Sub section 1 of Section 16 for the purposes of adjudication in respect of penalties under Section 13 Section 16 empowers the Central Government to appoint by an order published in the Official Gazette as many officers as it may think fit as the adjudicating authorities for holding an enquiry in the manner prescribed after giving the person alleged to have committed any contravention an opportunity of being heard Appellate Tribunal Section 2 b Appellate Tribunal means Appellate Tribunal for Foreign Exchange to hear appeals against the orders of the adjudicating authorities and Special Directors Appeals under the Act Authorised Person Section 2 c The term authorised person is defined to include an authorised dealer money changer offshore banking unit or any other person for the time being authorised to deal in foreign exchange or foreign securities Capital Account Transaction Section 2 e Capital account transaction has been defined to mean any transaction which alters the assets or liabilities including contingent liabilities outside India of persons resident in India or assets or liabilities in India of person resident outside India and includes the transactions specified in Sub section 3 of Section 6 of the Act
Lesson 1 Foreign Exchange Management 3 Currency Notes Section 2 i Currency Notes means and includes cash in the form of coins and bank notes In fact it means money and such bank notes or other paper money as are authorised by law and circulate from hand to hand as a medium of exchange Current Account Transaction Section 2 j The term current account transaction has been defined to mean a transaction other than a capital account transaction and includes payments due in connection with foreign trade other current business services and short term banking and credit facilities in the ordinary course of business payments due as interest on loan and as net income from investments remittances for living expenses of parents spouse and children residing abroad and expenses in connection with foreign travel education and medical care of parents spouse and children Under the Act freedom has been granted for selling and drawing of foreign exchange to or from an authorized person for undertaking current account transactions However the Central Government has been vested with powers in consultation with Reserve Bank to impose reasonable restrictions on current account transactions The Central Government has framed Foreign Exchange Management Current Account Transactions Rules 2000 dealing with various aspects of current account transactions Foreign Exchange Section 2 n The term foreign exchange has been defined to mean foreign currency and includes deposits credits balance payable in foreign currency drafts travellers cheques letters of credit bills of exchange expressed or drawn in Indian currency but payable in any foreign currency Any draft travellers cheque letters of credit or bills of exchange drawn by banks institutions or persons outside India but payable in Indian currency has also been included in the definition of foreign exchange Foreign Security Section 2 o The term Foreign Security has been defined to mean any security in the form of shares stocks bonds debentures or any other instrument denominated or expressed in foreign currency and includes securities expressed in foreign currency but where redemption or any form of return such as interest or dividend is payable in Indian currency Transfer or issue of a foreign security is a capital account transaction within the meaning of Section 6 3 a of the Act The Reserve Bank of India has made Foreign Exchange Management Transfer or Issue of Any Foreign Security Regulations 2000 for regulation acquisition and transfer of a foreign security by a person resident in India i e investment by Indian entities in overseas joint ventures and wholly owned subsidiaries as also investment by a person resident in India in shares and securities issued outside India Person Section 2 u The definition of the term person includes an individual a Hindu Undivided Family a company a firm an association of persons or body of individuals whether incorporated or not any agency office or branch owned or controlled by such persons Even every artificial juridical person not falling within the above definition has been treated as person as per clause u of Section 2 Person Resident in India Section 2 v The expression Person resident in India has been defined to mean a person residing in India for more than 182 days during the course of the preceding financial year However two categories of persons are excluded from the purview of definition
4 EP ECL The first category includes any person who has gone out of India or who stays outside India for or on taking up employment outside India or for carrying on outside India a business or vocation The definition also includes person who stays outside India for any other purpose in such circumstances as would indicate his intention to stay outside India for an uncertain period The second category of persons which have been excluded from the definition of person resident in India include A person who has come to stay or stays in India in either case otherwise than i for or taking up employment in India or ii for carrying on in India a business or vocation in India or iii for any other purpose in such circumstances as would indicate his intention to stay in India for an uncertain period REGULATION AND MANAGEMENT OF FOREIGN EXCHANGE Chapter II of the Act containing Sections 3 9 deals with Regulation and Management of Foreign Exchange Section 3 prohibits any person other than an authorised person from dealing in or transferring any foreign exchange or foreign security to any person or making any payment to or for the credit of any person resident outside India in any manner or receiving otherwise through an authorised person any payment by order or on behalf of any person resident outside India in any manner except as provided in the Act rules or regulations made thereunder or with the general or special permission of the Reserve Bank of India Section 3 d prohibits a person to enter into any 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 by any person except as otherwise provided in the Act and rules or regulations made thereunder For this purpose financial transaction has been defined to mean making any payment to or for the credit of any person or receiving any payment for by order or on behalf of any person Financial transaction also includes drawing issuing or negotiating any bill of exchange or promissory note or transferring any security or acknowledging any debt CURRENT ACCOUNT TRANSACTIONS Section 5 of the Act allows any person to sell or draw foreign exchange to or from an authorised person if such sale or drawl is a current account transaction as defined under Section 2 j of the Act However the Central Government may in the public interest and in consultation with the Reserve Bank impose reasonable restrictions for current account transactions Foreign Exchange Management Current Account Transactions Rules 2000 defines the term Drawal as to mean drawal of foreign exchange from an authorised person and includes opening of Letter of Credit or use of International Credit Card or International Debit Card or ATM Card or any other thing by whatever name called which has the effect of creating foreign exchange liability Prohibition on drawal of foreign exchange for certain transactions Rule 3 prohibits the drawal of foreign exchange for the purposes of transactions specified in the Schedule I or a travel to Nepal and or Bhutan or a transaction with a person resident in Nepal or Bhutan However in the case of transaction with a person resident in Nepal and Bhutan the prohibition may be exempted by RBI subject to such terms and conditions as it may consider necessary Schedule I to the Rules enumerate the situations in which the drawal of foreign exchange is prohibited These are as follows a Remittance out of lottery winnings
Lesson 1 Foreign Exchange Management 5 b Remittance of income from racing riding etc or any other hobby c Remittance for purchase of lottery tickets banned prescribed magazine football pools sweep stakes etc d Payment of commission on exports made towards equity investment in joint ventures wholly owned subsidiaries abroad of Indian Companies e Payment of Commission on exports under Rupee State Credit Route except commission upto 10 of invoice value of exports of tea and tobacco f Payment related to call back service of telephone g Remittance of interest income on funds held in Non resident Special Rupee Scheme Account Prior approval of Government of India for certain transactions Rule 4 requires prior approval of the Government of India for the transactions as specified in Schedule II However this does not apply to the cases where the payment is made out of funds held in Resident Foreign Currency Account RFC of the remitter Prior approval of Reserve Bank for certain transaction As per Rule 5 of the Foreign Exchange Management Current Account Transactions Amendment Rules 2015 every drawal of foreign exchange for transactions included in Schedule III shall be governed as provided therein Provided that this rule shall not apply where the payment is made out of funds held in Resident Foreign Currency RFC Account of the remitter Transactions included in Schedule III 1 Facilities for individuals 1 Individuals can avail of foreign exchange facility for the following purposes within the limit of USD 2 50 000 only Any additional remittance in excess of the said limit for the following purposes shall require prior approval of the Reserve Bank of India i Private visits to any country except Nepal and Bhutan ii Gift or donation iii Going abroad for employment iv Emigration v Maintenance of close relatives abroad vi Travel for business or attending a conference or specialised training or for meeting expenses for meeting medical expenses or check up abroad or for accompanying as attendant to a patient going abroad for medical treatment check up vii Expenses in connection with medical treatment abroad viii Studies abroad ix Any other current account transaction Provided that for the purposes mentioned at item numbers iv vii and viii the individual may avail of exchange facility for an amount in excess of the limit prescribed under the Liberalised Remittance Scheme as provided in regulation 4 to FEMA Notification 1 2000 RB dated the 3rd May 2000 here in after referred
6 EP ECL to as the said Liberalised Remittance Scheme if it is so required by a country of emigration medical institute offering treatment or the university respectively Provided further that if an individual remits any amount under the said Liberalised Remittance Scheme in a financial year then the applicable limit for such individual would be reduced from USD 250 000 US Dollars Two Hundred and Fifty Thousand Only by the amount so remitted Provided also that for a person who is resident but not permanently resident in India and a is a citizen of a foreign State other than Pakistan or b is a citizen of India who is on deputation to the office or branch of a foreign company or subsidiary or joint venture in India of such foreign company may make remittance up to his net salary after deduction of taxes contribution to provident fund and other deductions Explanation For the purpose of this item a person resident in India on account of his employment or deputation of a specified duration irrespective of length thereof or for a specific job or assignments the duration of which does not exceed three years is a resident but not permanently resident Provided also that a person other than an individual may also avail of foreign exchange facility mutatis mutandis within the limit prescribed under the said Liberalised Remittance Scheme for the purposes mentioned herein above 2 Facilities for persons other than individual The following remittances by persons other than individuals shall require prior approval of the Reserve Bank of India i Donations exceeding one per cent of their foreign exchange earnings during the previous three financial years or USD 5 000 000 whichever is less for a creation of Chairs in reputed educational institutes b contribution to funds not being an investment fund promoted by educational institutes and c contribution to a technical institution or body or association in the field of activity of the donor Company ii Commission per transaction to agents abroad for sale of residential flats or commercial plots in India exceeding USD 25 000 or five percent of the inward remittance whichever is more iii Remittances exceeding USD 10 000 000 per project for any consultancy services in respect of infrastructure projects and USD 1 000 000 per project for other consultancy services procured from outside India iv Remittances exceeding five per cent of investment brought into India or USD 100 000 whichever is higher by an entity in India by way of reimbursement of pre incorporation expenses 3 Procedure The procedure for drawal or remit of any foreign exchange under this schedule shall be the same as applicable for remitting any amount under the said Liberalised Remittance Scheme Liberalised Remittance Scheme LRS Under Liberalised Remittance Scheme allow remittances by a resident individual up to USD 250 000 per financial year for any permitted current or capital account transaction or a combination of both If an
Lesson 1 Foreign Exchange Management 7 individual has already remitted any amount under the LRS then the applicable limit for such an individual would be reduced from the present limit of USD 250 000 for the financial year by the amount already remitted The permissible capital account transactions by an individual under LRS are i opening of foreign currency account abroad with a bank ii purchase of property abroad iii making investments abroad iv setting up Wholly owned subsidiaries and Joint Ventures abroad v extending loans including loans in Indian Rupees to Non resident Indians NRIs who are relatives as defined in Companies Act 2013 The Scheme cannot be made use for making remittances for any prohibited or illegal activities such as margin trading lottery etc Requirements to be complied with by the remitter under LRS The resident individual seeking to make the remittances should furnish an application cum declaration in the prescribed format to the Authorised Dealer full fledged money changer FFMC concerned regarding the purpose of the remittances and declaration to the effect that the funds belong to the remitter and will not be used for the prohibited purposes Resident individuals can also purchase foreign exchange from a full fledged money changer FFMC for private business visits Foreign exchange thus purchased from an FFMC should also be reckoned within the overall LRS limit USD 250 000 and declared accordingly in the application cum declaration form submitted to the Authorise Dealer bank CAPITAL ACCOUNT TRANSACTION Section 6 allows capital account transactions subject however to certain conditions This section empowers the Reserve Bank of India to specify in consultation with the Central Government any class or classes of capital account transactions permissible and the limit upto which foreign exchange shall be admissible for such transactions However Reserve Bank shall not impose any restrictions on the drawal of foreign exchange for payments due on account of amortization of loans or for depreciation of direct investments in the ordinary course of business The Reserve Bank of India may by regulations prohibit restrict or regulate the transfer or issue of any foreign security by a person resident in India or by a person resident outside India Reserve Bank of India may also regulate prohibit or restrict transfer or issue of any security or foreign security through any branch office or agency in India of a person resident outside India Any borrowing or lending in foreign exchange in whatever form or by whatever name called may also be regulated or prohibited by the Reserve Bank Similarly RBI may also prohibit or restrict any borrowing or lending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India Deposits between persons resident in India and persons resident outside India may be regulated or prohibited by the Reserve Bank of India RBI may also regulate the export import or holding of currency or currency notes Acquisition or transfer of immovable property other than on lease not exceeding five years in India by person resident in India or a person resident outside India may be prohibited or regulated by the Reserve Bank of India RBI has also been empowered to prohibit or regulate giving of guarantee or surety in respect of any debt obligation or other liability incurred by a person resident in India and owed to a person resident outside India or by a person resident outside India Sub section 4 allows a person resident in India to hold own transfer or invest in foreign currency foreign
8 EP ECL security or any immovable property situated outside India if such currency security or property was acquired held or owned by such person when he was resident outside India or inherited from a person who was resident outside India Similarly a person resident outside India is permitted to hold own transfer or invest in Indian currency security or any immovable property situated in India if such currency security or property was acquired held or owned by such person when he was resident in India or inherited from a person who was resident in India Reserve Bank of India under sub section 6 has been empowered to regulate prohibit restrict establishment in India of a branch office or other place of business by a person resident outside India for carrying on any activity relating to such branch office or other place of business Permissible Capital Account Transactions Schedule I II to Foreign Exchange Management Permissible Capital Account Transactions Regulations 2000 classifies the capital account transactions of a person under the following two heads viz 1 Classes of capital account transactions of persons resident in India 2 Classes of capital account transactions of persons resident outside India Classes of Capital Account Transactions of Persons Resident in India i investment by a person resident in India in foreign securities ii foreign currency loans raised in India and abroad by a person resident in India iii transfer of immovable property outside India by a person resident in India iv guarantees issued by a person resident in India in favour of a person resident outside India v export import and holding of currency currency notes vi loans and overdrafts by a person resident in India from a person resident outside India vii maintenance of foreign currency accounts in India and outside India by a person resident in India viii taking out of insurance policy by a person resident in India from an insurance company outside India ix loans and overdrafts by a person resident in India to a person resident outside India x remittance outside India of capital assets of a person resident in India xi sale and purchase of foreign exchange derivatives in India and abroad and commodity derivatives abroad by a person resident in India However Notification No FEMA 165 2007 RB Dated October 10 2007 on Foreign Exchange Management Permissible Capital Account Transactions Amendment Regulations 2007 provides that subject to the provisions of the Act or the rules or regulations or directions or orders made or issued thereunder a resident individual may draw from an authorized person foreign exchange not exceeding USD 50 000 per financial year with effect from December 20 2006 USD 100 000 per financial year with effect from May 8 2007 and USD 2 00 000 per financial year with effect from September 26 2007 for a capital account transaction specified in Schedule I It may be noted that no part of the foreign exchange of USD 50 000 or USD 100 000 or USD 200 000 as the case may be drawn can be used for remittance directly or indirectly to countries notified as non co operative countries and territories by Financial Action Task Force FATF from time to time and communicated by the Reserve Bank of India to all concerned
Lesson 1 Foreign Exchange Management 9 Classes of Capital Account Transactions of Persons Resident Outside India i Investment in India by a person resident outside India that is to say a issue of security by a body corporate or an entity in India and investment therein by a person resident outside India and b investment by way of contribution by a person resident outside India to the capital of a firm or a proprietorship concern or an association of persons in India ii Acquisition and transfer of immovable property in India by a person resident outside India iii Guarantee by a person resident outside India in favour of or on behalf of a person resident in India iv Import and export of currency currency notes into from India by a person resident outside India v Deposits between a person resident in India and a person resident outside India vi Foreign Currency accounts in India of a person resident outside India vii Remittance outside India of capital assets in India of a person resident outside India Subject to the provisions of the Act or the rules or regulations or directions or orders made or issued thereunder any person may sell or draw foreign exchange to or from an authorised person for the above mentioned capital account transactions provided the transactions are within the limit if any specified in the Regulations relevant to the transaction However no person is allowed to undertake or sell or draw foreign exchange to or from an authorised person for any capital account transaction except as provided in the Act Rules or regulations made thereunder Similarly except as otherwise provided in the Act no person resident outside India is entitled to make investment in India in any form in any company or partnership firm or proprietary concern or any entity whether incorporated or not which is engaged or proposed to engage in the business of chit funds or Nidhi company or in agricultural or plantation activities or real estate business or construction of farm houses or trading in Transferable Development Rights TDRs For this purpose real estate business includes development of townships construction of residential commercial premises roads or bridges The payment for investment are required to be made by remittance from abroad through normal banking channels or by debit to an account of the investor maintained with an authorised person in India in accordance with the regulation made by the Reserve Bank of India Every person selling or drawing foreign exchange to or from an authorised person for a capital account transaction is required to furnish to Reserve Bank a declaration within the time specified in the regulations relevant to the transactions FOREIGN DIRECT INVESTMENT POLICY 2016 INTENT AND OBJECTIVE It is the intent and objective of the Government of India to attract and promote foreign direct investment in order to supplement domestic capital technology and skills for accelerated economic growth Foreign Direct Investment as distinguished from portfolio investment has the connotation of establishing a lasting interest in an enterprise that is resident in an economy other than that of the investor The Government has put in place a policy framework on Foreign Direct Investment which is transparent predictable and easily comprehensible This framework is embodied in the Circular on Consolidated FDI Policy which may be updated every year to capture and keep pace with the regulatory changes effected in the interregnum The Department of Industrial Policy and Promotion DIPP Ministry of Commerce Industry Government of India makes policy pronouncements on FDI through Press Notes Press Releases
10 EP ECL which are notified by the Reserve Bank of India as amendments to the Foreign Exchange Management Transfer or Issue of Security by Persons Resident Outside India Regulations 2000 notification No FEMA 20 2000 RB dated May 3 2000 These notifications take effect from the date of issue of Press Notes Press Releases unless specified otherwise therein In case of any conflict the relevant FEMA Notification will prevail The procedural instructions are issued by the Reserve Bank of India vide A P DIR Series Circulars The regulatory framework over a period of time thus consists of Acts Regulations Press Notes Press Releases Clarifications etc DEFINITIONS AD Category I Bank means a bank Scheduled Commercial State or Urban Cooperative which is authorized under Section 10 1 of FEMA to undertake all current and capital account transactions according to the directions issued by the RBI from time to time Authorized Bank means a bank including a co operative bank other than an authorized dealer authorized by the Reserve Bank to maintain an account of a person resident outside India Authorized Dealer means a person authorized as an authorized dealer under sub section 1 of section 10 of FEMA Authorized Person means an authorized dealer money changer offshore banking unit or any other person for the time being authorized under sub section a of section 10 of FEMA to deal in foreign exchange or foreign securities Capital means equity shares fully compulsorily mandatorily convertible preference shares fully compulsorily mandatorily convertible debentures and warrants The equity shares issued in accordance with the provisions of the Companies Act as applicable shall include equity shares that have been partly paid Preference shares and convertible debentures shall be required to be fully paid and should be mandatorily and fully convertible Further warrant includes Share Warrant issued by an Indian Company in accordance to provisions of the Companies Act as applicable Capital account transaction means a transaction which alters the assets or liabilities including contingent liabilities outside India of persons resident in India or assets or liabilities in India of persons resident outside India and includes transactions referred to in sub section 3 of section 6 of FEMA Control shall include the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements For the purposes of Limited Liability Partnership control will mean right to appoint majority of the designated partners where such designated partners with specific exclusion to others have control over all the policies of the LLP Depository Receipt DR means a negotiable security issued outside India by a Depository bank on behalf of an Indian company which represent the local Rupee denominated equity shares of the company held as deposit by a Custodian bank in India DRs are traded on Stock Exchanges in the US Singapore Luxembourg etc DRs listed and traded in the US markets are known as American Depository Receipts ADRs and those listed and traded anywhere elsewhere are known as Global Depository Receipts GDRs Employees Stock Option means the option given to the directors officers or employees of a company or of its holding company or joint venture or wholly owned overseas subsidiary subsidiaries if any which gives such directors officers or employees the benefit or right to purchase or to subscribe for the shares of the company at a future date at a pre determined price
Lesson 1 Foreign Exchange Management 11 Erstwhile Overseas Corporate Body OCB means a company partnership firm society and other corporate body owned directly or indirectly to the extent of at least sixty percent by non resident Indians and includes overseas trust in which not less than sixty percent beneficial interest is held by non resident Indians directly or indirectly but irrevocably and which was in existence on the date of commencement of the Foreign Exchange Management Withdrawal of General Permission to Overseas Corporate Bodies OCBs Regulations 2003 the Regulations and immediately prior to such commencement was eligible to undertake transactions pursuant to the general permission granted under the Regulations Foreign Currency Convertible Bond FCCB means a bond issued by an Indian company expressed in foreign currency the principal and interest of which is payable in foreign currency FCCBs are issued in accordance with the Foreign Currency Convertible Bonds and ordinary shares through depository receipt mechanism Scheme 1993 and subscribed by a non resident entity in foreign currency and convertible into ordinary shares of the issuing company in any manner either in whole or in part FDI means investment by non resident entity person resident outside India in the capital of an Indian company under Schedule 1 of Foreign Exchange Management Transfer or Issue of Security by a Person Resident Outside India Regulations 2000 FEMA means the Foreign Exchange Management Act 1999 42 of 1999 FIPB means the Foreign Investment Promotion Board constituted by the Government of India Foreign Institutional Investor FII means an entity established or incorporated outside India which proposes to make investment in India and which is registered as a FII in accordance with the Securities and Exchange Board of India SEBI Foreign Institutional Investor Regulations 1995 Foreign Portfolio Investor FPI means a person registered in accordance with the provisions of Securities and Exchange Board of India SEBI Foreign Portfolio Investors Regulations 2014 as amended from time to time Foreign Venture Capital Investor FVCI means an investor incorporated and established outside India which is registered under the Securities and Exchange Board of India Foreign Venture Capital Investor Regulations 2000 SEBI FVCI Regulations and proposes to make investment in accordance with these Regulations Government route means that investment in the capital of resident entities by non resident entities can be made only with the prior approval of Government FIPB Department of Economic Affairs DEA Ministry of Finance or Department of Industrial Policy Promotion as the case may be Group Company means two or more enterprises which directly or indirectly are in a position to a exercise twenty six percent or more of voting rights in other enterprise or b appoint more than fifty percent of members of board of directors in the other enterprise Holding Company would have the same meaning as defined in Companies Act as applicable Indian Company means a company incorporated in India under the Companies Act as applicable Indian Venture Capital Undertaking IVCU means an Indian company a whose shares are not listed in a recognised stock exchange in India
12 EP ECL b Which is engaged in the business of providing services production or manufacture of articles or things but does not include such activities or sectors which are specified in the negative list by the SEBI with approval of Central Government by notification in the Official Gazette in this behalf Investment Vehicle shall mean an entity registered and regulated under relevant regulations framed by SEBI or any other authority designated for the purpose and shall include Real Estate Investment Trusts REITs governed by the SEBI REITs Regulations 2014 Infrastructure Investment Trusts InvIts governed by the SEBI InvIts Regulations 2014 and Alternative Investment Funds AIFs governed by the SEBI AIFs Regulations 2012 Investing Company means an Indian Company holding only investments in other Indian company ies directly or indirectly other than for trading of such holdings securities Investment on repatriable basis means investment the sale proceeds of which net of taxes are eligible to be repatriated out of India and the expression investment on non repatriable basis shall be construed accordingly Joint Venture JV means an Indian entity incorporated in accordance with the laws and regulations in India in whose capital a non resident entity makes an investment Limited Liability Partnership means a Limited Liability Partnership firm formed and registered under the Limited Liability Partnership Act 2008 Manufacture with its grammatical variations means a change in a non living physical object or article or thing a resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name character and use or b bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure Non resident entity means a person resident outside India as defined under FEMA Non Resident Indian NRI means an individual resident outside India who is a citizen of India or is an Overseas Citizen of India cardholder within the meaning of section 7 A of the Citizenship Act 1955 Persons of Indian Origin cardholders registered as such under Notification No 26011 4 98 F I dated 19 8 2002 issued by the Central Government are deemed to be Overseas Citizen of India cardholders A company is considered as Owned by resident Indian citizens if more than 50 of the capital in it is beneficially owned by resident Indian citizens and or Indian companies which are ultimately owned and controlled by resident Indian citizens A Limited Liability Partnership will be considered as owned by resident Indian citizens if more than 50 of the investment in such an LLP is contributed by resident Indian citizens and or entities which are ultimately owned and controlled by resident Indian citizens and such resident Indian citizens and entities have majority of the profit share Person includes a an individual b a Hindu undivided family c a company d a firm e an association of persons or a body of individuals whether incorporated or not f every artificial juridical person not falling within any of the preceding sub clauses and
Lesson 1 Foreign Exchange Management 13 g any agency office or branch owned or controlled by such person Person of Indian Origin PIO means a citizen of any country other than Bangladesh or Pakistan if a he at any time held Indian Passport or b he or either of his parents or any of his grandparents was a citizen of India by virtue of the Constitution of India or the Citizenship Act 1955 57 of 1955 or c the person is a spouse of an Indian citizen or a person referred to in sub clause i or ii Person resident in India means i a person residing in India for more than one hundred and eighty two days during the course of the preceding financial year but does not include A A person who has gone out of India or who stays outside India in either case a for or on taking up employment outside India or b for carrying on outside India a business or vocation outside India or c for any other purpose in such circumstances as would indicate his intention to stay outside India for an uncertain period B A person who has come to or stays in India in either case otherwise than a for or on taking up employment in India or b for carrying on in India a business or vocation in India or c for any other purpose in such circumstances as would indicate his intention to stay in India for an uncertain period ii any person or body corporate registered or incorporated in India iii an office branch or agency in India owned or controlled by a person resident outside India iv an office branch or agency outside India owned or controlled by a person resident in India Person resident outside India means a person who is not a Person resident in India Portfolio Investment Scheme means the Portfolio Investment Scheme referred to in Schedules 2 2A 3 of FEMA Transfer or Issue of Security by a Person Resident Outside India Regulations 2000 RBI means the Reserve Bank of India established under the Reserve Bank of India Act 1934 Resident Entity means Person resident in India excluding an individual Resident Indian Citizen shall be interpreted in line with the definition of person resident in India as per FEMA 1999 read in conjunction with the Indian Citizenship Act 1955 SEBI means the Securities and Exchange Board of India established under the Securities and Exchange Board of India Act 1992 SEZ means a Special Economic Zone as defined in Special Economic Zones Act 2005 SIA means Secretariat of Industrial Assistance in DIPP Ministry of Commerce Industry Government of India
14 EP ECL Sweat Equity Shares means such equity shares as issued by a company to its directors or employees at a discount or for consideration other than cash for providing their know how or making available rights in the nature of intellectual property rights or value additions by whatever name called Transferable Development Rights TDR means certificates issued in respect of category of land acquired for public purposes either by the Central or State Government in consideration of surrender of land by the owner without monetary compensation which are transferable in part or whole Unit shall mean beneficial interest of an investor in the Investment Vehicle and shall include shares or partnership interests Venture Capital Fund VCF means an Alternative Investment Fund which invests primarily in unlisted securities of start ups emerging or early stage venture capital undertakings mainly involved in new products new services technology or intellectual property right based activities or a new business model and shall include an angel fund as defined under Chapter III A of SEBI AIF Regulations 2012 ELIGIBLE INVESTORS A non resident entity can invest in India subject to the FDI Policy except in those sectors activities which are prohibited However a citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under the Government route Further a citizen of Pakistan or an entity incorporated in Pakistan can invest only under the Government route in sectors activities other than defence space and atomic energy and sectors activities prohibited for foreign investment NRIs resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are permitted to invest in the capital of Indian companies on repatriation basis subject to the condition that the amount of consideration for such investment shall be paid only by way of inward remittance in free foreign exchange through normal banking channels OCBs have been derecognized as a class of investors in India with effect from September 16 2003 Erstwhile OCBs which are incorporated outside India and are not under the adverse notice of RBI can make fresh investments under FDI Policy as incorporated non resident entities with the prior approval of Government of India if the investment is through Government route and with the prior approval of RBI if the investment is through Automatic route A company trust and partnership firm incorporated outside India and owned and controlled by NRIs can invest in India with the special dispensation as available to NRIs under the FDI Policy Foreign Institutional Investor FII and Foreign Portfolio Investors FPI may in terms of Schedule 2 and 2A of FEMA Transfer or Issue of Security by Persons Resident Outside India Regulations as the case may be respectively invest in the capital of an Indian company under the Portfolio Investment Scheme which limits the individual holding of an FII FPI below 10 of the capital of the company and the aggregate limit for FII FPI investment to 24 of the capital of the company This aggregate limit of 24 can be increased to the sectoral cap statutory ceiling as applicable by the Indian company concerned through a resolution by its Board of Directors followed by a special resolution to that effect by its General Body and subject to prior intimation to RBI The aggregate FII FPI investment individually or in conjunction with other kinds of foreign investment will not exceed sectoral statutory cap Only registered FIIs FPIs and NRIs as per Schedules 2 2A and 3 respectively of Foreign Exchange Management Transfer or Issue of Security by a Person Resident Outside India Regulations 2000 can invest trade through a registered broker in the capital of Indian Companies on recognised Indian Stock Exchanges
Lesson 1 Foreign Exchange Management 15 A SEBI registered Foreign Venture Capital Investor FVCI may contribute up to 100 of the capital of an Indian company engaged in any activity mentioned in Schedule 6 of Notification No FEMA 20 2000 including startups irrespective of the sector in which it is engaged under the automatic route A SEBI registered FVCI can invest in a domestic venture capital fund registered under the SEBI Venture Capital Fund Regulations 1996 or a Category I Alternative Investment Fund registered under the SEBI Alternative Investment Fund Regulations 2012 Such investments shall also be subject to the extant FEMA regulations and extant FDI policy including sectoral caps etc The investment can be made in equities or equity linked instruments or debt instruments issued by the company including start ups and if a startup is organised as a partnership firm or an LLP the investment can be made in the capital or through any profit sharing arrangement or units issued by a VCF or by a Category I AIF either through purchase by private arrangement either from the issuer of the security or from any other person holding the security or on a recognised stock exchange It may also set up a domestic asset management company to manage its investments SEBI registered FVCIs are also allowed to invest under the FDI Scheme as non resident entities in other companies subject to FDI Policy and FEMA regulations A Non Resident Indian may subscribe to National Pension System governed and administered by Pension Fund Regulatory and Development Authority PFRDA provided such subscriptions are made through normal banking channels and the person is eligible to invest as per the provisions of the PFRDA Act The annuity accumulated saving will be repatriable ELIGIBLE INVESTEE ENTITIES FDI in an Indian Company Indian companies can issue capital against FDI FDI in Partnership Firm Proprietary Concern i A Non Resident Indian NRI or a Person of Indian Origin PIO resident outside India can invest in the capital of a firm or a proprietary concern in India on non repatriation basis provided a Amount is invested by inward remittance or out of NRE FCNR B NRO account maintained with Authorized Dealers Authorized banks b The firm or proprietary concern is not engaged in any agricultural plantation or real estate business or print media sector c Amount invested shall not be eligible for repatriation outside India ii Investments with repatriation option NRIs PIO may seek prior permission of Reserve Bank for investment in sole proprietorship concerns partnership firms with repatriation option The application will be decided in consultation with the Government of India iii Investment by non residents other than NRIs PIO A person resident outside India other than NRIs PIO may make an application and seek prior approval of Reserve Bank for making investment in the capital of a firm or a proprietorship concern or any association of persons in India The application will be decided in consultation with the Government of India iv Restrictions An NRI or PIO is not allowed to invest in a firm or proprietorship concern engaged in any agricultural plantation activity or real estate business or print media FDI in Trusts FDI is not permitted in Trusts other than in VCF registered and regulated by SEBI and Investment vehicle
16 EP ECL FDI in Limited Liability Partnerships LLPs FDI in LLPs is permitted subject to the following conditions FDI is permitted under the automatic route in Limited Liability Partnership LLPs operating in sectors activities where 100 FDI is allowed through the automatic route and there are no FDI linked performance conditions An Indian company or an LLP having foreign investment is also permitted to make downstream investment in another company or LLP in sectors in which 100 FDI is allowed under the automatic route and there are no FDI linked performance conditions FDI in LLP is subject to the compliance of the conditions of LLP Act 2008 Investment Vehicle An entity being investment vehicle registered and regulated under relevant regulations framed by SEBI or any other authority designated for the purpose including Real Estate Investment Trusts REITs governed by the SEBI REITs Regulations 2014 Infrastructure Investment Trusts InvIts governed by the SEBI InvIts Regulations 2014 Alternative Investment Funds AIFs governed by the SEBI AIFs Regulations 2012 and notified under Schedule 11 of Foreign Exchange Management Transfer or Issue of Security by a Person Resident outside India Regulations 2000 is permitted to receive foreign investment from a person resident outside India other than an individual who is citizen of or any other entity which is registered incorporated in Pakistan or Bangladesh including an Registered Foreign Portfolio Investor RFPI or a non resident Indian NRI ENTRY ROUTES FOR INVESTMENT Investments can be made by non residents in the equity shares fully compulsorily and mandatorily convertible debentures fully compulsorily and mandatorily convertible preference shares of an Indian company through the Automatic Route or the Government Route Under the Automatic Route the nonresident investor or the Indian company does not require any approval from Government of India for the investment Under the Government Route prior approval of the Government of India is required Proposals for foreign investment under Government route are considered by FIPB Foreign investment in sectors activities under government approval route will be subject to government approval where An Indian company is being established with foreign investment and is not owned by a resident entity or An Indian company is being established with foreign investment and is not controlled by a resident entity or The control of an existing Indian company currently owned or controlled by resident Indian citizens and Indian companies which are owned or controlled by resident Indian citizens will be is being transferred passed on to a non resident entity as a consequence of transfer of shares and or fresh issue of shares to non resident entities through amalgamation merger demerger acquisition etc or The ownership of an existing Indian company currently owned or controlled by resident Indian citizens and Indian companies which are owned or controlled by resident Indian citizens will be is being transferred passed on to a non resident entity as a consequence of transfer of shares and or fresh issue of shares to non resident entities through amalgamation merger demerger acquisition etc
Lesson 1 Foreign Exchange Management 17 It is clarified that Foreign investment shall include all types of foreign investments direct and indirect regardless of whether the said investments have been made under Schedule 1 FDI 2 FII 2A FPI 3 NRI 6 FVCI 9 LLPs 10 DRs and 11 Investment Vehicles of FEMA Transfer or Issue of Security by Persons Resident Outside India Regulations FCCBs and DRs having underlying of instruments which can be issued under Schedule 5 being in the nature of debt shall not be treated as foreign investment However any equity holding by a person resident outside India resulting from conversion of any debt instrument under any arrangement shall be reckoned as foreign investment Investment by NRIs under Schedule 4 of FEMA Transfer or Issue of Security by Persons Resident Outside India Regulations will be deemed to be domestic investment at par with the investment made by residents A company trust and partnership firm incorporated outside India and owned and controlled by nonresident Indians will be eligible for investments under Schedule 4 of FEMA Transfer or issue of Security by Persons Resident Outside India Regulations and such investment will also be deemed domestic investment at par with the investment made by residents Caps on Investments Investments can be made by non residents in the capital of a resident entity only to the extent of the percentage of the total capital as specified in the FDI policy Entry Conditions on Investment Investments by non residents can be permitted in the capital of a resident entity in certain sectors activity with entry conditions Such conditions may include norms for minimum capitalization lock in period etc Other Conditions on Investment besides Entry Conditions Besides the entry conditions on foreign investment the investment investors are required to comply with all relevant sectoral laws regulations rules security conditions and state local laws regulations PROHIBITED SECTORS FDI is prohibited in 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 Real estate businesses 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
18 EP ECL FDI PERMITTED SECTORS Floriculture Horticulture Apiculture and Cultivation of Vegetables Mushrooms under controlled conditions Development and Production of seeds and planting material Animal Husbandry including breeding of dogs Pisciculture Aquaculture under controlled conditions and Services related to agro and allied sectors Tea sector including tea plantations Mining and Exploration of metal and non metal ores Coal Lignite Petroleum Natural Gas Manufacture of items reserved for production in Micro and Small Enterprises MSEs Defence Industry subject to Industrial license under the Industries Development Regulation Act 1951 Broadcasting Carriage Services Broadcasting Content Services Print Media Civil Aviation Airports Air Transport Services Courier services Construction Development Townships Housing Built up Infrastructure Industrial Parks Satellites establishment and operation Private Security Agencies Telecom Services Cash Carry Wholesale Trading Wholesale Trading E commerce activities Single Brand product retail trading Multi Brand Retail Trading Railway Infrastructure Asset Reconstruction Companies
Lesson 1 Foreign Exchange Management 19 Banking Private Sector Banking Public Sector Commodity Exchanges Credit Information Companies CIC Infrastructure Company in the Securities Market Insurance Non Banking Finance Companies NBFC Pharmaceuticals Power Exchanges TYPES OF INSTRUMENTS 1 Indian companies can issue equity shares fully compulsorily and mandatorily convertible debentures and fully compulsorily and mandatorily convertible preference shares subject to pricing guidelines valuation norms prescribed under FEMA Regulations The price conversion formula of convertible capital instruments should be 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 as per any internationally accepted pricing methodology on arm s length basis for the unlisted companies and valuation in terms of SEBI ICDR Regulations for the listed companies Optionality clauses are allowed in equity shares fully compulsorily and mandatorily convertible debentures and fully compulsorily and mandatorily convertible preference shares under FDI scheme subject to the following conditions There is a minimum lock in period of one year which shall be effective from the date of allotment of such capital instruments After the lock in period and subject to FDI Policy provisions if any the non resident investor exercising option right shall be eligible to exit without any assured return as per pricing valuation guidelines issued by RBI from time to time 2 Other types of Preference shares Debentures i e non convertible optionally convertible or partially convertible for issue of which funds have been received on or after May 1 2007 are considered as debt Accordingly all norms applicable for ECBs relating to eligible borrowers recognized lenders amount and maturity end use stipulations etc shall apply Since these instruments would be denominated in rupees the rupee interest rate will be based on the swap equivalent of London Interbank Offered Rate LIBOR plus the spread as permissible for ECBs of corresponding maturity 3 The inward remittance received by the Indian company vide issuance of DRs and FCCBs are treated as FDI and counted towards FDI 4 Acquisition of Warrants and Partly Paid Shares An Indian company may issue warrants and partly paid shares to a person resident outside India subject to terms and conditions as stipulated by the Reserve Bank of India in this behalf from time to time
20 EP ECL 5 Issue of Foreign Currency Convertible Bonds FCCBs and Depository Receipts DRs a FCCBs DRs may be issued in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares Through Depository Receipt Mechanism Scheme 1993 and DR Scheme 2014 respectively as per the guidelines issued by the Government of India there under from time to time b DRs are foreign currency denominated instruments issued by a foreign Depository in a permissible jurisdiction against a pool of permissible securities issued or transferred to that foreign depository and deposited with a domestic custodian c In terms of Notification No FEMA 20 2000 RB dated May 3 2000 as amended from time to time a person will be eligible to issue or transfer eligible securities to a foreign depository for the purpose of converting the securities so purchased into depository receipts in terms of Depository Receipts Scheme 2014 and guidelines issued by the Government of India thereunder from time to time d A person can issue DRs if it is eligible to issue eligible instruments to person resident outside India under Schedules 1 2 2A 3 5 and 8 of Notification No FEMA 20 2000 RB dated May 3 2000 as amended from time to time e The aggregate of eligible securities which may be issued or transferred to foreign depositories along with eligible securities already held by persons resident outside India shall not exceed the limit on foreign holding of such eligible securities under the relevant regulations framed under FEMA 1999 f The pricing of eligible securities to be issued or transferred to a foreign depository for the purpose of issuing depository receipts should not be at a price less than the price applicable to a corresponding mode of issue or transfer of such securities to domestic investors under the relevant regulations framed under FEMA 1999 g The issue of depository receipts as per DR Scheme 2014 shall be reported to the Reserve Bank by the domestic custodian as per the reporting guidelines for DR Scheme 2014 6 i Two way Fungibility Scheme A limited two way Fungibility scheme has been put in place by the Government of India for ADRs GDRs Under this Scheme a stock broker in India registered with SEBI can purchase shares of an Indian company from the market for conversion into ADRs GDRs based on instructions received from overseas investors Re issuance of ADRs GDRs would be permitted to the extent of ADRs GDRs which have been redeemed into underlying shares and sold in the Indian market ii Sponsored ADR GDR issue An Indian company can also sponsor an issue of ADR GDR Under this mechanism the company offers its resident shareholders a choice to submit their shares back to the company so that on the basis of such shares ADRs GDRs can be issued abroad The proceeds of the ADR GDR issue are remitted back to India and distributed among the resident investors who had offered their Rupee denominated shares for conversion These proceeds can be kept in Resident Foreign Currency Domestic accounts in India by the resident shareholders who have tendered such shares for conversion into ADRs GDRs PROVISIONS RELATING TO ISSUE TRANSFER OF SHARES The capital instruments should be issued within 180 days from the date of receipt of the inward remittance received through normal banking channels including escrow account opened and maintained for the purpose or by debit to the NRE FCNR B account of the non resident investor In case the capital instruments are
Lesson 1 Foreign Exchange Management 21 not issued within 180 days from the date of receipt of the inward remittance or date of debit to the NRE FCNR B account the amount of consideration so received should be refunded immediately to the non resident investor by outward remittance through normal banking channels or by credit to the NRE FCNR B account as the case may be Non compliance with the above provision would be reckoned as a contravention under FEMA and would attract penal provisions In exceptional cases refund of the amount of consideration outstanding beyond a period of 180 days from the date of receipt may be considered by the RBI on the merits of the case Issue price of shares Price of shares issued to persons resident outside India under the FDI Policy shall not be less than the price worked out in accordance with the SEBI guidelines as applicable where the shares of the company are listed on any recognised stock exchange in India the fair valuation of shares done by a SEBI registered Merchant Banker or a Chartered Accountant as per any internationally accepted pricing methodology on arm s length basis where the shares of the company are not listed on any recognised stock exchange in India and the price as applicable to transfer of shares from resident to non resident as per the pricing guidelines laid down by the Reserve Bank from time to time where the issue of shares is on preferential allotment However where non residents including NRIs are making investments in an Indian company in compliance with the provisions of the Companies Act as applicable by way of subscription to its Memorandum of Association such investments may be made at face value subject to their eligibility to invest under the FDI scheme Foreign Currency Account Indian companies which are eligible to issue shares to persons resident outside India under the FDI Policy may be allowed to retain the share subscription amount in a Foreign Currency Account with the prior approval of RBI Transfer of shares and convertible debentures Subject to FDI sectoral policy relating to sectoral caps and entry routes applicable laws and other conditionalities including security conditions non resident investors can also invest in Indian companies by purchasing acquiring existing shares from Indian shareholders or from other non resident shareholders General permission has been granted to non residents NRIs for acquisition of shares by way of transfer subject to the following A person resident outside India other than NRI and erstwhile OCB may transfer by way of sale or gift the shares or convertible debentures to any person resident outside India including NRIs Government approval is not required for transfer of shares in the investee company from one nonresident to another non resident in sectors which are under automatic route In addition approval of Government will be required for transfer of stake from one non resident to another non resident in sectors which are under Government approval route NRIs may transfer by way of sale or gift the shares or convertible debentures held by them to another NRI A person resident outside India can transfer any security to a person resident in India by way of gift
22 EP ECL A person resident outside India can sell the shares and convertible debentures of an Indian company on a recognized Stock Exchange in India through a stock broker registered with stock exchange or a merchant banker registered with SEBI A person resident in India can transfer by way of sale shares convertible debentures including transfer of subscriber s shares of an Indian company under private arrangement to a person resident outside India subject to the specified guidelines General permission is also available for transfer of shares convertible debentures by way of sale under private arrangement by a person resident outside India to a person resident in India subject to the specified guidelines The above General Permission also covers transfer by a resident to a non resident of shares convertible debentures of an Indian company engaged in an activity earlier covered under the Government Route but now falling under Automatic Route as well as transfer of shares by a nonresident to an Indian company under buyback and or capital reduction scheme of the company The Form FC TRS should be submitted to the AD Category I Bank within 60 days from the date of receipt of the amount of consideration The onus of submission of the Form FC TRS within the given timeframe would be on the transferor transferee resident in India However in cases where the NR investor including an NRI acquires shares on the stock exchanges under the FDI scheme the investee company would have to file form FC TRS with the AD Category I bank The sale consideration in respect of equity instruments purchased by a person resident outside India remitted into India through normal banking channels shall be subjected to a Know Your Customer KYC check by the remittance receiving AD Category I bank at the time of receipt of funds In case the remittance receiving AD Category I bank is different from the AD Category I bank handling the transfer transaction the KYC check should be carried out by the remittance receiving bank and the KYC report be submitted by the customer to the AD Category I bank carrying out the transaction along with the Form FC TRS A person resident outside India including a Non Resident Indian investor who has already acquired and continues to hold the control in accordance with the SEBI Substantial Acquisition of Shares and Takeover Regulations can acquire shares of a listed Indian company on the stock exchange through a registered broker under FDI scheme provided that the original and resultant investments are in line with the extant FDI policy and FEMA regulations in respect of sectoral cap entry route mode of payment reporting requirement documentation etc Escrow AD Category I banks have been given general permission to open Escrow account and Special account of non resident corporate for open offers exit offers and delisting of shares The relevant SEBI Substantial Acquisition of Shares and Takeovers Regulations 2011 SAST Regulations or any other applicable SEBI Regulations provisions of the Companies Act as applicable will be applicable AD Category I banks have also been permitted to open and maintain without prior approval of RBI non interest bearing Escrow accounts in Indian Rupees in India on behalf of residents and or non residents towards payment of share purchase consideration and or provide Escrow facilities for keeping securities to facilitate FDI transactions subject to the terms and conditions specified by RBI SEBI authorised Depository Participants have also been permitted to open and maintain without prior approval of RBI Escrow accounts for securities subject to the terms and conditions as specified by RBI In both cases the Escrow agent shall necessarily be an AD Category I bank or SEBI authorised Depository Participant in case of securities accounts These facilities will be applicable for both issue of fresh shares to the non residents as well as transfer of shares from to the non residents
Lesson 1 Foreign Exchange Management 23 PRIOR PERMISSION OF RBI IN CERTAIN CASES FOR TRANSFER OF CAPITAL INSTRUMENTS In the following cases prior approval of RBI is required i Transfer of capital instruments from resident to non residents by way of sale where a Transfer is at a price which falls outside the pricing guidelines specified by the Reserve Bank from time to time b Transfer of capital instruments by the non resident acquirer involving deferment of payment of the amount of consideration Further in case approval is granted for a transaction the same should be reported in Form FC TRS to an AD Category I bank for necessary due diligence within 60 days from the date of receipt of the full and final amount of consideration ii Transfer of any capital instrument by way of gift by a person resident in India to a person resident outside India While forwarding applications to Reserve Bank for approval for transfer of capital instruments by way of gift the specified documents should be enclosed Reserve Bank considers the following factors while processing such applications a The proposed transferee donee is eligible to hold such capital instruments under Schedules 1 4 and 5 of Notification No FEMA 20 2000 RB dated May 3 2000 as amended from time to time b The gift does not exceed 5 per cent of the paid up capital of the Indian company each series of debentures each mutual fund scheme c The applicable sectoral cap limit in the Indian company is not breached d The transferor donor and the proposed transferee donee are close relatives as defined in Section 2 77 of Companies Act 2013 as amended from time to time e The value of capital instruments to be transferred together with any capital instruments already transferred by the transferor as gift to any person residing outside India does not exceed the rupee equivalent of USD 50 000 during the financial year f Such other conditions as stipulated by Reserve Bank in public interest from time to time iii Transfer of shares from NRI to non resident IN THE FOLLOWING CASES APPROVAL OF RBI IS NOT REQUIRED A Transfer of shares from a Non Resident to Resident under the FDI scheme where the pricing guidelines under FEMA 1999 are not met provided that The original and resultant investment are in line with the extant FDI policy and FEMA regulations in terms of sectoral caps conditionalities such as minimum capitalization etc reporting requirements documentation etc The pricing for the transaction is compliant with the specific explicit extant and relevant SEBI regulations guidelines such as IPO Book building block deals delisting exit open offer substantial acquisition SEBI SAST buy back 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
24 EP ECL B Transfer of shares from Resident to Non Resident i Where the transfer of shares requires the prior approval of the Government conveyed through FIPB as per the extant FDI policy provided that the requisite approval of the FIPB has been obtained and the transfer of shares adheres with the pricing guidelines and documentation requirements as specified by the Reserve Bank of India from time to time ii Where the transfer of shares attract SEBI SAST Regulations subject to the adherence with the pricing guidelines and documentation requirements as specified by Reserve Bank of India from time to time iii Where the transfer of shares does not meet the pricing guidelines under the FEMA 1999 provided that The resultant FDI is in compliance with the extant FDI policy and FEMA regulations in terms of sectoral caps conditionalities such as minimum capitalization etc reporting requirements documentation etc The pricing for the transaction is compliant with the specific explicit extant and relevant SEBI regulations guidelines such as IPO Book building block deals 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 iv where the investee company is in the financial sector provided that Any fit and proper due diligence requirements as regards the non resident investor as stipulated by the respective financial sector regulator from time to time have been complied with and The FDI policy and FEMA regulations in terms of sectoral caps conditionalities such as minimum capitalization pricing etc reporting requirements documentation etc are complied with CONVERSION OF ECB LUMP SUM FEE ROYALTY ETC INTO EQUITY i Indian companies have been granted general permission for conversion of External Commercial Borrowings ECB excluding those deemed as ECB in convertible foreign currency into equity shares fully compulsorily and mandatorily convertible preference shares subject to the following conditions and reporting requirements a The activity of the company is covered under the Automatic Route for FDI or the company has obtained Government approval for foreign equity in the company b The foreign equity after conversion of ECB into equity is within the sectoral cap if any c Pricing of shares is as per the Issue price of shares d Compliance with the requirements prescribed under any other statute and regulation in force and e The conversion facility is available for ECBs availed under the Automatic or Government Route and is applicable to ECBs due for payment or not as well as secured unsecured loans availed from non resident collaborators ii General permission is also available for issue of shares preference shares against lump sum technical
Lesson 1 Foreign Exchange Management 25 know how fee royalty due for payment subject to entry route sectoral cap and pricing guidelines as per the Issue price of shares and compliance with applicable tax laws Further issue of equity shares against any other funds payable by the investee company remittance of which does not require prior permission of the Government of India or Reserve Bank of India under FEMA 1999 or any rules regulations framed or directions issued thereunder is permitted provided that I The equity shares shall be issued in accordance with the extant FDI guidelines on sectoral caps pricing guidelines etc as amended by Reserve bank of India from time to time Explanation Issue of shares convertible debentures that require Government approval in terms of paragraph 3 of Schedule 1 of FEMA 20 or import dues deemed as ECB or trade credit or payable against import of second hand machinery shall continue to be dealt in accordance with extant guidelines II The issue of equity shares under this provision shall be subject to tax laws as applicable to the funds payable and the conversion to equity should be net of applicable taxes III Issue of equity shares under the FDI policy is allowed under the Government route for the following I Import of capital goods machinery equipment excluding second hand machinery subject to compliance with the following conditions a Any import of capital goods machinery etc made by a resident in India has to be in accordance with the Export Import Policy issued by Government of India as defined by DGFT FEMA provisions relating to imports b The application clearly indicating the beneficial ownership and identity of the Importer Company as well as overseas entity i Applications complete in all respects for conversions of import payables for capital goods into FDI being made within 180 days from the date of shipment of goods II Pre operative pre incorporation expenses including payments of rent etc subject to compliance with the following conditions a Submission of FIRC for remittance of funds by the overseas promoters for the expenditure incurred b Verification and certification of the pre incorporation pre operative expenses by the statutory auditor c Payments should be made by the foreign investor to the company directly or through the bank account opened by the foreign investor as provided under FEMA Regulations d The applications complete in all respects for capitalization being made within the period of 180 days from the date of incorporation of the company General conditions All requests for conversion should be accompanied by a special resolution of the company Government s approval would be subject to pricing guidelines of RBI and appropriate tax clearance ISSUE OF RIGHTS BONUS SHARES FEMA provisions allow Indian companies to freely issue Rights Bonus shares to existing non resident shareholders subject to adherence to sectoral cap if any However such issue of bonus rights shares has to be in accordance with other laws statutes like the Companies Act as applicable SEBI Issue of Capital and Disclosure Requirements Regulations 2009 in case of listed companies etc The offer on right basis
26 EP ECL to the persons resident outside India shall be in the case of shares of a company listed on a recognized stock exchange in India at a price as determined by the company 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 Prior permission of RBI for Rights issue to erstwhile OCBs OCBs have been de recognised as a class of investors from September 16 2003 Therefore companies desiring to issue rights share to such erstwhile OCBs will have to take specific prior permission from RBI As such entitlement of rights share is not automatically available to erstwhile OCBs However bonus shares can be issued to erstwhile OCBs without the approval of RBI Additional allocation of rights share by residents to non residents Existing non resident shareholders are allowed to apply for issue of additional shares fully compulsorily and mandatorily convertible debentures fully compulsorily and mandatorily convertible preference shares over and above their rights share entitlements The investee company can allot the additional rights share out of unsubscribed portion subject to the condition that the overall issue of shares to non residents in the total paid up capital of the company does not exceed the sectoral cap Acquisition of shares under Scheme of Merger Demerger Amalgamation Mergers demergers amalgamations of companies in India are usually governed by an order issued by a competent Court on the basis of the Scheme submitted by the companies undergoing merger demerger amalgamation Once the scheme of merger or demerger or amalgamation of two or more Indian companies has been approved by a Court in India the 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 the percentage of shareholding of persons resident outside India in the transferee or new company does not exceed the sectoral cap and the transferor company or the transferee or the new company is not engaged in activities which are prohibited under the FDI policy Note FIPB approval would not be required in case of mergers and acquisitions taking place in sectors under automatic route Issue of Non convertible redeemable bonus preference shares or debentures Indian companies are allowed to issue non convertible redeemable preference shares or debentures to nonresident shareholders including the depositories that act as trustees for the ADR GDR holders by way of distribution as bonus from its general reserves under a Scheme of Arrangement approved by a Court in India under the provisions of the Companies Act as applicable subject to no objection from the Income Tax Authorities Issue of Employees Stock Option Scheme ESOPs Sweat Equity An 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
Lesson 1 Foreign Exchange Management 27 overseas subsidiary subsidiaries who are resident outside India provided that 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 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 Issue of employee s stock option sweat equity shares by 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 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 The issuing company shall furnish to the Regional Office concerned of the Reserve Bank of India under whose jurisdiction the registered office of the company operates within 30 days from the date of issue of employees stock option or sweat equity shares a return as per the Form ESOP Share Swap In cases of investment by way of swap of shares irrespective of the amount valuation of the shares will have to be made by a Merchant Banker registered with SEBI or an Investment Banker outside India registered with the appropriate regulatory authority in the host country Approval of the Government will also be a prerequisite for investment by swap of shares for sector under Government approval route No approval of the Government is required for investment in automatic route sectors by way of swap of shares Pledge of Shares A A person being a promoter of a company registered in India borrowing company which has raised external commercial borrowings may pledge the shares of the borrowing company or that of its associate resident companies for the purpose of securing the ECB raised by the borrowing company provided that a no objection for the same is obtained from a bank which is an authorised dealer The authorized dealer shall issue the no objection for such a pledge after having satisfied itself that the external commercial borrowing is in line with the extant FEMA regulations for ECBs and that the loan agreement has been signed by both the lender and the borrower there exists a security clause in the Loan Agreement requiring the borrower to create charge on financial securities and the borrower has obtained Loan Registration Number LRN from the Reserve Bank and the said pledge would be subject to the following conditions the period of such pledge shall be co terminus with the maturity of the underlying ECB in case of invocation of pledge transfer shall be in accordance with the extant FDI Policy and directions issued by the Reserve Bank the Statutory Auditor has certified that the borrowing company will utilized has utilized the proceeds of the ECB for the permitted end use s only
28 EP ECL B Non residents holding shares of an Indian company can pledge these shares in favour of the AD bank in India to secure credit facilities being extended to the resident investee company for bonafide business purpose subject to the following conditions in case of invocation of pledge transfer of shares should be in accordance with the FDI policy in vogue at the time of creation of pledge submission of a declaration annual certificate from the statutory auditor of the investee company that the loan proceeds will be have been utilized for the declared purpose the Indian company has to follow the relevant SEBI disclosure norms and pledge of shares in favour of the lender bank would be subject to Section 19 of the Banking Regulation Act 1949 C Non residents holding shares of an Indian company can pledge these shares in favour of an overseas bank to secure the credit facilities being extended to the non resident investor non resident promoter of the Indian company or its overseas group company subject to the following loan is availed of only from an overseas bank loan is utilized for genuine business purposes overseas and not for any investments either directly or indirectly in India overseas investment should not result in any capital inflow into India in case of invocation of pledge transfer should be in accordance with the FDI policy in vogue at the time of creation of pledge and submission of a declaration annual certificate from a Chartered Accountant Certified Public Accountant of the non resident borrower that the loan proceeds will be have been utilized for the declared purpose REMITTANCE AND REPATRIATION Remittance of sale proceeds Remittance on winding up Liquidation of Companies Sale proceeds of shares and securities and their remittance is remittance of asset governed by The Foreign Exchange Management Remittance of Assets Regulations under FEMA AD Category I bank can allow the remittance of sale proceeds of a security net of applicable taxes to the seller of shares resident outside India provided the security has been held on repatriation basis the sale of security has been made in accordance with the prescribed guidelines and NOC tax clearance certificate from the Income Tax Department has been produced Remittance on winding up liquidation of Companies AD Category I banks have been allowed to remit winding up proceeds of companies in India which are under liquidation subject to payment of applicable taxes Liquidation may be subject to any order issued by the court winding up the company or the official liquidator in case of voluntary winding up under the provisions of the Companies Act as applicable AD Category I banks shall allow the remittance provided the applicant submits No objection or Tax clearance certificate from Income Tax Department for the remittance Auditor s certificate confirming that all liabilities in India have been either fully paid or adequately
Lesson 1 Foreign Exchange Management 29 provided for Auditor s certificate to the effect that the winding up is in accordance with the provisions of the Companies Act as applicable In case of winding up otherwise than by a court an auditor s certificate to the effect that there are no legal proceeding spending in any court in India against the applicant or the company under liquidation and there is no legal impediment in permitting the remittance Repatriation of Dividend Dividends are freely repatriable without any restrictions net after Tax deduction at source or Dividend Distribution Tax if any as the case may be The repatriation is governed by the provisions of the Foreign Exchange Management Current Account Transactions Rules 2000 as amended from time to time Repatriation of Interest Interest on fully mandatorily compulsorily convertible debentures is also freely repatriable without any restrictions net of applicable taxes The repatriation is governed by the provisions of the Foreign Exchange Management Current Account Transactions Rules 2000 as amended from time to time REPORTING OF FDI Reporting of Inflow i An Indian company receiving investment from outside India for issuing shares convertible debentures preference shares under the FDI Scheme should report the details of the amount of consideration to the Regional Office concerned of the Reserve Bank not later than 30 days from the date of receipt in the Advance Reporting Form ii Indian companies are required to report the details of the receipt of the amount of consideration for issue of shares convertible debentures through an AD Category I bank together with a copy ies of the FIRC s evidencing the receipt of the remittance along with the KYC report on the non resident investor from the overseas bank remitting the amount The report would be acknowledged by the Regional Office concerned which will allot a Unique Identification Number UIN for the amount reported Explanation An Indian company issuing partly paid equity shares shall furnish a report not later than 30 days from the date of receipt of each call payment Reporting of issue of shares iii After issue of shares including bonus and shares issued on rights basis and shares issued under ESOP fully mandatorily compulsorily convertible debentures fully mandatorily compulsorily convertible preference shares the Indian company has to file Form FC GPR not later than 30 days from the date of issue of shares Iv Form FC GPR has to be duly filled up and signed by Managing Director Director Secretary of the Company and submitted to the Authorized Dealer of the company who will forward it to the Reserve Bank The following documents have to be submitted along with the form a A certificate from the Company Secretary of the company certifying that A all the requirements of the Companies Act as applicable have been complied with B terms and conditions of the Government of India approval if any have been complied with
30 EP ECL C the company is eligible to issue shares under these Regulations and D the company has all original certificates issued by authorized dealers in India evidencing receipt of amount of consideration Note For companies with paid up capital with less than 5 crore the above mentioned certificate can be given by a practicing company secretary b A certificate from SEBI registered Merchant Banker or Chartered Accountant indicating the manner of arriving at the price of the shares is Indiad to the persons resident outside India c The report of receipt of consideration as well as Form FC GPR have to be submitted by the AD Category I bank to the Regional Office concerned of the Reserve Bank under whose jurisdiction the registered office of the company is situated Note An Indian company issuing partly paid equity shares shall file a report in form FC GPR to the extent they become paid up d Annual return on Foreign Liabilities and Assets should be filed on an annual basis by the Indian company directly with the Reserve Bank This is an annual return to be submitted by 15th of July every year pertaining to all investments by way of direct portfolio investments reinvested earnings other capital in the Indian company made during the previous years i e the information submitted by 15th July will pertain to all the investments made in the previous years up to March 31 The details of the investments to be reported would include all foreign investments made into the company which is outstanding as on the balance sheet date Issue of bonus rights shares or stock options to persons resident outside India directly or on amalgamation merger demerger with an existing Indian company as well as issue of shares on conversion of ECB royalty lumpsum technical know how fee import of capital goods by units in SEZs has to be reported in Form FC GPR Reporting of transfer of shares Reporting of transfer of shares between residents and non residents and vice versa is to be done in Form FC TRS The Form FC TRS should be submitted to the AD Category I bank within 60 days from the date of receipt of the amount of consideration The onus of submission of the Form FC TRS within the given timeframe would be on the transferor transferee resident in India However in cases where the NR investor including an NRI acquires shares on the stock exchanges under the FDI scheme the investee company would have to file form FC TRS with the AD Category I bank The AD Category I bank would forward the same to its link office The link office would consolidate the Form FC TRS and submit a monthly report to the Reserve Bank Reporting of Non Cash Details of issue of shares against conversion of ECB have to be reported to the Regional Office concerned of the RBI as indicated below In case of full conversion of ECB into equity the company shall report the conversion in Form FCGPR to the Regional Office concerned of the Reserve Bank as well as in Form ECB 2 to the Department of Statistics and Information Management DSIM Reserve Bank of India Bandra Kurla Complex Mumbai 400 051 within seven working days from the close of month to which it relates
Lesson 1 Foreign Exchange Management 31 The words ECB wholly converted to equity shall be clearly indicated on top of the Form ECB 2 Once reported filing of Form ECB 2 in the subsequent months is not necessary In case of partial conversion of ECB the company shall report the converted portion in Form FCGPR to the Regional Office concerned as well as in Form ECB 2 clearly differentiating the converted portion from the non converted portion The words ECB partially converted to equity shall be indicated on top of the Form ECB 2 In the subsequent months the outstanding balance of ECB shall be reported in Form ECB 2 to DSIM Reporting of FCCB DR Issues The domestic custodian shall report the issue transfer of sponsored unsponsored depository receipts as per DR Scheme 2014 in Form DRR within 30 days of close of the issue program ADHERENCE TO GUIDELINES ORDERS AND CONSEQUENCES OF VIOLATION FDI is a capital account transaction and thus any violation of FDI regulations are covered by the penal provisions of the FEMA Reserve Bank of India administers the FEMA and Directorate of Enforcement under the Ministry of Finance is the authority for the enforcement of FEMA The Directorate takes up investigation in any contravention of FEMA PENALTIES If a person violates contravenes any FDI Regulations by way of breach non adherence noncompliance contravention of any rule regulation notification press note press release circular direction or order issued in exercise of the powers under FEMA or contravenes any conditions subject to which an authorization is issued by the Government of India FIPB Reserve Bank of India he shall upon adjudication be liable to a penalty up to thrice the sum involved in such contraventions where such amount is quantifiable or up to two lakh Rupees where the amount is not quantifiable and where such contraventions is a continuing one further penalty which may extend to five thousand Rupees for every day after the first day during which the contraventions continues Where a person committing a contravention of any provisions of this Act or of any rule direction or order made there under is a company company means any body corporate and includes a firm or other association of individuals as defined in the Companies Act every person who at the time the contravention was committed was in charge of and was responsible to the company for the conduct of the business of the company as well as the company shall be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly Any Adjudicating Authority adjudging any contraventions under 3 1 i above may if he thinks fit in addition to any penalty which he may impose for such contravention direct that any currency security or any other money or property in respect of which the contravention has taken place shall be confiscated to the Central Government ADJUDICATION AND APPEALS For the purpose of adjudication of any contravention of FEMA the Ministry of Finance as per the provisions contained in the Foreign Exchange Management Adjudication Proceedings and Appeal Rules 2000 appoints officers of the Central Government as the Adjudicating Authorities for holding an enquiry in the manner prescribed A reasonable opportunity has to be given to the person alleged to have committed contraventions against whom a complaint has been made for being heard before imposing any penalty The Central Government may appoint as per the provisions contained in the Foreign Exchange Management
32 EP ECL Adjudication Proceedings and Appeal Rules 2000 an Appellate Authority Appellate Tribunal to hear appeals against the orders of the adjudicating authority COMPOUNDING PROCEEDINGS Under the Foreign Exchange Compounding Proceedings Rules 2000 the Central Government may appoint Compounding Authority an officer either from Enforcement Directorate or Reserve Bank of India for any person contravening any provisions of the FEMA The Compounding Authorities are authorized to compound the amount involved in the contravention to the Act made by the person No contravention shall be compounded unless the amount involved in such contravention is quantifiable Any second or subsequent contravention committed after the expiry of a period of three years from the date on which the contravention was previously compounded shall be deemed to be a first contravention The Compounding Authority may call for any information record or any other documents relevant to the compounding proceedings The Compounding Authority shall pass an order of compounding after affording an opportunity of being heard to all the concerns as expeditiously and not later than 180 days from the date of application made to the Compounding Authority Compounding Authority shall issue order specifying the provisions of the Act or of the rules directions requisitions or orders made there under in respect of which contravention has taken place along with details of the alleged contraventions DIRECT INVESTMENT OUTSIDE INDIA What is the significance of overseas direct investments for the country and for the investor Joint Ventures Wholly Owned Subsidiaries abroad promote economic co operation between India and the host countries They result in transfer of technology and skills sharing the results of Research Development access to the global market promotion of the brand image generation of employment and utilization raw materials available in India and the host country increased exports of plant and machinery and goods and services from India foreign exchange earnings through dividend earnings royalty technical know how fee etc Since globalization of trade is a two way process integration of the Indian economy with the rest of the world with all its attendant benefits is achieved through overseas investment It is the reverse of Foreign Direct Investment FDI i e Indian direct investment abroad In terms of section 6 3 of FEMA the Direct investments by residents in Joint Venture JV and Wholly Owned Subsidiary WOS has been allowed Section 6 3 of the Foreign Exchange Management Act empowers the Reserve Bank to prohibit restrict or regulate various transactions by making Regulations In exercise of the above powers the Reserve Bank has issued Foreign Exchange Management Transfer or Issue of any Foreign Security Regulations 2004 which has been amended from time to time The Notification seeks to regulate acquisition and transfer of a foreign security by a person resident in India i e investment by Indian entities in overseas joint ventures and wholly owned subsidiaries as also investment by a person resident in India in shares and securities issued outside India Prohibitions Indian parties are prohibited from making investment in a foreign entity engaged in real estate or banking business
Lesson 1 Foreign Exchange Management 33 General Permission In terms of Regulation 4 general permission has been granted to residents for purchase acquisition of securities in the following manner a out of funds held in RFC account and b as bonus shares on existing holding of foreign currency shares c when not permanently resident in India out of their foreign currency resources outside India General permission is also given to sell the shares so purchased or acquired Automatic Route In terms of Regulation 6 of the Foreign Exchange Management Transfers or Issue of Foreign Securities Regulation an Indian party has been permitted to make investment in overseas Joint Ventures JV Wholly Owned Subsidiaries WOS not exceeding 400 per cent of the net worth of the Indian party corporates as on the date of the last audited balance sheet This ceiling will not be applicable where the investment is made out of balances held in Exchange Earners Foreign Currency account of the Indian party or out of funds raised through ADRs GDRs The above ceiling includes contribution to the capital of the overseas JV WOS loan granted to the JV WOS and 100 per cent of guarantees issued to or on behalf of the JV WOS Such investments are subject to the following conditions a The Indian entity may extend loan guarantee to an overseas concern only in which it has equity participation Indian entities may offer any form of guarantee corporate or personal primary or collateral guarantee by the promoter company guarantee by group company sister concern or associate company in India provided that i All financial commitments including all forms of guarantees are within the overall ceiling prescribed for overseas investment by the Indian party i e currently within 400 per cent of the net worth of the Indian party ii No guarantee is open ended i e the amount of the guarantee should be specified upfront and iii As in the case of corporate guarantees all guarantees are required to be reported to Reserve Bank in Form ODI Part II Guarantees issued by banks in India in favour of WOSs JVs outside India are outside this ceiling and are subject to prudential norms issued by Reserve Bank from time to time The Indian party should not be on the Reserve Bank s Exporters caution list list of defaulters to the banking system circulated by the Reserve Bank The Credit Information Bureau India Ltd CIBIL or under investigation by any investigation enforcement agency or regulatory body All transactions relating to a JV WOS should be routed through one branch of an authorised dealer bank to be designated by the Indian party In case of partial full acquisition of an existing foreign company where the investment is more than USD 5 00 million valuation of the shares of the company is required to be made by a Category I Merchant Banker registered with SEBI or an Investment Banker Merchant Banker outside India registered with the appropriate regulatory authority in the host country and in all other cases by a Chartered Accountant or a Certified Public Accountant However in cases of investment by way of swap of shares in all cases irrespective of the amount valuation of the shares is required to be made by a Category I Merchant Banker registered with SEBI or an Investment Banker outside India registered with the appropriate regulatory authority in the host country Approval of the Foreign Investment Promotion Board FIPB is also a precondition
34 EP ECL In case of investment in overseas JV WOS abroad by a registered Partnership firm where entire funding for such investment is done by the firm it will be in order for individual partners to hold shares for and on behalf of the firm in the overseas JV WOS if the host country regulations or operational requirements warrant such holdings An Indian party is also permitted to acquire shares of a foreign company engaged in a bonafide business activity in exchange of ADRs GDRs issued to the latter in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares through Depository Receipt Mechanism Scheme 1993 and the guidelines issued there under from time to time by the Central Government provided a ADRs GDRs are listed on any stock exchange outside India b The ADR and or GDR issue for the purpose of acquisition is backed by underlying fresh equity shares issued by the Indian party c The total holding in the Indian entity by persons resident outside India in the expanded capital base after the new ADR and or GDR issue does not exceed the sectoral cap prescribed under the relevant regulations for such investment under FDI d Valuation of the shares of the foreign company shouldl be i as per the recommendations of the Investment Banker if the shares are not listed on any recognized stock exchange or ii based on the current market Capitalization of the foreign company arrived at on the basis of monthly average price on any stock exchange abroad for the three months preceding the month in which the acquisition is committed and over and above the premium if any as recommended by the Investment Banker in its due diligence report in other cases The Indian Party is required to report such acquisition in form ODI to the AD Bank for report to the Reserve Bank within a period of 30 days from the date of the transaction It may be noted that Investments in Nepal are permitted only in Indian rupees Investments in Bhutan are permitted in Indian Rupees as well as in freely convertible currencies All dues receivable on investments made in freely convertible currencies as well as their sale winding up proceeds are required to be repatriated to India in freely convertible currencies only The automatic route facility is not available for investment in Pakistan Method of Funding Investment in an overseas JV WOS may be funded out of one or more of the following sources i drawal of foreign exchange from an AD Bank in India ii capitalisation of exports iii swap of shares iv utilisation of proceeds of External Commercial Borrowings ECBs Foreign Currency Convertible Bonds FCCBs v in exchange of ADRs GDRs issued in accordance with the scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares through Depository Receipt Mechanism Scheme 1993 and the guidelines issued there under from time to time by the Central Government vi balances held in EEFC account of the Indian party and vii utilisation of proceeds of foreign currency funds raised through ADR GDR issues
Lesson 1 Foreign Exchange Management 35 In respect of vi and vii above the ceiling of 400 per cent of net worth does not apply However in respect of investments in the financial sector they are subject to compliance of Regulation 7 irrespective of the method of funding Capitalisation of exports and other dues a Indian parties are also permitted to capitalise the payments due from the foreign entity towards exports fees royalties or any other entitlements due from the foreign entity for supplying technical know how consultancy managerial and other services within the ceilings applicable Capitalization of Export proceeds remaining unrealized beyond the prescribed period of realization will require the prior approval of the Reserve Bank before capitalisation b Indian software exporters are permitted to receive 25 per cent of the value of their exports to an overseas software startup company in the form of shares without entering into Joint Venture Agreements with prior approval of the Reserve Bank Investments in Financial Services Sector In terms of Regulation 7 an Indian party seeking to make investment in an entity engaged in the financial services sector also is required to fulfill the following additional conditions i be registered with the appropriate regulatory authority in India for conducting the financial sector activities ii have earned net profit during the preceding three financial years from the financial services activities iii have obtained approval for investment in financial sector activities abroad from regulatory authorities concerned in India and abroad and iv have fulfilled the prudential norms relating to capital adequacy as prescribed by the regulatory authority concerned in India A step down subsidiary of JV WOS investing in a financial services sector is also required to comply with the above conditions Regulated entities in the financial sector making investments in any activity overseas are required to comply with the above guidelines It is clarified that unregulated entities in the financial services sector in India may invest in non financial sector activities subject to compliance with the provisions of Regulation 6 It is further clarified that trading in Commodities Exchanges overseas and setting up JV WOS for trading in overseas exchanges are reckoned as financial services activity and require clearance from the Forward Markets Commission Investment in Equity of Companies Registered Overseas Rated Debt Instruments Corporates Listed Indian companies are permitted to invest abroad in companies listed on a recognized stock exchange Such investments should not exceed 50 per cent of the Indian company s net worth as on the date of the latest audited balance sheet Individuals Resident individuals are permitted to 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 Liberalised Remittance Scheme
36 EP ECL Investment by Mutual Funds Mutual Funds are permitted to invest in ADRs GDRs of the Indian and foreign companies rated debt instruments equity of listed overseas companies ETFs and overseas mutual funds that make nominal investments in unlisted overseas securities Domestic Venture Capital Funds registered with SEBI may invest in equity and equity linked instruments of off shore Venture Capital Undertakings subject to an overall limit of USD 500 million Approval of the Reserve Bank Prior approval of the Reserve Bank is required in all other cases of direct investment abroad For this purpose application together with necessary documents should be made in Form ODI submitted through their Authorised Dealer Reserve Bank takes into account the following factors while considering such applications a Prima facie viability of the JV WOS outside India b Contribution to external trade and other benefits which will accrue to India through such investment c Financial position and business track record of the Indian party and the foreign entity d Expertise and experience of the Indian party in the same or related line of activity of the JV WOS outside India Overseas Investments by Proprietorship Concerns With a view to enabling recognized star exporters with a proven track record and a consistently high export performance to reap the benefits of globalization and liberalization proprietorship concerns and unregistered partnership firms have been allowed to set up a JV WOS outside India with prior approval of the Reserve Bank subject to satisfying certain eligibility criteria An application in form ODI may be made to the Chief General Manager Reserve Bank of India Foreign Exchange Department Overseas Investment Division Central Office Amar Building 3rd Floor Fort Mumbai 400 001 through the AD Banks Investments by established proprietorship or unregistered partnership exporter firms is subject to the following criteria i The Partnership Proprietorship firm is classified as Status Holder as per the Foreign Trade Policy issued from time to time ii The AD bank is satisfied that the exporter is KYC Know Your Customer compliant is engaged in the proposed business and has turnover as indicated iii Exporter has proven track record i e export outstanding does not exceed 10 per cent of the average export realization of preceding three financial years iv The exporter has not come under adverse notice of any Government agency like Enforcement Directorate CBI and does not appear in the exporters caution list of the Reserve Bank or in the list of defaulters to the banking system in India v The amount of investment outside India does not exceed 10 per cent of the average of three financial years export realization or 200 per cent of the net owned funds of the firm whichever is lower Overseas Investment by Registered Trust Society Registered Trusts and Societies engaged in manufacturing educational sector are allowed make investment
Lesson 1 Foreign Exchange Management 37 in the same sector s in a Joint Venture or Wholly Owned Subsidiary outside India with the prior approval of the Reserve Bank Trusts Societies satisfying the eligibility criteria as given below may submit the application s in Form ODI Part I through their Authorised Dealer Eligibility Criteria for Trust The Trust should be registered under the Indian Trust Act 1882 The Trust deed permits the proposed investment overseas The proposed investment should be approved by the trustee s Authorised Dealer Bank is satisfied that the Trust is KYC Know Your Customer compliant and is engaged in a bonafide activity The Trust has been in existence at least for a period of three years The Trust has not come under the adverse notice of any Regulatory Enforcement agency like the Directorate of Enforcement CBI etc Eligibility Criteria for Society The Society should be registered under the Societies Registration Act 1860 The Memorandum of Association and rules and regulations permit the Society to make the proposed investment which should also be approved by the governing body council or a managing executive committee The AD Category I bank is satisfied that the Society is KYC Know Your Customer compliant and is engaged in a bonafide activity The Society has been in existence at least for a period of three years The Society has not come under the adverse notice of any Regulatory Enforcement agency like the Directorate of Enforcement CBI etc In addition to the registration the activities which require special license permission either from the Ministry of Home Affairs Government of India or from the relevant local authority as the case may be the Authorised Dealer Bank should ensure that such special license permission has been obtained by the applicant sale of securities so acquired Acquisition of a foreign company through bidding or tender procedure In terms of Regulation 14 an Indian party may remit earnest money deposit or issue a bid bond guarantee for acquisition of a foreign company through bidding and tender procedure and also make subsequent remittances through an AD Bank Obligations of Indian Entity In terms of provisions of Regulation 15 an Indian party which has made direct investment abroad has been
38 EP ECL put under obligation to a receive share certificate or any other document as an evidence of investment b repatriate to India the dues receivable from foreign entity and c submit the documents Annual Performance Report to the Reserve Bank in accordance with the provisions specified in Regulation 15 of the Notification Transfer by way of sale of shares of a JV WOS Involving Write Off of the Investment Indian parties may also disinvest without prior approval of the Reserve Bank in the following categories i in case where the JV WOS is listed in the overseas stock exchange ii in cases where the Indian party is listed on a stock exchange in India and has a net worth of not less than 100 crore iii where the Indian party is an unlisted company and the investment in overseas venture does not exceed USD 10 million iv where the Indian Party is a listed company with the net worth of less than 100 crore but investment in an overseas JV WOS does not exceed USD 10 million The Indian entity is required to submit details of the disinvestment through its designated Authorised Dealer bank within 30 days from the date of investment An Indian party which does not satisfy the conditions laid down shall have to apply to the Reserve Bank for prior permission Permission for purchase acquisition of foreign securities in certain cases General permission has been granted to a person resident in India who is an individual a to acquire foreign securities as a gift from any person resident outside India or b to acquire shares under Cashless Employees Stock Option Scheme issued by a company outside India provided it does not involve any remittance from India or c to acquire shares by way of inheritance from a person whether resident in or outside India d to purchase equity shares offered by a foreign company under its ESOP Schemes if he is an employee or a director of an Indian office or branch of a foreign company or of a subsidiary in India of a foreign company or an Indian company in which foreign equity holding either direct or through a holding company Special Purpose Vehicle SPV is not less than 51 per cent A person resident in India may transfer by way of sale the shares acquired as stated above provided that the proceeds thereof are repatriated immediately on receipt thereof and in any case not later than 90 days from the date of sale of such securities e Foreign companies are permitted to repurchase the shares issued to residents in India under any ESOP Scheme provided i the shares were issued in accordance with the Rules Regulations framed under Foreign Exchange Management Act 1999 ii the shares are being repurchased in terms of the initial offer document and iii An annual return is submitted through the AD Bank giving details of remittances beneficiaries etc f In all other cases not covered by general or special permission approval of the Reserve Bank is required to be obtained before acquisition of a foreign security Pledge of a foreign security by a person resident in India The shares acquired by persons resident in India in accordance with the provisions of Foreign Exchange
Lesson 1 Foreign Exchange Management 39 Management Act 1999 or Rules or Regulations made thereunder are allowed to be pledged for obtaining credit facilities in India from an AD Bank Public Financial Institution General permission in certain cases Residents are permitted to acquire a foreign security if it represents a qualification shares for becoming a director of a company outside India to the extent prescribed as per the law of the host country where the company is located provided it does not exceed the limit prescribed for the resident individuals under the Liberalized Remittance Scheme LRS in force at the time of acquisition b part full consideration of professional services rendered to the foreign company or in lieu of Director s remuneration The limit of acquiring such shares in terms of value is restricted to the overall ceiling prescribed for the resident individuals under the Liberalized Remittance Scheme LRS in force at the time of acquisition c purchase of shares of a JV WOS abroad of the Indian promoter company by the employees directors of Indian promoter company which is engaged in the field of software where the consideration for purchase does not exceed the ceiling as stipulated by Reserve Bank from time to time the shares so acquired do not exceed 5 per cent of the paid up capital of the JV WOS outside India and after allotment of such shares the percentage of shares held by the Indian promoter company together with shares allotted to its employees is not less than the percentage of shares held by the Indian promoter company prior to such allotment d purchase of foreign securities under ADR GDR linked stock option schemes by resident employees of Indian companies in the knowledge based sectors including working director What is direct investment outside India Direct investment outside India means investment by way of contribution to the capital or subscription to the Memorandum of Association of a foreign entity signifying a long term interest setting up a Joint Venture JV or a Wholly Owned Subsidiary WOS in the overseas entity and thus does not include portfolio investment ACQUISITION AND TRANSFER OF IMMOVABLE PROPERTY OUTSIDE INDIA The Reserve Bank of India in exercise of the powers conferred under Section 6 3 h and Section 47 2 of the Foreign Exchange Management Act 1999 prescribed regulations in respect of acquisition and transfer of immovable property outside India A person resident in India is prohibited from acquiring or transferring any immovable property situated outside India without general or special permission of the Reserve Bank However this prohibition is not applicable to the property held by a person resident in India who is a national of a foreign state and acquired by a person resident in India on or before 8th July 1947 and continued to be held by him with the permission of the Reserve Bank A person resident in India may acquire immovable property outside India by way of gift or inheritance from a person who was resident outside India in terms of Section 6 4 of FEMA acquired by a person resident in India on or before July 8 1947 and continued to be held by him with the permission of RBI A person resident in India may acquire immovable property outside India by way of purchase out of foreign
40 EP ECL exchange held in Resident Foreign Currency RFC account maintained in accordance with the Foreign Exchange Management Foreign Currency Accounts by a person resident in India Regulations 2000 Reserve Bank is empowered to permit a company incorporated in India having overseas offices to acquire immovable property outside India for its business and for residential purpose of its staff subject to such terms and conditions as it considers necessary A person resident in India who has acquired immovable property outside India as above may transfer it by way of gift to his relative who is a person resident in India For this purpose relative in relation to an individual means husband wife brother or sister or any lineal ascendant or descendant of that individual ACQUISITION AND TRANSFER OF IMMOVABLE PROPERTY IN INDIA The Foreign Exchange Management Acquisition and Transfer of Immovable Property in India Regulations 2000 issued by the RBI defines the term A person of Indian origin as to mean an individual not being a citizen of Pakistan or Bangladesh or Sri Lanka or Afghanistan or China or Iran or Nepal or Bhutan who i at any time held Indian passport or ii who or either of whose father or whose grandfather was a citizen of India by virtue of the Constitution of India or the Citizenship Act 1955 The term Repatriation outside India has been defined to mean the buying or drawing of foreign exchange from an authorised dealer in India and remitting it outside India through normal banking channels or crediting it to an account denominated in foreign currency or to an account in Indian currency maintained with an authorised dealer from which it can be converted in foreign currency Acquisition and Transfer of Property in India by an Indian Citizen Resident Outside India An Indian citizen resident outside India may i acquire any immovable property in India other than agricultural plantation farm house ii transfer any immovable property in India to a person resident in India and iii transfer any immovable property other than agricultural or plantation property or farm house to an Indian citizen or to a person of Indian origin resident outside India Acquisition and Transfer of Property in India by a Person of Indian Origin A person of Indian origin resident outside India may acquire any immovable property other than agricultural land farm house plantation property in India by purchase from out of funds received in India through normal banking channels by way of inward remittance from any place outside India or funds held in any non resident account maintained in accordance with the provisions of the Act and the regulations made by the Reserve Bank under the Act It has been clarified that such payments can not be made either by traveller s cheque or by foreign currency notes or by other mode other than those specified in this behalf He may also acquire any immovable property in India other than agricultural land farm house plantation property by way of gift from a person resident in India or from a person resident outside India who is a citizen of India or from a person of Indian origin resident outside India A person of Indian origin resident outside may also acquire any immovable property in India by way of inheritance from a person resident outside India who had acquired such property in accordance with the provisions of the foreign exchange law in force at the time of acquisition by him or the provisions of these Regulations or from a person resident in India He has been permitted to transfer any immovable property in India other than agricultural land farm house plantation property by way of sale to a person resident in India
Lesson 1 Foreign Exchange Management 41 transfer agricultural land farm house plantation property in India by way of gift or sale to a person resident in India who is a citizen of India and transfer residential or commercial property in India by way of gift to a person resident in India or to a person resident outside India who is a citizen of India or to a person of Indian origin resident outside India Acquisition of Immovable Property for Carrying on a Permitted Activity A person resident outside India who has established in India in accordance with the Foreign Exchange Management Establishment in India of Branch or Office or other Place of Business Regulations 2000 a branch office or other place of business for carrying on in India any activity except a liaison office may acquire any immovable property in India which is necessary for or incidental to carrying on such activity provided that all applicable laws rules regulations or directions for the time being in force are duly complied with and the person files with the Reserve Bank a declaration in the Form IPI not later than ninety days from the date of such acquisition Such a person is also allowed to transfer by way of mortgage to an authorised dealer as a security for any borrowing the acquired immovable property Purchase Sale of Immovable Property by Foreign Embassies Diplomats Consulate Generals A Foreign Embassies Diplomats Consulate Generals may purchase sell immovable property in India other than agricultural land farm house plantation property provided i clearance from government of India Ministry of External Affairs is obtained for such purchase sale and ii the consideration for acquisition of immovable property in India is paid out of funds remitted from abroad through banking channel Repatriation of Sale Proceeds A person resident outside India or his successor shall not except with the prior permission of the Reserve Bank repatriate outside India the sale proceeds of any immovable property In the event of sale of immovable property other than agricultural land farm house plantation property in India by a person resident outside India who is a citizen of India or a person of Indian origin the authorised dealer may allow repatriation of the sale proceeds outside India provided the following conditions are satisfied a the immovable property was acquired by the seller in accordance with the provisions of the foreign exchange law in force at the time of acquisition by him or the provisions of Foreign Exchange Management Acquisition and Transfer of Immovable Property in India Regulations 2000 b the amount to be repatriated does not exceed the amount paid for acquisition of the immovable property in foreign exchange received through normal banking channels or out of funds held in Foreign Currency Non Resident Account or the foreign currency equivalent as on the date of payment of the amount paid where such payment was made from the funds held in Non Resident External account for acquisition of the property c In the case of residential property the repatriation of sale proceeds is restricted to not more than two such properties Who can purchase immovable property in India Under the general permission available the following categories can purchase immovable property in India i Non Resident Indian NRI ii Person of Indian Origin PIO The general permission however covers only purchase of residential and commercial property and is not available for purchase of agricultural land plantation property farm house in India
42 EP ECL ESTABLISHMENT IN INDIA OF BRANCH LIAISON PROJECT OFFICE Establishment of Branch Liaison Project Offices in India is regulated in terms of Section 6 6 of Foreign Exchange Management Act 1999 read with Foreign Exchange Management Establishment in India of branch or office or other place of business Regulations 2016 as amended from time to time A body corporate incorporated outside India including a firm or other association of individuals desirous of opening a Liaison Office LO Branch Office BO in India have to obtain permission from the Reserve Bank under provisions of FEMA 1999 The applications from such entities considered by Reserve Bank under two routes Reserve Bank Route Where principal business of the foreign entity falls under sectors where 100 per cent Foreign Direct Investment FDI is permissible under the automatic route Government Route Where principal business of the foreign entity falls under the sectors where 100 per cent FDI is not permissible under the automatic route Applications from entities falling under this category and those from Non Government Organisations Non Profit Organisations Government Bodies Departments are considered by the Reserve Bank in consultation with the Ministry of Finance Government of India The following additional criteria are also considered by the Reserve Bank while sanctioning Liaison Branch Offices of foreign entities Track Record For Branch Office a profit making track record during the immediately preceding five financial years in the home country For Liaison Office a profit making track record during the immediately preceding three financial years in the home country Net Worth total of paid up capital and free reserves less intangible assets as per the latest Audited Balance Sheet or Account Statement certified by a Certified Public Accountant or any Registered Accounts Practitioner by whatever name For Branch Office not less than USD 100 000 or its equivalent For Liaison Office not less than USD 50 000 or its equivalent Permissible Activities for a Liaison Office A Liaison Office also known as Representative Office can undertake only liaison activities i e it can act as a channel of communication between Head Office abroad and parties in India It is not allowed to undertake any business activity in India and cannot earn any income in India Expenses of such offices are to be met entirely through inward remittances of foreign exchange from the Head Office outside India The role of such offices is therefore limited to collecting information about possible market opportunities and providing information about the company and its products to the prospective Indian customers Permission to set up such offices is initially granted for a period of 3 years and this may be extended from time to time by an AD Category I bank Liaison Office can undertake the following activities in India Representing in India the parent company group companies Promoting export import from to India
Lesson 1 Foreign Exchange Management 43 Promoting technical financial collaborations between parent group companies and companies in India Acting as a communication channel between the parent company and Indian companies Liaison Office of Foreign Insurance Companies Banks Foreign Insurance companies can establish Liaison Offices in India only after obtaining approval from the Insurance Regulatory and Development Authority IRDA Foreign banks can establish Liaison Offices in India only after obtaining approval from the Department of Banking Operations and Development DBOD Reserve Bank of India Permissible Activities for branch offices Companies incorporated outside India and engaged in manufacturing or trading activities are allowed to set up Branch Offices in India with specific approval of the Reserve Bank Such Branch Offices 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 Branch Office should be engaged in the activity in which the parent company is engaged Branch Office in Special Economic Zones SEZs Reserve Bank has given general permission to foreign companies for establishing branch unit in Special Economic Zones SEZs to undertake manufacturing and service activities The general permission is subject to the following conditions such units are functioning in those sectors where 100 per cent FDI is permitted such units comply with part XI of the Companies Act 2013 such units function on a stand alone basis In the event of winding up of business and for remittance of winding up proceeds the branch shall approach an AD Category I bank with the documents as mentioned under Closure of Liaison Branch Office except the copy of the letter granting approval by the Reserve Bank Project office Reserve Bank has granted general permission to foreign companies to establish Project Offices in India provided they have secured a contract from an Indian company to execute a project in India and the project is funded directly by inward remittance from abroad or
44 EP ECL the project is funded by a bilateral or multilateral International Financing Agency or the project has been cleared by an appropriate authority or a company or entity in India awarding the contract has been granted Term Loan by a Public Financial Institution or a bank in India for the project However if the above criteria are not met the foreign entity has to approach the Reserve Bank of India for approval What are the permitted activities of Liaison Office Representative Office Liaison Office also known as Representative Office can undertake only liaison activities i e it can act as a channel of communication between Head Office abroad and parties in India It is not allowed to undertake any business activity in India and cannot earn any income in India Expenses of such offices are to be met entirely through inward remittances of foreign exchange from the Head Office outside India The role of such offices is therefore limited to collecting information about possible market opportunities and providing information about the company and its products to the prospective Indian customers A Liaison Office can undertake the following activities in India i Representing in India the parent company group companies ii Promoting export import from to India iii Promoting technical financial collaborations between parent group companies and companies in India iv Acting as a communication channel between the parent company and Indian companies EXPORT OF GOODS AND SERVICES Section 7 of the Act deals with export of goods and services Under Sub section 1 every exporter is required to furnish to Reserve Bank or any other authority as prescribed a declaration containing true and correct particulars including the amount representing the full export value or if the full export value of the goods is not ascertainable at the time of export the value which the exporter having regard to prevailing market conditions expects to receive on sale of the goods in a market outside India Every exporter is also under obligation to furnish such other information as may be required by the Reserve Bank for the purpose of ensuring the realisation of the export proceeds Declaration as Regards Export of Goods and Services Every exporter of goods or software in physical form or through any other form either directly or indirectly to any place outside India other than Nepal and Bhutan is required to furnish to the specified authority a declaration in the prescribed form and supported by specified evidence containing true and correct material particulars including the amount representing the full export value of the goods or software or if the full export value is not ascertainable at the time of export the value which the exporter having regard to the prevailing market conditions expects to receive on the sale of goods or the software in the overseas market affirming that the full export value of goods whether ascertainable at the time of export or not or the software has been or will within the specified period be paid in the specified manner In respect of export of services to which none of the forms specified apply the exporter may export such services without furnishing any declaration but shall be liable to realise the amount of foreign exchange which becomes due or accrues on account of such export and to repatriate the same to India
Lesson 1 Foreign Exchange Management 45 Export of Goods or Services Without Declaration Export of goods or services may be made without furnishing the declaration in the following cases namely i trade samples of goods and publicity material supplied free of cost ii personal effects of travellers whether accompanied or unaccompanied iii ships stores trans shipment cargo and goods supplied under the orders of Central Government or of such officers as may be appointed by the Central Government in this behalf or of the military naval or air force authorities in India for military naval or air force requirements iv by way of gift of goods accompanied by a declaration by the exporter that they are not more than five lakh rupees in value v aircrafts or aircraft engines and spare parts for overhauling and or repairs abroad subject to their reimport into India after overhauling repairs within a period of six months from the date of their export vi goods imported free of cost on re export basis vii the goods which are permitted by the Development Commissioner of the Export Processing Zones EHTP STP or Free Trade Zones to be re exported viii replacement goods exported free of charge in accordance with the provisions of Foreign Trade Policy for the time being ix goods sent outside India for testing subject to re import into India x defective goods sent outside India for repair and re import provided the goods are accompanied by a certificate from authorised dealer in India that the export is for repair and re import and that the export does not involve any transaction in foreign exchange xi export permitted by RBI Indication of Importer Exporter Code Number The importer exporter code number allotted by the Director General of Foreign Trade under Section 7 of the Foreign Trade Development and Regulation Act 1992 has to be indicated on all copies of the declaration forms submitted by the exporter to the specified authority and also in all correspondence with the authorised dealer or the Reserve Bank as the case may be Evidence in Support of Declaration The Commissioner of Customs or the postal authority or the official of Department of Electronics to whom the declaration form is submitted may in order to satisfy themselves of due compliance of provisions of the Act and the regulations made thereunder require such evidence in support of the declaration as may establish that the exporter is a person resident in India and has a place of business in India and the destination stated on the declaration is the final place of the destination of the goods exported The term final place of destination has been defined to mean a place in a country in which the goods are ultimately imported and cleared through Customs of that country and the value stated in the declaration represents the full export value of the goods or software or where the full export value of the goods or software is not ascertainable at the time of export the value which the exporter having regard to the prevailing market conditions expects to receive on the sale of the goods in the overseas market
46 EP ECL Manner of Payment of Export Value of Goods Unless otherwise authorised by the Reserve Bank the amount representing the full export value of the goods exported shall be paid through an authorised dealer in the manner specified in the Foreign Exchange Management Manner of Receipt and Payment Regulations 2000 In this context the re import into India within the period specified for realisation of the export value of the exported goods in respect of which a declaration was made shall be deemed to be realisation of full export value of such goods Time Limit for Realisation of Export Value of Goods Software The amount representing the full export value of goods or software exported is required to be realised and repatriated to India within twelve months from the date of export However where the goods or software are exported by the units in Special Economic Zones the stipulation of period of realization and repatriation to India of full export value of goods or software within nine months from the date of export In the case of export of goods to a warehouse established outside India with the permission of the Reserve Bank the amount representing the full export value of goods exported is to be paid to the authorised dealer as soon as it is realised and in any case within fifteen months from the date of shipment of goods In this regard the authorised dealer have been empowered for a sufficient and reasonable cause shown to extend the said period of nine months or fifteen months as the case may be However in the case of export of goods or software by a statusholder exporter the amount representing full export value of goods or software shall be realised within a period of twelve months from the date of export In this context RBI has been empowered to extend the said period of twelve months No person shall enter into any contract without the approval of RBI to export goods on the terms which provide for a period longer than twelve months for payment of the value of the goods to be exported Submission of export documents The documents pertaining to export shall within 21 days from the date of export as as the case may be from the date of certification of SOFTEX form be submitted to the Authorised Dealer mentioned in the relevant declaration form However subject to the directions issued by the Reserve Bank from time to time the Authorised Dealer may accept the documents pertaining to export submitted after the expiry of the specified period of 21 days for reasons beyond the control of the exporter Transfer of Documents An authorised dealer to accept for negotiation or collection shipping documents including invoice and bill of exchange covering exports from his constituent not being a person who has signed the declaration as regards to export of goods and services However where the value declared in the declaration does not differ from the value shown in the documents being negotiated or sent for collection or where the value declared in the declaration is less than the value shown in the documents being negotiated or sent for collection the authorised dealer before accepting the documents require the constituent concerned also to sign such declaration and thereupon such constituent shall be bound to comply with such requisition and such constituent signing the declaration shall be considered to be the exporter to the extent of the full value shown in the documents being negotiated or sent for collection Payment for the Export In respect of export of any goods or software requiring a declaration to be furnished no person shall without the permission of the Reserve Bank or subject to the directions of the Reserve Bank do or refrain from doing anything or take or refrain from taking any action which has the effect of securing that the payment for
Lesson 1 Foreign Exchange Management 47 the goods or software is made otherwise than in the specified manner or that the payment is delayed beyond the specified period or that the proceeds of sale of the goods or software exported do not represent the full export value of the goods or software subject to such deductions if any as may be allowed by the Reserve Bank or subject to the directions of the Reserve Bank by an authorised dealer However proceedings in respect of contravention of these provisions shall not be instituted unless the specified period has expired and payment for the goods or software representing the full export value or the value after allowed deductions has not been made in the specified manner within the specified period Delay in Receipt of Payment Where in relation to goods or software export of which is required to be declared on the specified form the specified period has expired and the payment therefor has not been made as aforesaid the Reserve Bank may give to any person who has sold the goods or software or who is entitled to sell the goods or software or procure the sale thereof such directions as appear to it to be expedient for the purpose of securing a the payment therefor if the goods or software has been sold and b the sale of goods and payment thereof if goods or software has not been sold or re import thereof into India as the circumstances permit within such period as the Reserve Bank may specify in this behalf However omission of the Reserve Bank to give directions shall not have the effect of absolving the person committing the contravention from the consequences thereof Advance payment against exports Where an exporter receives advance payment with or without interest from a buyer outside India the exporter has been put under an obligation to ensure that i The shipment of goods is made within one year from the date of receipt of advance payment ii The rate of interest if any payable on the advance payment does not exceed London Inter Bank Offered Rate LIBOR 100 basis points and iii The documents covering the shipment are routed through the Authorised Dealer through whom the advance payment is received However in the event of the exporter s inability to make the shipment partly or fully within one year from the date of receipt of advance payment no remittance towards refund of unutilised portion of advance payment or towards payment of interest shall be made after the expiry of the said period of one year without the prior approval of the Reserve Bank In case the export agreement provides for shipment of goods extending beyond the period of one year from the date of receipt of advance payment the exporter shall require the prior approval of the Reserve Bank Project exports Where the export of goods or services is proposed to be made on deferred payment terms or in execution of a turnkey project or a civil construction contract the exporter shall before entering into any such export arrangement submit the proposal for prior approval of the approving authority which shall consider the proposal in accordance with the guidelines issued by the Reserve Bank from time to time REALISATION REPATRIATION AND SURRENDER OF FOREIGN CURRENCY Section 8 of the Act requires the person resident in India to make all reasonable efforts to realise and
48 EP ECL repatriate the foreign exchange due or accrued as per the directions of the Reserve Bank Foreign Exchange Management Realisation Repatriation and Surrender of Foreign Exchange Regulations 2015 requires a person resident in India to whom any foreign exchange is due or has accrued to take all reasonable steps to realise and repatriate to India such foreign exchange unless an exemption has been granted under the Act and rules or regulations made thereunder or under the general or special permission of Reserve Bank Regulation 3 also requires a person resident in India to refrain from doing anything taking any action resulting in delay in receipt of foreign exchange in whole or part or ceasing in whole or part the foreign exchange receivable by him Manner of Repatriation Regulation 4 requires that after realisation of foreign exchange due the person concerned shall repatriate the same to India and sell it to an authorised person or retain it to the specified extent in an account with an authorised dealer or use it for discharging a foreign exchange debt or liability to the specified extent The regulation further provides that the realised foreign exchange shall be deemed to be repatriated to India when the person concerned receives in India payments in rupees from the account of a bank or an exchange house situated in any country outside India maintained with an authorised dealer Period for Surrender of Realised Foreign Exchange Any foreign exchange due or accrued as remuneration for services rendered whether in or outside India or in settlement of any lawful obligation or an income on assets held outside India or as inheritance settlement or gift should be sold by the person concerned to an authorised person within a period of seven days of its receipt and in all other cases within 90 days from the date of its receipt Regulation 6 deals with Period for surrender of foreign exchange in certain other cases and provides that any person who has acquired or purchased foreign exchange for any purpose mentioned in the declaration made by him to an authorised person under Section 10 5 of the Act and does not use it for such purpose or for any other purpose for which purchase or acquisition of foreign exchange is permissible under the Act or the rules or regulations or direction or order made thereunder shall surrender such foreign exchange or the unused portion thereof to an authorised person within a period of sixty days from the date of its acquisition or purchase by him However in case the foreign exchange acquired or purchased by any person from an authorised person is for the purpose of foreign travel then the unspent balance of such foreign exchange shall be surrendered to an authorised person within ninety days from the date of return of the traveller to India when the unspent foreign exchange is in the form of currency notes and coins and within one hundred eighty days from the date of return of the traveller to India when the unspent foreign exchange is in the form of travellers cheques Note The provisions of Foreign Exchange Management Realisation Repatriation and Surrender of Foreign Exchange Regulation are not applicable to foreign exchange in the form of currency of Nepal or Bhutan Exemption from Realisation or Repatriation Section 9 of the Act contains exemptions from the application of provisions relating to holding of foreign currency and realisation and repatriation in certain circumstances as provided under Sections 4 and 8 of the Act respectively Accordingly possession of foreign currency or coins by any person or class of persons as the Reserve Bank may specify is not prohibited A person or class of persons may hold and operate foreign currency account within the prescribed limits as may be specified by the Reserve Bank Foreign exchange acquired or received before 8th July 1947 or any income arising or accruing thereon which is held outside India in pursuance of a general or special permission of RBI is also exempted
Lesson 1 Foreign Exchange Management 49 Provisions relating to holding of foreign exchange realisation and repatriation of foreign exchange are not applicable to person resident in India upto such limit as the Reserve Bank may specify if such foreign exchange was acquired by way of gift or inheritance from certain persons mentioned above and any income arising therefrom Reserve Bank may also specify the exemption limit upto which the foreign exchange earned by a person from employment business trade vocation services honorarium gifts inheritance or other legitimate means may be possessed Reserve Bank may also exempt such other receipts as it thinks fit POSSESSION AND RETENTION OF FOREIGN CURRENCY OR FOREIGN COINS Foreign Exchange Management Possession and Retention of Foreign Currency Regulations 2015 provides for limits for possession and retention of foreign currency or foreign coins Under Regulation 3 the Reserve Bank has specified following limits for possession or retention of foreign currency or foreign coins namely i possession without limit of foreign currency and coins by an authorised person within the scope of his authority ii possession without limit of foreign coins by any person iii retention by a person resident in India of foreign currency notes bank notes and foreign currency travellers cheques not exceeding US 2000 or its equivalent in aggregate provided that such foreign exchange in the form of currency notes bank notes and travellers cheques acquired during a visit to any place outside India by way of payment for services not arising from any business in or anything done in India or from any person not resident in India and also who is on a visit to India or as honorarium or gift or for services rendered or in settlement of any lawful obligation or as a honorarium or gift while on a visit to any place outside India or represents unspent amount of foreign exchange acquired from an authorised person for travel abroad Regulation 4 deals with possession of foreign exchange by a person resident in India but not permanently resident therein and provides that a person resident in India but not permanently resident therein may possess without limit foreign currency in the form of currency notes bank notes and travellers cheques if such foreign currency was acquired held or owned by him when he was resident outside India and has been brought into India in accordance with the law for the time being inforce Explanation to regulation 4 defines the term not permanently resident as to mean a person resident in India for employment of a specified duration irrespective of length thereof or for a specific job or assignment the duration of which does not exceed three years AUTHORISED PERSON Chapter III of the Act containing Sections 10 12 deals with the provisions relating to authorised person Section 10 deals with the procedure of appointing authorised person by the Reserve Bank Section 11 specifies the powers of the RBI to issue directions to authorised person and Section 12 prescribes the power of the RBI to inspect authorised person Under Section 10 any person who has made an application to the RBI may be authorised by it to act as an authorised person to deal in foreign exchange or in foreign securities as an authorised dealer money changer or offshore banking unit or in any other manner as the RBI deem fit This authorisation is in writing and subject to the conditions laid down by the RBI Normally nationalised banks leading non nationalized banks and foreign banks are appointed as authorized persons Authorised persons are required to comply with the directions of the Reserve Bank with regard to his dealing in foreign exchange or foreign security receipt with the previous permission of the Reserve Bank However authorised person are required not to engage in any transaction involving any foreign exchange or foreign security which is not in conformity with the terms of his authorisation
50 EP ECL Reserve Bank of India has been empowered to revoke the authorisation granted to any person at any time in the public interest It may also revoke the authorisation after giving an opportunity if the authorised person failed to comply with the conditions subject to which the authorisation was granted or contravened any of the provisions of the Act rules notifications or directions An authorised person before undertaking any transaction on behalf of any person shall require that person to make such declaration and give such information as will reasonably satisfy the authorised person that the transaction will not involve or is not intended to violate or contravene any provisions of the Act rules notification or directions In case the person refuses to comply with such requirements or makes only unsatisfactory compliances the authorised person is duty bound to refuse in writing to act on behalf of such person in such transaction and report the matter to Reserve Bank Any person other than an authorised person who has acquired or purchased foreign exchange for any purpose mentioned in the declaration made by him to the authorised person does not use it for such purpose or does not surrender it to authorised person within the specified period or uses the foreign exchange for any other purpose which is not permitted under the provisions of the Act such person shall be deemed to have committed contravention of the provisions of the Act Power of the Reserve Bank to issue directions to authorised person Section 11 of the Act empowers the RBI to issue directions to the authorised person in regard to making of payment or doing or desist from doing any act relating to foreign exchange or foreign security Reserve Bank has also been empowered to issue directions to the authorised persons to furnish such information in such manner as it deems fit If any authorised person contravenes any direction given by the RBI or fails to file the return as directed by RBI he may be liable to a fine not exceeding Rs 10 000 and in the case of continuing contravention with an additional penalty which may extend to Rs 2 000 for every day during which such contravention continues The Government of India took a policy decision to permit FDI in infrastructure companies in securities market viz stock exchanges depositories and clearing corporation SEBI issued a circular in this regard RBI also issued a circular A P DIR Series Circular No 25 dated 22 12 2006 giving certain directions to authorized dealers The petitioner challenged the RBI Circular as invalid in as much as it restricts the trade activities of general corporate sector In Prof Krishnaraj Goswami vs Reserve Bank of India 2008 83 SCL 133 BOM Bombay High Court observed that the RBI had issued the impugned circular dated 22 12 2006 by way of directions as contemplated under section 10 4 and 11 1 of the FEMA A bare reading of the provisions of these sections clearly shows that RBI has power to issue direction s to authorized persons and this power is wide enough to cover any kind of directions so far it provides for regulation of foreign exchange management The contention of petitioner that RBI had no jurisdiction to issue such circulars can not accepted Section 10 4 clearly stipulate that an authorized person in all dealings is bound by the directions general or special issued by RBI Similarly section 11 1 provides that RBI may for the purpose of securing compliance of the provisions of the FEMA and of any rules regulations and directions made thereunder give to the authorized persons any direction in regard to making of payment or the doing or desist from doing of any act relating to foreign exchange or foreign security The petitioner had not challenged the policy decision of the Central Government but had merely questioned the incidental act i e the impugned circular In any event these are policy decisions which fall within the domain of the authorities concerned in the Central Government The effect and repercussions of such policy decision can hardly be subject mater of judicial review Policy decision unless and until are
Lesson 1 Foreign Exchange Management 51 reversed or inconsistent with the constitutional mandate or a patent abuse of power judicial intervention will normally be not necessitated Petition dismissed Power of Reserve Bank to Inspect authorised person Section 12 of the Act empowers RBI to inspect the business of any authorised person for the purpose of verifying the correctness of any statement information or particulars furnished In case authorised person fails to furnish the information sought the RBI can initiate inspection of the authorised person for obtaining such information RBI may also inspect the business of an authorised person for securing compliance with the provisions of the Foreign Exchange Management Act or any of the Rules Regulations or directions The Reserve Bank may make an order in writing authorising any of its officer for this purpose When an inspection is initiated by the Reserve Bank it shall be the duty of every authorised person where the authorised person is a company or firm every director partner or officer of such a company or firm to produce before the inspecting officer such books accounts and other documents in his custody and to furnish any statement or information relating to the affairs of such authorised person within the time limit and the manner in which such inspecting officer may direct Who is an Authorized Dealer An Authorised Dealer is any person specifically authorized by the Reserve Bank under Section 10 1 of FEMA 1999 to deal in foreign exchange or foreign securities CONTRAVENTION AND PENALTIES Chapter IV of the Act containing Sections 13 to 15 deals with contravention and penalties Section 13 deals with penalties Section 14 provides for enforcement of the orders of Adjudicating Authority and Section 15 deals with compounding of contraventions Section 13 provides that any person contravening any provision of the Act or any condition subject to which the authorisation is granted by the RBI shall be liable for penalty upon adjudication which may extend upto thrice the sum involved in such contravention where such amount is quantifiable or upto two lakh rupees where the amount is not quantifiable If the contravention continues the penalty of Rs 5 000 per day during the period in which the contravention continues shall be imposed In addition to the powers to impose penalty the Adjudicating Authority adjudging any contravention is empowered to confiscate to the Government of India any currency security or any other money or property in respect of which the contravention has taken place and may further direct that the foreign exchange holdings if any of the persons committing the contravention shall be brought back either to India or retained outside India in accordance with the directions Enforcement of the Orders of Adjudicating Authority In terms of Section 14 of the Act if any person fails to make full payment of the penalty imposed within a period of ninety days from the date on which the notice of payment of such penalty is served on him he shall be liable for civil imprisonment However no order of arrest and detention in civil imprisonment should be made unless the Adjudicating Authority issue showcause notice to defaulter as to why he should not be
52 EP ECL committed to civil imprisonment and unless the Adjudicating Authority for reasons in writing is satisfied that the defaulter has transferred concealed or removed any part of his property or he has refused to pay the penalty despite the fact he had means to pay the arrears The defaulter may be issued by the Adjudicating Authority a warrant of arrest on its satisfaction by affidavit or otherwise that the defaulter is likely to abscond or leave the local limit of its jurisdiction A warrant issued by one Adjudicating Authority may also be executed by any other Adjudicating Authority within whose jurisdiction the defaulter is found and the person so arrested shall be brought before the Adjudicating Authority issuing warrant within 24 hours of arrest excluding however the time taken in journey On arrest if the defaulter pays the amount entered in the warrant as due and the cost of arrest to the arresting officer such officer is under obligation to release him at once The Act gives an opportunity to make an appeal to Appellate Tribunal within forty five days from the date on which a copy of the order made by the Adjudicating Authority or the Special Director Appeals is received by the aggrieved person This period of forty five days for filing the appeal may be relaxed by the Appellate Tribunal if it is satisfied that there was sufficient cause for not filing the appeal in time Compounding of Contraventions What is meant by contravention and compounding of contravention Contravention is a breach of the provisions of the Foreign Exchange Management Act FEMA 1999 and rules regulations notification orders directions circulars issued there under Compounding refers to the process of voluntarily admitting the contravention pleading guilty and seeking redressal The Reserve Bank is empowered to compound any contraventions as defined under section 13 of FEMA 1999 except the contravention under section 3 a for a specified sum after offering an opportunity of personal hearing to the contravener It is a voluntary process in which an individual or a corporate seeks compounding of an admitted contravention It provides comfort to any person who contravenes any provisions of FEMA 1999 except section 3 a of the Act by minimizing transaction costs Willful malafide and fraudulent transactions are however viewed seriously which will not be compounded by the Reserve Bank Section 15 empowers the Directorate of Enforcement or Officers of the Directorate of Enforcement and Reserve Bank to compound the offences This section provides that contravention under Section 13 may be compounded within 180 days from the date of receipt of application Sub section 2 provides that where the contravention has been compounded the accused person is relieved from further proceedings for the contravention Foreign Exchange Compounding Proceedings Rules 2000 deals with procedure for compounding of contravention of the provisions of the Act Rule 3 defines the Compounding Authority as to mean the persons authorised by the Central Government under Sub section 1 of Section 15 of the Act namely a an officer of the Enforcement Directorate not below the rank of Deputy Director or Deputy Legal Advisor DLA b an officer of the Reserve Bank of India not below the rank of the Assistant General Manager
Lesson 1 Foreign Exchange Management 53 Powers of Reserve Bank to Compound Contravention Rule 4 empowers the RBI to compound only quantifiable contravention committed by any person of the provisions of Section 7 or Section 8 or Section 9 or Third Schedule to the Foreign Exchange Management Current Account Transactions Rules 2000 in the following manner a where the sum involved in such contravention is ten lakhs rupees or below by the Assistant General Manager of the Reserve Bank of India b where the sum involved in such contravention is more than rupees ten lakhs but less than rupees forty lakhs by the Deputy General Manager of Reserve Bank of India c where the sum involved in the contravention is rupees forty lakhs or more but less than rupees one hundred lakhs by the General Manager of Reserve Bank of India and d the sum involved in such contravention is rupees one hundred lakhs or more by the Chief General Manager of the Reserve Bank of India Powers of Enforcement Directorate to Compound Contravention Rule 5 specifies the cases in which only quantifiable contraventions of the provisions of the Act other than Section 7 or Section 8 or Section 9 or Third Schedule to the Foreign Exchange Current Account Transactions Rules 2000 can be compounded by the Enforcement Directorate These include a where the sum involved in such contravention is five lakhs rupees or below by the Deputy Director of the Directorate of Enforcement b where the sum involved in such contravention is more than rupees five lakhs but less than rupees ten lakhs by the Additional Director of the Directorate of Enforcement c where the sum involved in the contravention is rupees ten lakhs or more but less than rupees fifty lakhs by the Special Director of the Directorate of Enforcement d where the sum involved in the contravention is rupees fifty lakhs or more but less than rupees one crore by Special Director with Deputy Legal Advisor of the Directorate of Enforcement e where the sum involved in such contravention is one crore rupees or more by the Director of Enforcement with Special Director of the Enforcement Directorate The benefit of above provisions shall not be available in case a contravention committed by any person within a period of three years from the date on which a similar contravention committed by him was compounded under these rules However any second or subsequent contravention committed after the expiry of a period of three years from the date on which the contravention was previously compounded shall be deemed to be a first contravention Where any contravention is compounded before the adjudication of any contravention under Section 16 no inquiry shall be held for adjudication of such contravention in relation to such contravention against the person in relation to whom the contravention is so compounded In case the compounding of any contravention is made after making of a complaint under Sub section 3 of Section 16 such compounding shall be brought by the authority specified in Rule 4 or Rule 5 in writing to the notice of the Adjudicating Authority and on such notice of the compounding of the contravention being given the person in relation to whom the contravention is so compounded shall be discharged Payment of Compounded Amount Rule 9 deals with payment of amount compounded Where a contravention has been compounded in terms of Rule 8 2 the sum involved in such contravention shall be deposited within fifteen days from the date of
54 EP ECL the order of compounding of such contravention by demand draft in favour of the Compounding Authority In case a person fails to pay the sum compounded within the specified time he shall be deemed to have never made an application for compounding of any contravention and the provisions of the Act for contravention shall apply to him However no contravention shall be compounded if an appeal has been filed with the Special Director Appeals under Section 17 or with Appellate Tribunal under Section 19 Every order of compounding the contravention shall specify the provisions of the Act or the rules directions requisitions or orders made thereunder in respect of which contravention has taken place alongwith details of the alleged contravention and a copy thereof shall be supplied to the applicant and the Adjudicating Authority as the case may be ADJUDICATION AND APPEAL Chapter V containing Sections 16 35 deals with the adjudication and appeal Appointment of Adjudicating Authority Section 16 empowers the Central Government to appoint by notification in the Official Gazette as many Adjudicating Authorities as it may think fit for holding enquiries under Section 13 The Central Government is however under obligation to specify the jurisdiction of the Adjudicating Authority The Adjudicating Authority has been empowered to hold any enquiry on a complaint made in writing by an officer authorised by a general or special order by the Central Government In case a complaint has been made in respect of a person alleged to have committed the contravention such person shall be given a reasonable opportunity of being heard before imposing any penalty under Section 13 The Adjudicating Authority has discretion to demand from the persons against whom a complaint is made a bond or guarantee for any such amount as he thinks fit if he is of the opinion that such persons likely to abscond or evade the payment of penalty if imposed Appeal to Special Director Appeals Section 17 of the Act provides for appointment of one or more Special Directors Appeals to hear appeals against the orders of the Adjudicating Authorities In this context the Central Government has been empowered to appoint by notification Special Directors Appeals specifying their jurisdiction over matters and places An appeal to the Special Director Appeals may be made against the orders of the Assistant Director or Deputy Director of enforcement acting as Adjudicating Authority The appeal against the order of Adjudicating Authority shall be made in the prescribed form along with requisite fee within forty five days from the date of the receipt of the order by aggrieved person The Special Director Appeals has however been empowered to entertain appeal after the expiry of the said period of forty five days Establishment of Appellate Tribunal Under Section 18 the Central Government is empowered to establish an Appellate Tribunal by a notification in the Official Gazette to hear appeals against the orders of Adjudication Authorities and Special Director Appeals The Central Government or any person aggrieved by the orders of Adjudicating Authority or Special Director Appeals may prefer an appeal to the Appellate Tribunal under Section 19 of the Act Section 20 of the Act empowers the Central Government to appoint a Chairperson and as many members as it may deem fit to the Appellate Tribunal The jurisdiction of the Appellate Tribunal may be exercised by benches A bench may be constituted by the Chairperson with one or more member as the Chairperson
Lesson 1 Foreign Exchange Management 55 deem fit The Chairperson can also transfer member of one bench to another bench The Appellate Tribunal shall sit ordinarily at New Delhi for hearing The Central Government however may in consultation with the Chairperson notify the sitting of the Tribunal elsewhere as it may deem fit A person who is or has been or is qualified to be a judge of a High Court shall be eligible for the appointment as chairperson of Appellate Tribunal A person who is or has been or is eligible to be a district judge shall be eligible for apointment as a member of Appellate Tribunal A member of the Indian Legal Service and holding the post in Grade I of that Services or the member of Indian Revenue Service and holding the post equivalent to a Joint Secretary to the Government of India shall be eligible to be appointed as Special Director Appeals The Chairperson and Members will hold office for a period of 5 years from the date of assuming office However no chairperson or member shall hold office on attaining the age of 65 years and 62 years respectively Appeal to High Court A right to appeal to High Court lies with the appellant who is aggrieved by the decision of the Tribunal Such appeal must be filed within 60 days from the date of communication of the decision or order of the Tribunal The appeal to the High Court can be made on any question of law arising out of such order A relaxation for a maximum period of sixty days for making an appeal may be granted by the High Court if it is satisfied that the appellant was prevented by sufficient cause from filing the appeal within the specified period Directorate of Enforcement Section 36 of the Act empowers the Central Government to establish a Directorate of Enforcement with a Director and other officers or class of Officers for the purposes of the enforcement of the Act The Central Government has also been empowered to authorise Director Additional Director Special Director or Deputy Director to appoint officers of enforcement below the rank of Assistant Director of Enforcement to exercise the powers and discharge the duties conferred or imposed on him under the Act The Central Government may by order and with prescribed conditions and limitations authorise any officers of customs or Central Excise or any police officer or officers of Central or State Government to exercise such powers and discharge such duties of the Director of Enforcement or any other officer of the Enforcement as stated in the order Investigation Section 37 of the Act empowers the Director of Enforcement and other officers below the rank of an Assistant Director to take up for investigation the contravention referred to in Section 13 of the Act In addition the Central Government may also authorise any officer or class of officers in the Central Government State Government Reserve Bank of India not below the rank of Under Secretary to Government of India to investigate any contravention under Section 13 of the Act The officers so appointed shall exercise the like powers which are conferred on income tax authorities under the Income Tax Act 1961 subject to such conditions and limitations as laid down under that Act In this context Foreign Exchange Management Encashment of Draft Cheque Instrument and Payment of Interest Rules 2000 provides that where investigation referred to in Section 37 of the Act is being taken up into any alleged contravention of any provisions of the Act or rule regulation direction or order or violation of any condition subject to which Reserve Bank of India gives authorisation and any draft cheque or other instrument relevant for such investigation such officer shall send such draft cheque or other instrument to the Reserve Bank of India or to an authorised person as the officer may specify for encashment The Reserve Bank of India or the authorised person is required to take steps without delay for encashment of the
56 EP ECL draft cheque or other instrument and to credit the proceeds of such encashment less any commission and expenses incurred for such encashment to a separate account in the name of the Directorate of Enforcement The Central Government is required to indemnify the Reserve Bank of India or an authorised person against any liability which may incur by reason of or in connection with the encashment of the draft cheque or other instrument delivered to it Contravention by Companies Section 42 of the Act deals with contravention of the provisions of the Act by the Companies and provides that where the person committing the contravention of the Act or Rules happened to be a company every person who at the time the contravention was committed was in charge of and was responsible to the company for the conduct of the business of the company shall be deemed to be guilty of the contravention and liable to be proceeded against and punished accordingly However no such persons shall be deemed to be guilty of committing any offence if he proves that such contravention took place without his knowledge or that he exercised adequate steps to prevent such contravention In case the contravention is committed by a company and it is proved that such contravention is committed with the knowledge consent and connivance or is attributed to the neglect on the part of any director manager or secretary or other officer of the company they will also be deemed to be guilty of contravention and liable to be proceeded against and punished accordingly LESSON ROUND UP The Foreign Exchange Management Act has repealed the FERA The Foreign Exchange Management Act 1999 is an Act to facilitate external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India Foreign exchange means foreign currency and includes i deposits credits and balances payable in any foreign currency ii drafts travellers cheques letters of credit or bills of exchange expressed or drawn in Indian currency but payable in any foreign currency and iii drafts travellers cheques letters of credit or bills of exchange drawn by banks institutions or persons outside India but payable in Indian currency Capital Account transactions means any transaction which alters the assets or liabilities including contingent liabilities outside India of persons resident in India or assets or liabilities in India of person resident outside India and includes the transactions specified in Sub section 3 of Section 6 of the Act Current Account Transaction means a transaction other than a capital account transaction and includes payments due in connection with foreign trade other current business services and short term banking and credit facilities in the ordinary course of business payments due as interest on loan and as net income from investments remittances for living expenses of parents spouse and children residing abroad and expenses in connection with foreign travel education and medical care of parents spouse and children Foreign Direct Investment FDI is a category of cross border investment made by a resident in one economy the direct investor with the objective of establishing a lasting interest in an enterprise the direct investment enterprise i e resident in an economy other than that of the direct investor Joint Ventures Wholly Owned Subsidiaries abroad promote economic co operation between India and the host countries They result in transfer of technology and skills sharing the results of Research Development access to the global market promotion of the brand image generation of employment and utilization raw materials available in India and the host country increased exports of plant and machinery and goods and services from India foreign exchange earnings through dividend earnings royalty technical know how fee etc
Lesson 1 Foreign Exchange Management 57 Resident outside India and permitted by the Reserve Bank to establish a branch or a liaison office in India may undertake or carry on any specified activity Compounding refers to the process of voluntarily admitting the contravention pleading guilty and seeking redressal The Reserve Bank is empowered to compound any contraventions as defined under section 13 of FEMA 1999 except the contravention under section 3 a for a specified sum after offering an opportunity of personal hearing to the contravener It is a voluntary process in which an individual or a corporate seeks compounding of an admitted contravention It provides comfort to any person who contravenes any provisions of FEMA 1999 except section 3 a of the Act by minimizing transaction costs SELF TEST QUESTIONS 1 Define the Capital Account Transactions and enumerate permissible capital account transactions in relation to persons resident in India and resident outside India 2 Discuss the Acquisition and Transfer of Immovable Property in India under FEMA 3 Discuss the establishment of branch or office or place of business in India under FEMA 4 Define Authorised person Briefly discuss the powers of RBI to give directions to Authorised persons 5 Write short note on the following i Compounding of Contraventions ii Directorate of Enforcement iii Appellate Tribunal iv Investigation v Export of Goods and Services
58 EP ECL
Foreign Exchange Management Foreign Contribution Regulation Act 2010 Section II LESSON OUTLINE Objective of FCRA Foreign contribution Foreign Source Foreign hospitality Regulation of foreign contribution and foreign hospitality Certificate of Registration Application for Renewal Renewal of Certificate Cancellation of Certificate Management of Foreign Contribution Intimation to Government Obligation of Banks under FCRA Inspection Audit Confiscation Adjudication Offences and penalties Appeal Compounding of offences LEARNING OBJECTIVES Foreign Contribution Regulation Act 2010 is internal security legislation and regulated by Ministry of Home Affaires which prohibits certain classes of persons from receiving foreign contribution It also restricts certain classes of persons from accepting foreign hospitality while visiting any country or territory outside India without the prior permission of the Central Government The Act provides that persons having definite cultural economic educational religious and social programmes should get themselves registered with the Government of India before accepting any foreign contribution Foreign contribution means the donation delivery or transfer made by any foreign source of any article not being an article given to a person as a gift for his personal use if the market value in India of such article on the date of such gift is not more than such sum as may be specified from time to time by the Central Government by the rules made by it in this behalf of any currency whether Indian or foreign any security as defined under Securities Contracts Regulation Act 1956 and the Foreign Exchange Management Act 1999 The Act mandates that every bank or authorized person in foreign exchange shall report to specified authority the prescribed amount of foreign remittance source and manner in which foreign remittance was received and other particulars in such form and manner as may be prescribed The object of the study is to familiarize the students with the legal requirements stipulated under the FCRA 2010 The object of the Foreign Contribution Regulation Act 2010 is to regulate the acceptance and utilisation of foreign contribution or foreign hospitality by certain individuals or associations or companies and to prohibit acceptance and utilisation of foreign contribution or foreign hospitality for any activities detrimental to the national interest and for matters connected therewith or incidental thereto
60 EP ECL INTRODUCTION The Foreign Contribution Regulation Act 1976 was enacted to regulate the acceptance and utilization of foreign contribution or hospitality with a view to ensuring that the Parliamentary institutions political associations academic and other voluntary organizations as well as individuals working in important areas of national life may function in a manner consistent with the values of sovereign democratic republic The Act was amended in 1984 to extend it provisions to cover second and subsequent recipients of foreign contribution and to the members of higher judiciary besides introducing the system of grant of registration to the association receiving foreign contribution Significant development have taken place since 1984 such as change in internal security scenario an increased influence of voluntary organizations spread of use of communication and information technology quantum jump in the amount of foreign contribution being received and large scale growth in the number of registered organizations This has necessitated large scale changes in the Act of 1976 and therefore it was thought appropriate to replace the FCRA 1976 by a new legislation to regulate the acceptance and utilization of foreign contribution and foreign hospitality by a person or association The Foreign Contribution Regulation Act 2010 has come into effect from May 1 2011 The Ministry of Home Affairs has issued the necessary Gazette Notification vide S O 999 E dated the 29th April 2011 in this regard The Ministry of Home Affairs has also issued a Gazette Notification vide G S R 349 E dated the 29th April 2011 notifying the Foreign Contribution Regulation Rules 2011 made under section 48 of FCRA 2010 The FCR Rules 2011 have come into force simultaneously with FCRA 2010 DEFINITIONS The definitions of the following terms used in the statute are relevant for understanding the operative provisions of the Foreign Contribution Regulation Act 2010 Association means an association of individuals whether incorporated or not having an office in India and includes a society whether registered under the Societies Registration Act 1860 or not and any other organisation by whatever name called Section 2 1 a Authorised person in foreign exchange means an authorised person referred to in clause c of section 2 of the Foreign Exchange Management Act 1999 Section 2 1 b Bank means a banking company as referred to in clause c of section 5 of the Banking Regulation Act 1949 Section 2 1 c Candidate for election means a person who has been duly nominated as a candidate for election to any Legislature Section 2 1 d Certificate means certificate of registration granted under sub section 3 of section 12 Section 2 1 e Company shall have the meaning assigned to it under clause 17 of section 2 of the Income tax Act 1961 Section 2 1 f Foreign company means any company or association or body of individuals incorporated outside India and includes i a foreign company within the meaning of section 591 of the Companies Act 1956 1 of 1956
Lesson 1 Foreign Contribution Regulation Act 2010 61 ii a company which is a subsidiary of a foreign company iii the registered office or principal place of business of a foreign company referred to in sub clause i or company referred to in sub clause ii iv a multi national corporation Explanation For the purposes of this sub clause a corporation incorporated in a foreign country or territory shall be deemed to be a multi national corporation if such corporation a has a subsidiary or a branch or a place of business in two or more countries or territories or b carries on business or otherwise operates in two or more countries or territories Section 2 1 g Foreign contribution means the donation delivery or transfer made by any foreign source i of any article not being an article given to a person as a gift for his personal use if the market value in India of such article on the date of such gift is not more than such sum as may be specified from time to time by the Central Government by the rules made by it in this behalf ii of any currency whether Indian or foreign iii of any security as defined in clause h of section 2 of the Securities Contracts Regulation Act 1956 and includes any foreign security as defined in clause o of section 2 of the Foreign Exchange Management Act 1999 Explanation 1 A donation delivery or transfer of any article currency or foreign security referred to in this clause by any person who has received it from any foreign source either directly or through one or more persons shall also be deemed to be foreign contribution within the meaning of this clause Explanation 2 The interest accrued on the foreign contribution deposited in any bank referred to in subsection 1 of section 17 or any other income derived from the foreign contribution or interest thereon shall also be deemed to be foreign contribution within the meaning of this clause Explanation 3 Any amount received by any person from any foreign source in India by way of fee including fees charged by an educational institution in India from foreign student or towards cost in lieu of goods or services rendered by such person in the ordinary course of his business trade or commerce whether within India or outside India or any contribution received from an agent of a foreign source towards such fee or cost shall be excluded from the definition of foreign contribution within the meaning of this clause Section 2 1 h Foreign hospitality means any offer not being a purely casual one made in cash or kind by a foreign source for providing a person with the costs of travel to any foreign country or territory or with free boarding lodging transport or medical treatment Section 2 1 i Foreign source includes i the Government of any foreign country or territory and any agency of such Government ii any international agency not being the United Nations or any of its specialised agencies the World Bank International Monetary Fund or such other agency as the Central Government may by notification specify in this behalf iii a foreign company iv a corporation not being a foreign company incorporated in a foreign country or territory
62 EP ECL v a multi national corporation referred to in sub clause iv of clause g vi a company within the meaning of the Companies Act 1956 and more than one half of the nominal value of its share capital is held either singly or in the aggregate by one or more of the following namely A the Government of a foreign country or territory B the citizens of a foreign country or territory C corporations incorporated in a foreign country or territory D trusts societies or other associations of individuals whether incorporated or not formed or registered in a foreign country or territory E foreign company vii a trade union in any foreign country or territory whether or not registered in such foreign country or territory viii a foreign trust or a foreign foundation by whatever name called or such trust or foundation mainly financed by a foreign country or territory ix a society club or other association of individuals formed or registered outside India x a citizen of a foreign country Section 2 1 j Legislature means A either House of Parliament B the Legislative Assembly of a State or in the case of a State having a Legislative Council either House of the Legislature of that State C Legislative Assembly of a Union territory constituted under the Government of Union Territories Act 1963 D Legislative Assembly for the National Capital Territory of Delhi referred to in the Government of National Capital Territory of Delhi Act 1991 E Municipality as defined in clause e of article 243P of the Constitution F District Councils and Regional Councils in the States of Assam Meghalaya Tripura and Mizoram as provided in the Sixth Schedule to the Constitution Section 2 1 k Person includes i an individual ii a Hindu undivided family iii an association iv a company registered under section 25 of the Companies Act 1956 Section 2 1 m Political party means i an association or body of individual citizens of India A to be registered with the Election Commission of India as a political party under section 29A of the Representation of the People Act 1951 or
Lesson 1 Foreign Contribution Regulation Act 2010 63 B which has set up candidates for election to any Legislature but is not so registered or deemed to be registered under the Election Symbols Reservation and Allotment Order 1968 ii a political party mentioned in column 2 of Table 1 and Table 2 to the notification of the Election Commission of India No 56 J K 02 dated the 8th August 2002 as in force for the time being Section 2 1 n It may be noted that Words and expressions used herein and not defined in this Act but defined in the Representation of the People Act 1950 or the Representation of the People Act 1951 or the Foreign Exchange Management Act 1999 shall have the meanings respectively assigned to them in those Acts REGULATION OF FOREIGN CONTRIBUTION AND FOREIGN HOSPITALITY Prohibition to accept foreign contribution Section 3 1 of the Act imposes restriction on acceptance of foreign contribution by candidate for election correspondent columnist cartoonist editor owner printer or publisher of a registered newspaper Judge Government servant or employee of any corporation or any other body controlled or owned by the Government member of any Legislature political party or office bearer thereof organisation of a political nature as may be specified by the Central Government association or company engaged in the production or broadcast of audio news or audio visual news or current affairs programmes through any electronic mode or any other electronic form as defined in clause r of sub section 1 of section 2 of the Information Technology Act 2000 or any other mode of mass communication correspondent or columnist cartoonist editor owner of the association or company A corporation for the above purpose means a corporation owned or controlled by the Government and includes a Government company as defined in section 617 of the Companies Act 1956 Sub section 2 a of Section 3 provides that no person resident in India and no citizen of India resident outside India shall accept any foreign contribution or acquire or agree to acquire any currency from a foreign source on behalf of any political party or any person prohibited from accepting any foreign contribution Sub section 2 b mandates that no person resident in India shall deliver any currency whether Indian or foreign which has been accepted from any foreign source to any person if he knows or has reasonable cause to believe that such other person intends or is likely to deliver such currency to any political party or any person prohibited from accepting any foreign contribution Section 3 2 c provides that no citizen of India resident outside India shall deliver any currency whether Indian or foreign which has been accepted from any foreign source to any political party or any person specified in sub section 1 of section 3 or both or any other person if he knows or has reasonable cause to believe that such other person intends or is likely to deliver such currency to a political party or to any person specified in sub section 1 of section 3 or both Section 3 3 provides that no person receiving any currency whether Indian or foreign from a foreign source on behalf of any person or class of persons referred to in section 9 shall deliver such currency to any person other than a person for which it was received or to any other person if he knows or has reasonable cause to believe that such other person intends or is likely to deliver such currency to a person other than the person for which such currency was received Person to whom section 3 does not apply Section 4 provides that nothing contained in section 3 shall apply to the acceptance by any person specified
64 EP ECL in that section of any foreign contribution where such contribution is accepted by him subject to the provisions of section 10 a by way of salary wages or other remuneration due to him or to any group of persons working under him from any foreign source or by way of payment in the ordinary course of business transacted in India by such foreign source or b by way of payment in the course of international trade or commerce or in the ordinary course of business transacted by him outside India or c as an agent of a foreign source in relation to any transaction made by such foreign source with the Central Government or State Government or d by way of a gift or presentation made to him as a member of any Indian delegation provided that such gift or present was accepted in accordance with the rules made by the Central Government with regard to the acceptance or retention of such gift or presentation or e from his relative or f by way of remittance received in the ordinary course of business through any official channel post office or any authorised person in foreign exchange under the Foreign Exchange Management Act 1999 or g by way of any scholarship stipend or any payment of like nature Further in case any foreign contribution received by any person specified under section 3 for any of the purposes other than those specified under this section such contribution shall be deemed to have been accepted in contravention of the provisions of section 3 Procedure to notify an organization of a political nature Section 5 1 provides that the Central Government may having regard to the activities of the organisation or the ideology propagated by the organisation or the programme of the organisation or the association of the organisations with the activities of any political party by an order published in the Official Gazette specify such organisation as an organisation of a political nature not being a political party referred to in clause f of sub section 1 of section 3 Further the Central Government may frame the guidelines specifying the ground or grounds on which an organisation shall be specified as an organisation of a political nature Restriction on acceptance of foreign hospitality Section 6 prohibits acceptance of foreign hospitality by certain persons except with the prior permission of Central Government Accordingly no member of a Legislature or office bearer of a political party or Judge or Government servant or employee of any corporation or any other body owned or controlled by the Government shall while visiting any country or territory outside India accept except with the prior permission of the Central Government any foreign hospitality However it shall not be necessary to obtain any such permission for an emergent medical aid needed on account of sudden illness contracted during a visit outside India but where such foreign hospitality has been received the person receiving such hospitality shall give within one month from the date of receipt of such hospitality an intimation to the Central Government as to the receipt of such hospitality and the source from which and the manner in which such hospitality was received by him
Lesson 1 Foreign Contribution Regulation Act 2010 65 Prohibition to transfer foreign contribution to other person Section 7 prohibits the transfer of foreign contribution to other person Accordingly no person who is registered and granted a certificate or has obtained prior permission under the Act and receives any foreign contribution shall transfer such foreign contribution to any other person unless such other person is also registered and had been granted the certificate or obtained the prior permission under the Act However such person may transfer with the prior approval of the Central Government a part of such foreign contribution to any other person who has not been granted a certificate or obtained permission under the Act in accordance with the rules made by the Central Government Which are the organisations individuals specifically debarred from receiving foreign contribution The following are the persons prohibited from accepting foreign contribution a Candidate for election b Correspondent columnist cartoonist editor owner printer or publisher of a registered newspaper c Judge government servant or employee of any entity controlled or owned by the Government d Member of any Legislature e Political party or office bearers thereof f Organisations of a political nature as may be specified g Associations or companies engaged in the production or broadcast of audio news or audiovisual news or current affairs programmes through any electronic mode or form or any other mode of mass communication h Correspondent or columnist cartoonist editor owner of the association or company referred to in g above Utilization of foreign contribution Section 8 1 a provides that every person who is registered and granted a certificate or given prior permission under the Act and receives any foreign contribution shall utilise such contribution for the purposes for which the contribution has been received Further any foreign contribution or any income arising out of it shall not be used for speculative business and that the Central Government shall by rules specify the activities or business which shall be construed as speculative business for the purpose of this section Section 8 1 b provides that every person who is registered and granted a certificate or given prior permission under this Act and receives any foreign contribution shall not defray as far as possible such sum not exceeding fifty per cent of such contribution received in a financial year to meet administrative expenses Further administrative expenses exceeding fifty per cent of such contribution may be defrayed with prior approval of the Central Government The Central Government prescribes the elements which shall be included in the administrative expenses and the manner in which the administrative expenses shall be calculated
66 EP ECL Power of Central Government to prohibit receipt of foreign contribution Section 9 deals with power of Central Government to prohibit receipt of foreign contribution etc in certain cases Accordingly the Central Government has been empowered to a prohibit any person or organisation not specified in section 3 from accepting any foreign contribution b require any person or class of persons not specified in section 6 to obtain prior permission of the Central Government before accepting any foreign hospitality c require any person or class of persons not specified in section 11 to furnish intimation within such time and in such manner as may be prescribed as to the amount of any foreign contribution received by such person or class of persons as the case may be and the source from which and the manner in which such contribution was received and the purpose for which and the manner in which such foreign contribution was utilised d without prejudice to the provisions of sub section 1 of section 11 require any person or class of persons specified in that sub section to obtain prior permission of the Central Government before accepting any foreign contribution e require any person or class of persons not specified in section 6 to furnish intimation within such time and in such manner as may be prescribed as to the receipt of any foreign hospitality the source from which and the manner in which such hospitality was received However no such prohibition or requirement shall be made unless the Central Government is satisfied that the acceptance of foreign contribution by such person or class of persons as the case may be or the acceptance of foreign hospitality by such person is likely to affect prejudicially the sovereignty and integrity of India or public interest or freedom or fairness of election to any Legislature or friendly relations with any foreign State or harmony between religious racial social linguistic or regional groups castes or communities Power to prohibit payment of currency received in contravention of the Act Section 10 provides that where the Central Government is satisfied after making such inquiry as it may deem fit that any person has in his custody or control any article or currency or security whether Indian or foreign which has been accepted by such person in contravention of any of the provisions of this Act it may by order in writing prohibit such person from paying delivering transferring or otherwise dealing with in any manner whatsoever such article or currency or security save in accordance with the written orders of the Central Government and a copy of such order shall be served upon the person so prohibited in the prescribed manner Who can receive foreign contribution An association having a definite cultural economic educational religious or social programme shall accept foreign contribution unless such person obtains a certificate of registration prior permission from the Central Government Registration of certain persons with Central Government Section 11 1 requires that person having a definite cultural economic educational religious or social
Lesson 1 Foreign Contribution Regulation Act 2010 67 programme shall accept foreign contribution if such person obtains a certificate of registration from the Central Government It may be noted that any association registered with the Central Government under section 6 or granted prior permission under that section of the Foreign Contribution Regulation Act 1976 as it stood immediately before the commencement of this Act shall be deemed to have been registered or granted prior permission as the case may be under this Act and such registration shall be valid for a period of five years from the date on which this section comes into force Sub section 2 of Section 11 provides that every person referred to in sub section 1 may if it is not registered with the Central Government under that sub section accept any foreign contribution only after obtaining the prior permission of the Central Government and such prior permission shall be valid for the specific purpose for which it is obtained and from the specific source Further if the person referred to in subsections 1 and 2 has been found guilty of violation of any of the provisions of this Act or the Foreign Contribution Regulation Act 1976 the unutilised or unreceived amount of foreign contribution shall not be utilised or received as the case may be without the prior approval of the Central Government Sub section 3 of Section 11 provides that the Central Government may by notification in the Official Gazette specify the person or class of persons who shall obtain its prior permission before accepting the foreign contribution or the area or areas in which the foreign contribution shall be accepted and utilised with the prior permission of the Central Government or the purpose or purposes for which the foreign contribution shall be utilised with the prior permission of the Central Government or the source or sources from which the foreign contribution shall be accepted with the prior permission of the Central Government Grant of certificate of registration Section 12 1 provides that an application by a person for grant of certificate or giving prior permission shall be made to the Central Government in such form and manner and alongwith such fee as may be prescribed On receipt of an application the Central Government shall by an order if the application is not in the prescribed form or does not contain any of the particulars specified in that form reject the application If on receipt of an application for grant of certificate or giving prior permission and after making such inquiry as the Central Government deems fit it is of the opinion that the conditions specified in sub section 4 are satisfied it may ordinarily within ninety days from the date of receipt of application register such person and grant him a certificate or give him prior permission as the case may be subject to such terms and conditions as may be prescribed In case the Central Government does not grant within the said period of ninety days a certificate or give prior permission it shall communicate the reasons therefor to the applicant and that a person shall not be eligible for grant of certificate or giving prior permission if his certificate has been suspended and such suspension of certificate continues on the date of making application Sub section 4 of Section 12 provides following conditions for granting certificate of registration a the person making an application for registration or grant of prior permission under sub section 1 i is not fictitious or benami ii has not been prosecuted or convicted for indulging in activities aimed at conversion through inducement or force either directly or indirectly from one religious faith to another iii has not been prosecuted or convicted for creating communal tension or disharmony in any specified district or any other part of the country iv has not been found guilty or diversion or mis utilisation of its funds
68 EP ECL v is not engaged or likely to engage in propagation of sedition or advocate violent methods to achieve its ends vi is not likely to use the foreign contribution for personal gains or divert it for undesirable purposes vii has not contravened any of the provisions of this Act viii has not been prohibited from accepting foreign contribution b the person making an application for registration under sub section 1 has undertaken reasonable activity in its chosen filed for the benefit of the society for which the foreign contribution is proposed to be utilised c the person making an application for giving prior permission under sub section 1 has prepared a reasonable project for the benefit of the society for which the foreign contribution is proposed to be utilised d in case the person being an individual such individual has neither been convicted under any law for the time being in force nor any prosecution for any offence pending against him e in case the person being other than an individual any of its directors or office bearers has neither been convicted under any law for the time being in force nor any prosecution for any offence is pending against him f the acceptance of foreign contribution by the person referred to in sub section 1 is not likely to affect prejudicially i the sovereignty and integrity of India or ii the security strategic scientific or economic interest of the State or iii the public interest or iv freedom or fairness of election to any Legislature or v friendly relation with any foreign State or vi harmony between religious racial social linguistic regional groups castes or communities g the acceptance of foreign contribution referred to in sub section 1 i shall not lead to incitement of an offence ii shall not endanger the life or physical safety of any person Where the Central Government refuses the grant of certificate or does not give prior permission it shall record in its order the reasons therefor and furnish a copy thereof to the applicant The Central Government may not communicate the reasons for refusal for grant of certificate or for not giving prior permission to the applicant under this section in cases where is no obligation to give any information or documents or records or papers under the Right to Information Act 2005 It may be noted that the certificate granted shall be valid for a period of five years and the prior permission shall be valid for the specific purpose or specific amount of foreign contribution proposed to be received as the case may be
Lesson 1 Foreign Contribution Regulation Act 2010 69 Suspension of certificate Section 13 1 provides that where the Central Government for reasons to be recorded in writing is satisfied that pending consideration of the question of cancelling the certificate on any of the grounds mentioned in sub section 1 of section 14 it is necessary so to do it may by order in writing suspend the certificate for such period not exceeding one hundred and eighty days as may be specified in the order Further every person whose certificate has been suspended shall not receive any foreign contribution during the period of suspension of certificate However the Central Government on an application made by such person if it considers appropriate allow receipt of any foreign contribution by such person on such terms and conditions as it may specify Every person whose certificate has been suspended shall utilise in the prescribed manner the foreign contribution in his custody with the prior approval of the Central Government Cancellation of certificate Section 14 empowers the Central Government to cancel the certificate Accordingly the Central Government may if it is satisfied after making such inquiry as it may deem fit by an order cancel the certificate if a the holder of the certificate has made a statement in or in relation to the application for the grant of registration or renewal thereof which is incorrect or false or b the holder of the certificate has violated any of the terms and conditions of the certificate or renewal thereof or c in the opinion of the Central Government it is necessary in the public interest to cancel the certificate or d the holder of certificate has violated any of the provisions of this Act or rules or order made thereunder or e if the holder of the certificate has not been engaged in any reasonable activity in its chosen field for the benefit of the society for two consecutive years or has become defunct Before passing an order of cancellation of certificate the person concerned would be given a reasonable opportunity of being heard Any person whose certificate has been cancelled shall not be eligible for registration or grant of prior permission for a period of three years from the date of cancellation of such certificate Management of foreign contribution of person whose certificate has been cancelled Section 15 provides that the foreign contribution and assets created out of the foreign contribution in the custody of every person whose certificate has been cancelled under section 14 shall vest in such authority as may be prescribed The authority may if it considers necessary and in public interest manage the activities of the person referred to in that sub section for such period and in such manner as the Central Government may direct Such authority may utilise the foreign contribution or dispose of the assets created out of it in case adequate funds are not available for running such activity The authority shall return the foreign contribution and the assets vested upon it to the person if such person is subsequently registered under this Act Renewal of certificate Every person who has been granted a certificate under section 12 shall have such certificate renewed within six months before the expiry of the period of the certificate Section 16
70 EP ECL Application for Renewal The application for renewal of the certificate shall be made to the Central Government in such form and manner and accompanied by such fee as may be prescribed The Central Government shall renew the certificate ordinarily within ninety days from the date of receipt of application for renewal of certificate subject to such terms and conditions as it may deem fit and grant a certificate of renewal for a period of five years In case the Central Government does not renew the certificate within the said period of ninety days it shall communicate the reasons therefor to the applicant The Central Government may refuse to renew the certificate in case where a person has violated any of the provisions of this Act or rules made thereunder ACCOUNTS INTIMATION AUDIT AND DISPOSAL OF ASSETS Foreign contribution through scheduled bank Section 17 provides that every person who has been granted a certificate or given prior permission shall receive foreign contribution in a single account only through such one of the branches of a bank as he may specify in his application for grant of certificate However such person may open one or more accounts in one or more banks for utilising the foreign contribution received by him Further no funds other than foreign contribution shall be received or deposited in such account or accounts Every bank or authorised person in foreign exchange shall report to such authority as may be specified amount of foreign remittance the source and maner in which the foreign remittance was received and other particulars in such form and manner as may be prescribed Intimation Section 18 requires every person who has been granted a certificate or given prior approval to provide within such time and in such manner as may be prescribed an intimation to the Central Government and such other authority as may be specified by the Central Government as to the amount of each foreign contribution received by it the source from which and the manner in which such foreign contribution was received and the purposes for which and the manner in which such foreign contribution was utilised by him Every person receiving foreign contribution is required to submit a copy of a statement indicating therein the particulars of foreign contribution received duly certified by officer of the bank or authorised person in foreign exchange and furnish the same to the Central Government along with the intimation Maintenance of accounts Section 19 requires every person who has been granted a certificate or given prior approval to maintain in such form and manner as may be prescribed an account of any foreign contribution received by him and a record as to the manner in which such contribution has been utilised by him Order for Audit of accounts Section 20 provides that where any person who has been granted a certificate or given prior permission fails to furnish any intimation within the time specified therefor or the intimation so furnished is not in accordance with law or if after inspection of such intimation the Central Government has any reasonable cause to believe that any provision of Act has been or is being contravened the Central Government may by general or special order authorise such gazetted officer holding a Group A post under the Central Government or any other officer or authority or organisation as it may think fit to audit any books of account
Lesson 1 Foreign Contribution Regulation Act 2010 71 kept or maintained by such person and thereupon every such officer shall have the right to enter in or upon any premises at any reasonable hour before sunset and after sunrise for the purpose of auditing the said books of account and any information obtained from such audit shall be kept confidential and shall not be disclosed except for the purposes of the Act Intimation by candidate for election Section 21 requires every candidate for election who had received any foreign contribution at any time within one hundred and eighty days immediately preceding the date on which he is duly nominated as such candidate shall give within such time and in such manner as may be prescribed an intimation to the Central Government or prescribed authority or both as to the amount of foreign contribution received by him the source from which and the manner in which such foreign contribution was received and the purposes for which and the manner in which such foreign contribution was utilised by him Disposal of assets created out of foreign contribution Section 22 provides that where any person who was permitted to accept foreign contribution under this Act ceases to exist or has become defunct all the assets of such person shall be disposed of in accordance with the provisions contained in any law for the time being in force under which the person was registered or incorporated In the absence of any such law the Central Government may having regard to the nature of assets created out of foreign contribution received under this Act by notification specify that all such assets shall be disposed off by such authority as it may specify in such manner and procedure as may be prescribed INSPECTION SEARCH AND SEIZURE Section 23 provides that if the Central Government has for any reason to be recorded in writing any ground to suspect that any provision of this Act has been or is being contravened by any political party or any person or any organisation or any association it may by general or special order authorise such gazetted officer holding a Group A post under the Central Government or such other officer or authority or organisation as it may think fit to inspect any account or record maintained by such political party person organisation or association as the case may be and thereupon every such inspecting officer shall have the right to enter in or upon any premises at any reasonable hour before sunset and after sunrise for the purpose of inspecting the said account or record Seizure of accounts or records Section 24 provides that if after inspection of an account or record the inspecting officer has any reasonable cause to believe that any provision of the Act or of any other law relating to foreign exchange has been or is being contravened he may seize such account or record and produce the same before the court authority or tribunal in which any proceeding is brought for such contravention Further the authorised officer shall return such account or record to the person from whom it was seized if no proceeding is brought within six months from the date of such seizure for the contravention disclosed by such account or record Adjudication of confiscation Section 29 dealing with adjudication of confiscation provides that any confiscation article or currency or security which is seized may be adjudged without limit by the Court of Session within the local limits of whose jurisdiction the seizure was made and subject to such limits as may be prescribed by such officer not below the rank of an Assistant Sessions Judge as the Central Government may by notification in the Official Gazette
72 EP ECL Section 30 provides that no order of adjudication of confiscation shall be made unless a reasonable opportunity of making a representation against such confiscation has been given to the person from whom any article or currency or security has been seized Appeal Section 31 deals with appeals and provides that any person aggrieved by any order made under section 29 may prefer an appeal where the order has been made by the Court of Session to the High Court to which such Court is subordinate or where the order has been made by any officer specified to the Court of Session within the local limits of whose jurisdiction such order of adjudication of confiscation was made within one month from the date of communication to such person of the order Further the appellate court may if it is satisfied that the appellant was prevented by sufficient cause from preferring the appeal within the said period of one month allow such appeal to be preferred within a further period of one month but not thereafter Every appeal preferred under this section shall be deemed to be an appeal from an original decree and the provisions of Order XLI of the First Schedule to the Code of Civil Procedure 1908 shall as far as may be apply thereto as they apply to an appeal from an original decree Penalty and Punishment Section 34 prescribes for penalty on any person on whom any prohibitory order has been served under section 10 pays delivers transfers or otherwise deals with in any manner whatsoever any article or currency or security whether Indian or foreign in contravention of such prohibitory order he shall be punished with imprisonment for a term which may extend to three years or with fine or with both The court trying such contravention may also impose on the person convicted an additional fine equivalent to the market value of the article or the amount of the currency or security in respect of which the prohibitory order has been contravened by him or such part thereof as the court may deem fit Section 35 provides for punishment with imprisonment for a term which may extend to five years or with fine or with both for accepting or assisting any person political party or organisation in accepting any foreign contribution or any currency or security from a foreign source in contravention of any provision of this Act or any rule or order made thereunder Offences by companies Section 39 deals with offences by companies and provides that where an offence has been committed by a company every person who at the time the offence was committed was in charge of and was responsible to the company for the conduct of the business of the company as well as the company shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly However such person shall not liable to any punishment if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence Further in the case an offence has been committed by a company and it is proved that the offence has been committed with the consent or connivance of or is attributable to any neglect on the part of any director manager secretary or other officer of the company such director manager secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly Composition of certain offences Section 41 1 provides that any offence punishable under this Act whether committed by an individual or association or any officer or employee thereof not being an offence punishable with imprisonment only may before the institution of any prosecution be compounded by such officers or authorities and for such sums as the Central Government may by notification in the Official Gazette specify in this behalf
Lesson 1 Foreign Contribution Regulation Act 2010 73 Section 41 2 provides that any second or subsequent offence committed after the expiry of a period of three years from the date on which the offence was previously compounded shall be deemed to be a first offence Every officer or authority shall exercise the powers to compound an offence subject to the direction control and supervision of the Central Government Every application for the compounding of an offence shall be made to the officer or authority referred to in sub section 1 in such form and manner alongwith such fee as may be prescribed Where any offence is compounded before the institution of any prosecution no prosecution shall be instituted in relation to such offence against the offender in relation to whom the offence is so compounded Every officer or authority while dealing with an application for the compounding of an offence for a default in compliance with any provision of this Act which requires by an individual or association or its officer or other employee to obtain permission or file or register with or deliver or send to the Central Government or any prescribed authority any return account or other document may direct by order if he or it thinks fit to do so any individual or association or its officer or other employee to file or register with such return account or other document within such time as may be specified in the order LESSON ROUND UP FCRA 2010 regulate the acceptance and utilisation of foreign contribution or foreign hospitality by certain individuals or associations or companies and to prohibit acceptance and utilisation of foreign contribution or foreign hospitality for any activities detrimental to the national interest and for matters connected therewith or incidental thereto The Act provides that persons having definite cultural economic educational religious and social programmes should get themselves registered with the Government of India before accepting any foreign contribution In case a person falling in the above category is not registered with the Central Government it can accept foreign contribution only after obtaining prior permission of the Central Government Central Government is empowered to prohibit any person or organisation not specified in the Act from accepting any foreign contribution and to require any person or class of persons not specified in it to obtain prior permission of the Central Government before accepting any foreign hospitality Associations which were granted certificates of registration such registration shall be valid for a period of five years Any offence punishable under this act whether committed by an individual or association or any officer or employee thereof not being an offence punishable with imprisonment only may before the institution of any prosecution be compounded by such officers or authorities and for such sums as the central government may by notification in the official gazette specify in this behalf SELF TEST QUESTIONS 1 How does the FCRA 2010 seeks to regulate the receipt of foreign contribution and foreign hospitality 2 Define foreign contribution and foreign source 3 Discuss the provisions of FCRA relevant to exemptions from acceptance of foreign contribution 4 Explain the concept of organisation of a political nature under the Foreign Contribution Regulation Act 2010 5 Discuss the powers of Central Government under FCRA to prohibit receipt of foreign contribution
74 EP ECL
Lesson 2 Foreign Trade Policy and Procedure Section I LESSON OUTLINE Introduction Focus of the Foreign Trade Policy Legal Basis of Foreign Trade Policy Transitional Arrangements Definitions General Provisions regarding imports and exports Importer Exporter Code IEC number e IEC LEARNING OBJECTIVES India s Foreign Trade Policy FTP has conventionally been formulated for five years at a time and reviewed annually The focus of the FTP has been to provide a framework of rules and procedures for exports and imports and a set of incentives for promoting exports The Foreign Trade Policy for 2015 2020 seeks to provide a stable and sustainable policy environment for foreign trade in merchandise and services Mandatory Documents for export import of goods from into India There is a symbiotic relationship between the Foreign Trade Policy FTP and the Government s Make in Principles of Restrictions India initiative Foreign Trade Policy 2015 20 contemplates increasing export of goods and services Exports from India Schemes Merchandise Exports from India Scheme MEIS Service Exports from India Scheme SEIS Status Holder Duty Exemption Remission Schemes Duty Free Import Authorisation Scheme DFIA Schemes for Exporters of Gems and Jewellery as well as generation of employment which support the Make in India initiative of the Government Further Online filing of documents applications paperless trade in 24x7 environment and simplification of procedures processes digitization egovernance initiatives under FTP definitely improve the ease of doing business in India Export Promotion Capital Goods EPCG Scheme Export Oriented Units EOUs Electronics Hardware Technology Parks EHTPs Software Technology Parks STPs and Bio Technology Parks BTPs Quality Complaints and Trade Disputes The Foreign Trade Policy 2015 20 is notified by Central Government in exercise of powers conferred under Section 5 of the Foreign Trade Development Regulation Act 1992 as amended The Foreign Trade Policy 2015 20 came into force with effect from 01 04 2015
76 EP ECL INTRODUCTION India s Foreign Trade Policy FTP has conventionally been formulated for five years at a time and reviewed annually The focus of the FTP has been to provide a framework of rules and procedures for exports and imports and a set of incentives for promoting exports The FTP for 2015 2020 seeks to achieve the following objectives i To provide a stable and sustainable policy environment for foreign trade in merchandise and services ii To link rules procedures and incentives for exports and imports with other initiatives such as Make in India Digital India and Skills India to create an Export Promotion Mission for India iii To promote the diversification of India s export basket by helping various sectors of the Indian economy to gain global competitiveness with a view to promoting exports iv To create an architecture for India s global trade engagement with a view to expanding its markets and better integrating with major regions thereby increasing the demand for India s products and contributing to the government s flagship Make in India initiative v To provide a mechanism for regular appraisal in order to rationalise imports and reduce the trade imbalance Exports should not merely be a function of marketable surplus but should also reflect an enhancement of economic capacity and development Foreign Trade Policy envisages Employment creation in both manufacturing and services through the generation of foreign trade opportunities Zero defect products with a focus on quality and standards A stable agricultural trade policy encouraging the import of raw material where required and export of processed products A focus on higher value addition and technology infusion Investment in agriculture overseas to produce raw material for the Indian industry Lower tariffs on inputs and raw materials and Development of trade infrastructure and provision of production and export incentives Focus of the Foreign Trade Policy FTP The Foreign Trade Policy is primarily focused on accelerating exports This is sought to be implemented through various schemes intended to exempt and remit indirect taxes on inputs physically incorporated in the export product import capital goods at concessional duty stimulate services exports and focus on specific markets and products The Policy attempts to dovetail these schemes with the specific market access openings that India has achieved through negotiations with its trading partners for various bilateral and regional trading arrangements Legal Basis of Foreign Trade Policy FTP The Foreign Trade Policy 2015 20 is notified by Central Government in exercise of powers conferred
Lesson 2 Foreign Trade Policy and Procedure 77 under Section 5 of the Foreign Trade Development Regulation Act 1992 as amended The Foreign Trade Policy 2015 20 came into force with effect from 01 04 2015 Amendment to Foreign Trade Policy FTP Central Government in exercise of powers conferred by Section 5 of FT D R Act 1992 as amended from time to time reserves the right to make any amendment to the FTP by means of notification in public interest Duration of Foreign Trade Policy FTP The Foreign Trade Policy FTP 2015 2020 incorporating provisions relating to export and import of goods and services shall come into force with effect from the date of notification and shall remain in force up to 31st March 2020 unless otherwise specified All exports and imports made upto the date of notification shall accordingly be governed by the relevant FTP unless otherwise specified Transitional Arrangements Any License Authorisation Certificate Scrip any instrument bestowing financial or fiscal benefit issued before commencement of FTP 2015 20 shall continue to be valid for the purpose and duration for which such License Authorisation Certificate Scrip any instrument bestowing financial or fiscal benefit Authorisation was issued unless otherwise stipulated In case an export or import that is permitted freely under FTP is subsequently subjected to any restriction or regulation such export or import will ordinarily be permitted notwithstanding such restriction or regulation unless otherwise stipulated This is subject to the condition that the shipment of export or import is made within the original validity period of an irrevocable commercial letter of credit established before the date of imposition of such restriction and it shall be restricted to the balance value and quantity available and time period of such irrevocable letter of credit For operationalising such irrevocable letter of credit the applicant shall have to register the Letter of Credit with jurisdictional Regional Authority RA against computerized receipt within 15 days of the imposition of any such restriction or regulation DEFINITIONS For purpose of Foreign Trade Policy unless context otherwise requires the following words and expressions shall have the following meanings attached to them Accessory or Attachment means a part sub assembly or assembly that contributes to efficiency or effectiveness of a piece of equipment without changing its basic functions Act means Foreign Trade Development and Regulation Act 1992 No 22 of 1992 FT D R Act as amended from time to time Actual User is a person either natural or legal who is authorized to use imported goods in his its own premise which has a definitive postal address a Actual User Industrial is a person either natural legal who utilizes imported goods for manufacturing in his own industrial unit or manufacturing for his own use in another unit including a jobbing unit which has a definitive postal address b Actual User Non Industrial is a person either natural legal who utilizes the imported goods for his own use in i any commercial establishment carrying on any business trade or profession which has a definitive
78 EP ECL postal address or ii any laboratory Scientific or Research and Development R D institution university or other educational institution or hospital which has a definitive postal address or iii any service industry which has a definitive postal address AEZ means Agricultural Export Zones notified by Director General of Foreign Trade DGFA in Appendix 2V of Appendices and Aayat Niryat Forms of FTP 2015 Appeal is an application filed under section 15 of the Act and includes such applications preferred by DGFT officials in government interest against decision by designated adjudicating appellate authorities Applicant means person on whose behalf an application is made and shall wherever context so requires includes person signing the application Authorization means permission as included in Section 2 g of the Act to import or export as per provisions of FTP Capital Goods means any plant machinery equipment or accessories required for manufacture or production either directly or indirectly of goods or for rendering services including those required for replacement modernisation technological up gradation or expansion It includes packaging machinery and equipment refrigeration equipment power generating sets machine tools equipment and instruments for testing research and development quality and pollution control Capital goods may be for use in manufacturing mining agriculture aquaculture animal husbandry floriculture horticulture pisciculture poultry sericulture and viticulture as well as for use in services sector Competent Authority means an authority competent to exercise any power or to discharge any duty or function under the Act or the Rules and Orders made there under or under FTP Component means one of the parts of a sub assembly or assembly of which a manufactured product is made up and into which it may be resolved A component includes an accessory or attachment to another component Consumables means any item which participates in or is required for a manufacturing process but does not necessarily form part of end product Items which are substantially or totally consumed during a manufacturing process will be deemed to be consumables Consumer Goods means any consumption goods which can directly satisfy human needs without further processing and includes consumer durables and accessories thereof Counter Trade means any arrangement under which exports imports from to India are balanced either by direct imports exports from importing exporting country or through a third country under a Trade Agreement or otherwise Exports Imports under Counter Trade may be carried out through Escrow Account Buy Back arrangements Barter trade or any similar arrangement Balancing of exports and imports could wholly or partly be in cash goods and or services Developer means a person or body of persons company firm and such other private or government undertaking who develops builds designs organises promotes finances operates maintains or manages a part or whole of infrastructure and other facilities in SEZ as approved by Central Government and also includes a co developer Development Commissioner means Development Commissioner of Special Economic Zone SEZ
Lesson 2 Foreign Trade Policy and Procedure 79 Domestic Tariff Area DTA means area within India which is outside SEZs and Export Oriented Undertaking EOU Electronic Hardware Technology Park EHTP Software Technology Park STP Biotechnology Park BTP Drawback on deemed export in relation to any goods manufactured in India and supplied as deemed exports means the rebate of duty or tax as the case may be chargeable on any imported materials or excisable materials used or taxable services used as input services in the manufacture of such goods EOU means Export Oriented Unit for which a letter of permit has been issued by Development Commissioner Excisable goods means any goods produced or manufactured in India and subject to duty of excise under Central Excise and Salt Act 1944 1 of 1944 Export is as defined in FT D R Act 1992 as amended from time to time Exporter means a person who exports or intends to export and holds an IEC number unless otherwise specifically exempted Export Obligation means obligation to export product or products covered by Authorisation or permission in terms of quantity value or both as may be prescribed or specified by Regional or competent authority Free as appearing in context of import export policy for items means goods which do not need any Authorisation License or permission for being imported into the country or exported out FTP means the Foreign Trade Policy which specifies policy for exports and imports under Section 5 of the Act Import is as defined in FT D R Act 1992 as amended from time to time Importer means a person who imports or intends to import and holds an Import Export Numbered IEC number unless otherwise specifically exempted ITC HS refers to Indian Trade Classification Harmonized System at 8 digits Jobbing means processing or working upon of raw materials or semi finished goods supplied to job worker so as to complete a part of process resulting in manufacture or finishing of an article or any operation which is essential for aforesaid process Licensing Year means period beginning on the 1st April of a year and ending on the 31st March of the following year Managed Hotel means hotels managed by a three star or above hotel hotel chain under an operating management contract for a duration of at least three years between operating hotel hotel chain and hotel being managed Management contract must necessarily cover the entire gamut of operations management of managed hotel Manufacture means to make produce fabricate assemble process or bring into existence by hand or by machine a new product having a distinctive name character or use and shall include processes such as refrigeration re packing polishing labelling Re conditioning repair remaking refurbishing testing calibration re engineering Manufacture for the purpose of FTP shall also include agriculture aquaculture animal husbandry floriculture horticulture pisciculture poultry sericulture viticulture and mining
80 EP ECL Manufacturer Exporter means a person who exports goods manufactured by him or intends to export such goods Merchant Exporter means a person engaged in trading activity and exporting or intending to export goods NC means the Norms Committee in the Directorate General of Foreign Trade for approval of adhoc input output norms in cases where SION does not exist and recommend SION to be notified in DGFT Notification means a notification published in Official Gazette Order means an Order made by Central Government under the Act Part means an element of a sub assembly or assembly not normally useful by itself and not amenable to further disassembly for maintenance purposes A part may be a component spare or an accessory Person means both natural and legal and includes an individual firm society company corporation or any other legal person including the DGFT officials Policy means Foreign Trade Policy 2015 2020 as amended from time to time Prescribed means prescribed under the Act or the Rules or Orders made there under or under FTP Prohibited indicates the import export policy of an item as appearing in ITC HS or elsewhere whose import or export is not permitted Public Notice means a notice published under provisions of paragraph 2 04 of FTP Quota means the quantity of goods of a specific kind that is permitted to be imported without restriction or imposition of additional Duties Raw material means input s needed for manufacturing of goods These inputs may either be in a raw natural unrefined unmanufactured or manufactured state Regional Authority means authority competent to grant an Authorisation under the Act Order Registration Cum Membership Certificate RCMC means certificate of registration and membership granted by an Export Promotion Council Commodity Board Development Authority or other competent authority as prescribed in FTP or Handbook of Procedures Restricted is a term indicating the import or export policy of an item which can be imported into the country or exported outside only after obtaining an authorization from the offices of DGFT Rules means Rules made by Central Government under Section 19 of the FT D R Act SCOMET is the nomenclature for dual use items of Special Chemicals Organisms Materials Equipment and Technologies SCOMET Export of dual use items and technologies under India s Foreign Trade Policy is regulated It is either prohibited or is permitted under an authorization Services include all tradable services covered under General Agreement on Trade in Services GATS and earning free foreign exchange Service Provider means a person providing i Supply of a service from India to any other country Mode1 Cross border trade ii Supply of a service from India to service consumer s of any other country Mode 2 Consumption abroad
Lesson 2 Foreign Trade Policy and Procedure 81 iii Supply of a service from India through commercial presence in any other country Mode 3 Commercial Presence iv Supply of a service from India through the presence of natural persons in any other country Mode 4 Presence of natural persons Ships mean all types of vessels used for sea borne trade or coastal trade and shall include second hand vessels SION means Standard Input Output Norms notified by DGFT Spares means a part or a sub assembly or assembly for substitution that is ready to replace an identical or similar part or sub assembly or assembly Spares include a component or an accessory Specified means specified by or under the provisions of this Policy through Notification Public Notice Status holder means an exporter recognized as One Star Export House Two Star Export House Three Star Export House Four Star Export House Five Star Export House by DGFT Development Commissioner Stores means goods for use in a vessel or aircraft and includes fuel and spares and other articles of equipment whether or not for immediate fitting a Supporting Manufacturer is one who manufactures goods products or any part accessories components of a good product for a merchant exporter or a manufacturer exporter under a specific authorization b Supporting Manufacturer for the EPCG Scheme shall be one in whose premises factory Capital Goods imported procured under EPCG authorization is installed State Trading Enterprises STEs for the purpose of this FTP are those entities which are granted exclusive right privileges export and or import as per FTP Third party exports means exports made by an exporter or manufacturer on behalf of another exporter s In such cases export documents such as shipping bills shall indicate name of manufacturing exporter manufacturer and third party exporter s Bank Realisation Certificate Self Declaration Form SDF export order and invoice should be in the name of third party exporter Transaction Value is as defined in Customs Valuation Rules of Department of Revenue GENERAL PROVISIONS REGARDING IMPORTS AND EXPORTS Exports and Imports Free unless regulated a Exports and Imports shall be Free except when regulated by way of prohibition restriction or exclusive trading through State Trading Enterprises STEs as laid down in Indian Trade Classification Harmonised System ITC HS of Exports and Imports b Further there are some items which are free for import export but subject to conditions stipulated in other Acts or in law for the time being in force Indian Trade Classification Harmonised System ITC HS of Exports and Imports a ITC HS is a compilation of codes for all merchandise goods for export import Goods are classified based on their group or sub group at 2 4 6 8 digits
82 EP ECL b ITC HS is aligned at 6 digit level with international Harmonized System goods nomenclature maintained by World Customs Organization http www wcoomd org However India maintains national Harmonized System of goods at 8 digit level which may be viewed by clicking on Downloads at http dgft gov in c The import export policies for all goods are indicated against each item in ITC HS Schedule 1 of ITC HS lays down the Import Policy regime while Schedule 2 of ITC HS details the Export Policy regime d Except where it is clearly specified Schedule 1 of ITC HS Import Policy is for new goods and not for the Second Hand goods For Second Hand goods the Import Policy regime is given in Para 2 31 in this FTP Compliance of Imports with Domestic Laws a Domestic Laws Rules Orders Regulations Technical specifications environmental safety and health norms applicable to domestically produced goods shall apply mutatis mutandis to imports unless specifically exempted b However goods to be utilized consumed in manufacture of export products as notified by DGFT may be exempted from domestic standards quality specifications Authority to specify Procedures Director General of Foreign Trade DGFT may specify procedure to be followed by an exporter or importer or by any licensing Regional Authority RA or by any other authority for purposes of implementing provisions of FT D R Act the Rules and the Orders made there under and FTP Such procedure or amendments if any shall be published by means of a Public Notice IMPORTER EXPORTER CODE IEC NUMBER E IEC An IEC is a 10 digit number allotted to a person that is mandatory for undertaking any export import activities Now the facility for IEC in electronic form or e IEC has also been operationalised a Application for obtaining IEC can be filed manually and submitting the form in the office of Regional Authority RA of DGFT Alternatively Exporters Importers shall file an application in ANF 2A format for grant of e IEC Those who have digital signatures can sign and submit the application online along with the requisite documents Others may take a printout of the application sign the undertaking declaration upload the same with other requisite documents and thereafter submit the signed copy of the online application form to concerned jurisdictional Regional Authorities RA either through post or by hand b Deficiency in the application form has to be removed by re loging onto Online IEC application on DGFT website and filling the form again by paying the requisite application processing charges c When an e IEC is approved by the competent authority applicant is informed through e mail that a computer generated e IEC is available on the DGFT website By clicking on Application Status after having filled and submitted the requisite details in Online IEC Application webpage applicant can view and print his e IEC Briefly following are the requisite details documents scanned copies to be submitted uploaded along with the application for IEC i Details of the entity seeking the IEC
Lesson 2 Foreign Trade Policy and Procedure 83 1 PAN of the business entity in whose name Import Export would be done Applicant individual in case of Proprietorship firms 2 Address Proof of the applicant entity 3 LLPIN CIN Registration Certification Number whichever is applicable 4 Bank account details of the entity Cancelled Cheque bearing entity s pre printed name or Bank certificate in prescribed format ANF2A I ii Details of the Proprietor Partners Directors Secretary or Chief Executive of the Society Managing Trustee of the entity 1 PAN for all categories 2 DIN DPIN in case of Company LLP firm iii Details of the signatory applicant 1 Identity proof 2 PAN 3 Digital photograph d In case the applicant has digital signature the application can also be submitted online and no physical application or document is required In case the applicant does not possess digital signature a print out of the application filed online duly signed by the applicant has to be submitted to the concerned jurisdictional RA in person or by post No Export Import without IEC No export or import shall be made by any person without obtaining an IEC number unless specifically exempted a The following categories of importers or exporters are exempted from obtaining IEC IEC Number Exempted Categories Sl No Categories Exempted from obtaining IEC i Importers covered by clause 3 1 except sub clauses e and l and exporters covered by clause 3 2 except sub clauses i and k of Foreign Trade Exemption from application of Rules in certain cases Order 1993 ii Ministries Departments of Central or State Government iii Persons importing or exporting goods for personal use not connected with trade or manufacture or agriculture iv Persons importing exporting goods from to Nepal Myanmar through Indo Myanmar border areas and China through Gunji Namgaya Shipkila and Nathula ports provided CIF value of a single consignment does not exceed Indian Rs 25 000 In case of Nathula port the applicable value ceiling will be Rs 1 00 000
84 EP ECL Further exemption from obtaining IEC shall not be applicable for export of Special Chemicals Organisms Materials Equipments and Technologies SCOMET as listed in Appendix 3 Schedule 2 of ITC HS except in case of exports by category ii above b Following permanent IEC numbers shall be used by non commercial Public Sector Undertaking PSUs and categories or importers exporters mentioned against them for import export purposes Sr No Permanent IEC Categories of Importer Exporter 1 0100000011 All Ministries Departments of Central Government and agencies wholly or partially owned by them 2 0100000029 All Ministries Departments of any State Government and agencies wholly or partially owned by them 3 0100000037 Diplomatic personnel Counsellor officers in India and officials of UNO and its specialised agencies 4 0100000045 Indians returning from going abroad and claiming benefit under Baggage Rules 5 0100000053 Persons Institutions Hospitals importing or exporting goods for personal use not connected with trade or manufacture or agriculture 6 0100000061 Persons importing exporting goods from to Nepal 7 0100000070 Persons importing exporting goods from to Myanmar through Indo Myanmar border areas 8 0100000088 Ford Foundation 9 0100000096 Importers importing goods for display or use in fairs exhibitions or similar events under provisions of ATA carnet This IEC number can also be used by importers importing for exhibitions fairs as per Paragraph 2 63 of Handbook of Procedures 10 0100000100 Director National Blood Group 11 0100000126 Individuals Charitable Institution Registered NGOs importing goods which have been exempted from Customs duty under Notification issued by Ministry of Finance for bonafide use by victims affected by natural calamity 12 0100000134 Persons importing exporting permissible goods as notified from time to time from to China through Gunji Namgaya Shipkila and Nathula ports subject to value ceilings of single consignment as given in a iv above 13 0100000169 Non commercial imports and exports by entities who have been authorised by Reserve Bank of India
Lesson 2 Foreign Trade Policy and Procedure 85 Only one IEC against one Permanent Account Number PAN Only one IEC is permitted against on Permanent Account Number PAN If any PAN card holder has more than one IEC the extra IECs shall be disabled MANDATORY DOCUMENTS FOR EXPORT IMPORT OF GOODS FROM INTO INDIA a Mandatory documents required for export of goods from India 1 Bill of Lading Airway Bill 2 Commercial Invoice cum Packing List 3 Shipping Bill Bill of Export b Mandatory documents required for import of goods into India 1 Bill of Lading Airway Bill 2 Commercial Invoice cum Packing List 3 Bill of Entry Note i As per CBEC Circular No 01 15 Customs dated 12 01 2015 ii Separate Commercial Invoice and Packing List would also be accepted c For export or import of specific goods or category of goods which are subject to any restrictions policy conditions or require NOC or product specific compliances under any statute the regulatory authority concerned may notify additional documents for purposes of export or import d In specific cases of export or import the regulatory authority concerned may electronically or in writing seek additional documents or information as deemed necessary to ensure legal compliance PRINCIPLES OF RESTRICTIONS DGFT may through a Notification impose restrictions on export and import necessary for a Protection of public morals b Protection of human animal or plant life or health c Protection of patents trademarks and copyrights and the prevention of deceptive practices d Prevention of use of prison labour e Protection of national treasures of artistic historic or archaeological value f Conservation of exhaustible natural resources g Protection of trade of fissionable material or material from which they are derived h Prevention of traffic in arms ammunition and implements of war EXPORT IMPORT OF RESTRICTED GOODS SERVICES Any goods service the export or import of which is Restricted may be exported or imported only in accordance with an Authorisation Permission or in accordance with the procedure prescribed in a Notification Public Notice issued in this regard EXPORTS FROM INDIA SCHEMES The objective of the Export from India Schemes is to provide rewards to exporters to offset infrastructural inefficiencies and associated costs involved and to provide exporters a level playing field
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