1. BASICS

The Foreign Exchange Management Act, 1999 (FEMA) deals with cross border investments, foreign exchange transactions and transactions between residents and non-residents. It has come into force from June 1, 2000.

The operation of FEMA is akin to any other commercial law. However as compared to most other commercial laws FEMA is one of the smallest, having only 49 Sections. If guidelines, rules etc. are followed, the person can undertake most transactions without any approvals. If proposed transactions fall outside the guidelines, one will have to obtain necessary prior approvals. The consequence of any violation is a penalty. If penalty is not paid within the specified time, then there can be prosecution.

FEMA extends to the whole of India. It also applies to all branches, offices and agencies outside India, which are owned or controlled by a person resident in India, in this respect FEMA can be said to acquire extra-territorial jurisdiction.

It is important to note that RBI/GOI issues various Notifications, Directions, Press Notes, Guidance, etc. from time-to-time to administer FEMA. However, in case of conflict between any of them the relevant FEMA Notification will prevail.

2. IMPORTANT TERMS UNDER FEMA – Section 2

2.1 Capital Account Transaction means a transaction which:

• Alters foreign assets and foreign liabilities (including contingent liabilities) of Indian residents.
• Alters Indian assets and Indian liabilities of non-residents.
• Is a specified transaction as mentioned in section 6.

Essentially this is an economic definition and not an accounting or legal definition. It is intended to cover cross-border investments, cross-border loans and transfer of wealth across borders. RBI has been empowered to regulate capital account transactions. Unless the transaction is permitted as per regulations, Foreign Exchange (FX) cannot be drawn for the same.

Capital account transactions though liberalised to a great extent, continue to be regulated – by RBI in respect of transactions involving debt instruments and by the Government of India in respect of other transactions. Unless permitted by way of notifications and rules or specific approvals, transactions cannot be undertaken. But there are two very important purposes for which no restrictions can be imposed, either by RBI or by the Government of India, viz.:

1. Drawing of foreign exchange for the repayment of any loans and;
2. for replenishing depreciation of direct investments in the ordinary course of business. (Section 6)

2.2 Current Account Transaction means all transactions, which are not capital account transactions. Specifically, it includes:

• Business transactions between residents and non-residents.
• Short-term banking and credit facilities in the ordinary course of business.
• Payments towards interest on loans and by way of income from investments.
• Payment of expenses of parents, spouse or children living abroad or expenses on their foreign travel, medical and education.
• Scholarships / Chairs, etc.

Primarily there are no restrictions on current account transactions. A person may sell or draw foreign exchange freely for his current account transactions, except in a few cases where limits have been prescribed (Section 5). The Central Government has the power to regulate current account transactions. Unless the transaction is restricted, FX can be drawn for the same.

See paragraph 7 for more details on current account transactions.

2.3 Person includes:

1. An individual
2. A Hindu Undivided Family (HUF)
3. A Company
4. A firm
5. An association of persons or body of individuals, whether incorporated or not
6. Every artificial judicial person not falling in any of the above sub-clauses
7. Any agency, office or branch owned or controlled by such person.

2.4 Resident / Non-Resident: -If an individual stays in India for more than 182 days during the course of the preceding financial year, he will be treated as a person resident in India. There are a few exceptions as under:

• If a person goes/stays outside India for (a) taking up employment, or (b) carrying on business or vocation, or (c) for any other purpose for an uncertain period; he will be treated as a person resident outside India (non-resident). (It has been clarified that students going abroad for further studies will be regarded as non-residents.)
• If a person who is residing abroad comes to/stays in India only for (a) taking up employment, or (b) carrying on business or vocation, or (c) for any other purpose for an uncertain period; he will be treated as a person resident in India.

The term financial year means a twelve-month period beginning from April 1 and ending on March 31 next.

Following persons (other than individuals) will be treated as persons resident in India:

• Person or body corporate which is registered or incorporated in India.
• An office, branch or agency in India, even if it is owned or controlled by a person resident outside India.
• An office, branch or agency outside India, if it is owned or controlled by a person resident in India.

The definition is however inadequate to define residential status of a firm, an HUF, a trust or any entity which does not have to be registered.

Conversely, a non-resident means a person who is not a resident in India.

3. IMPORTANT FEATURES

3.1 All dealings in foreign exchange or foreign security can be done only through an authorised person if permitted by FEMA, rules & regulations framed there under, or by general or special permission of the RBI. Further no payments can be made by a resident to a non-resident unless permitted under FEMA (section 3).

3.2 Holdings / surrender of foreign currency, etc. (sections 4, 8 & 9) - Persons resident in India are primarily prohibited from acquiring, holding, owning, possessing, etc. any foreign exchange, foreign security or immovable property outside India. Also they are required to repatriate and bring to India all foreign exchange that is due to or accrued to them and deposit the same in the bank account. However, they are permitted to hold foreign coins without any limit, and foreign currency notes and travellers’ cheques up to US $ 2,000 or equivalent foreign currency. The foreign exchange received has to be surrendered to the authorised dealer within the prescribed time limit as mentioned below:

3.3 Residents have been allowed to maintain foreign currency accounts in India as under:

3.3.1 EEFC Account

A person is permitted to credit the under-mentioned amounts out of his foreign exchange earnings to his EEFC Account: -

** Professionals mean Director on Board of overseas company; Scientist / Professor in Indian University / Institution; Economist; Lawyer/Doctor/Architect/Engineer/Artist/Cost/Chartered Account/Any other person rendering professional services in his individual capacity, as may be specified by the Reserve Bank from time-to-time. Professional earnings including director's fees, consultancy fees, lecture fees, honorarium and similar other earnings received by a professional by rendering services in his individual capacity.

However, amounts received to meet specific obligations of the account holder cannot be credited (e.g., equity investment from a non-resident investor). The balances do not earn any interest.

These funds can be used for several current account purposes. For many transactions, where there are restrictions under the current account rules, funds in EEFC account can be used without restrictions. However, EEFC account holders are permitted to purchase foreign exchange only after utilizing fully the available balances in the EEFC accounts.

Individuals can open EEFC account jointly with any of their ‘close relative’ on ‘former or survivor basis’ but the joint relative cannot operate the account.

3.3.2 Units in SEZ are permitted to open, hold and maintain a Foreign Currency Account with an authorised dealer in India.

3.3.3 Resident Foreign Currency (Domestic) Account – Rfc (D) A/c

A person resident in India can open, hold and maintain a Resident Foreign Currency (Domestic) Account and credit the account with foreign exchange in the form of currency notes, bank notes and travellers cheques: -

1. Acquired by him while on a visit to any place outside India by way of payment of services not arising from any business in or anything done in India; or
2. Acquired by him, from any person not resident in India and who is on a visit to India, as honorarium or gift or for services rendered or in settlement of any lawful obligation; or
3. Acquired by him by way of honorarium or gift while on a visit to any place outside India; or
4. Representing the unspent amount of foreign exchange acquired by him from an authorised person for travel abroad; or
5. Earned by way of export of goods / services, royalty, honorarium, etc.; or
6. Received by way of gift from close relatives (as defined under section 2(77) of the Companies Act, 2013); or
7. By way of sale proceeds of shares offered for conversion to ADR / GDR, where such conversion is approved by the FIPB; or
8. Proceeds of insurance policies settled in foreign currency.

Balances in this account do not earn interest. However, there is no ceiling on the balance that can be held in the account.

Balances in the account can be used for all permitted current account and capital account transactions.

3.3.4 Resident Foreign Currency Account – RFC A/c

Resident Indians can also open RFC account. This account is different from RFC (D) account. This account is primarily for non-residents who return to India. In RFC A/c, following items can be deposited:

1. Pension or any other superannuation or other monetary benefits from employer outside India.
2. Amount received on conversion of the assets if those assets were acquired when such person was a non-resident.
3. Amount received as gift or inheritance from a person who was a non-resident and has become a resident.
4. Proceeds of insurance policies settled in foreign currency that is issued by Insurance Companies in India.

There are no restrictions on use of funds. They can be used for meeting expenses and making investments abroad. RFC account can be maintained in the form of current or savings or term deposit accounts.

3.3.5 Bank Account outside India of Employees of Foreign Companies on Deputation in India

Employees of foreign companies (either foreign nationals or Indian nationals) who are on deputation in India are permitted to open, hold and maintain a foreign currency account outside India and remit the whole salary received in India to the said account provide appropriate Income-tax has been paid on the same.

3.3.6 Foreign Currency Account of Project / Service Exporter

Exporters of projects/services are permitted to open, hold and maintain foreign currency bank accounts either in India or abroad for each project under execution abroad subject to certain terms and conditions.

3.3.7 Foreign Currency Accounts by Ship-Manning/Crew-Management Agencies

Ship manning/crew managing agencies rendering services to shipping companies incorporated outside India can open and maintain non-interest bearing foreign currency accounts in India, till the validity period of their agreement, for the purpose of undertaking transactions in the ordinary course of their business.

3.3.8 US $ ACCOUNTS OF GEM & JEWELLERY ENTITIES

Certain firms and companies dealing in purchase/sale of rough or cut and polished diamonds/precious metal jewellery plain, minakari and/or studded with/without diamond and/or other stones, with a track record of at least 2 years in import /export of diamonds/coloured gemstones/diamond and coloured gemstones studded jewellery/plain gold jewellery, and having an average annual turnover of Rs 3 crore or above during preceding three licensing years, are allowed to open and maintain non-interest bearing Diamond Dollar Accounts (DDA) in US $.

3.3.9 Foreign Currency Account of Indian Party

An Indian party is permitted to open, hold and maintain a Foreign Currency Account (FCA) abroad for the purpose of overseas direct investments (ODI) if the host country Regulations stipulate that investments into the country must be routed through a designated account in that country. This account can be used only for overseas investments in JV/WOS under ODI and receipt of entitlements from such investments. Normal procedure for repatriation of investment income and closure of bank account upon divestment will apply.

3.4 Any passenger bringing in foreign exchange on his arrival in India in the form of currency notes, bank notes or travellers cheques exceeding US $ 10,000 or its equivalent and / or the value of foreign currency notes exceeding US $ 5,000 or its equivalent is required to file a declaration in Form CDF with the Custom Authorities. A person resident in India is permitted to carry only ₹ 10,000/- during his visit abroad (except Nepal and Bhutan).

3.5 An Indian entity opening a Branch / Representative / Liaison Office outside India is allowed to remit, subject to certain terms and conditions, as under: -

1. For Initial Expenses – Up to 15% of its average annual sales /income or turnover during the last two accounting years or up to 25 % of net worth, whichever is higher.
2. For Recurring Expenses – Up to 10%of its average annual sales/income or turnover during the last two accounting years.

The overseas office is also permitted to acquire immovable property outside India for its business and for residential purpose of its staff out of the above remittances.

4. CONTRAVENTION, PENALTIES & APPEALS Sections 13 to 35

4.1 Penalties for contraventions under FEMA are per se monetary in nature. If any person contravenes any provisions, rules, regulations, etc. the penalty imposed may be 3 times the amount involved in contravention; and if the amount of contravention is not ascertainable, penalty can be up to ₹ 200,000. If the contravention is a continuing one, a penalty up to ₹ 5,000 per day may be imposed for every day after the 1st day during which the contravention continues.

4.2 If any person is found to have acquired any foreign exchange, foreign security or immovable property, situated outside India, of the aggregate value exceeding the threshold prescribed u/s. 37A (at present no limit has been prescribed), then such person is liable to: –

1. Penalty up to 3 times the sum involved.
2. Confiscation of the value equivalent situated in India.
3. Imprisonment for a term which may extend to 5 year + fine.

4.3 The adjudicating officer / competent authorities may also confiscate any currency, security or property in addition to imposing penalty.

4.4 If a person does not pay up the penalty within 90 days, he is liable for civil imprisonment.

4.5 There is a right to appeal given at every stage and an appeal against an order of the Adjudicating Authority can be made to the Special Director (Appeal). An appeal against the order of the Special Director (Appeals) can be made to the Appellate Tribunal. An appeal, on questions of Law, against the order of the Appellate Tribunal can be made to the High Court.

4.6 A person preferring an appeal to the Special Director (Appeals) or the Appellate Tribunal can take assistance of a Chartered Accountant or Legal Practitioner.

5. DIRECTORATE OF ENFORCEMENT – Sections 36 to 38

5.1 The officers of the Directorate have powers to investigate contraventions referred to in section 13.

5.2 The powers and limitations of these Officers are the same as those conferred on Income-tax Authorities under the Income-Tax Act, 1961.

5.3 Authorised Officer can, if he has reason to believe any foreign exchange, foreign security or immovable property, situated outside India, of the aggregate value exceeding the threshold prescribed, is suspected to have been held in contravention of Section 4, seize value equivalent situated in India.

5.4 The aggrieved can disclose the fact of such foreign exchange, foreign security or immovable property and bring the same into India and request that his / her Indian assets be not seized.

5.5 The aggrieved person can appeal to the Appellate Tribunal.

5.6 This is not compoundable.

6. COMPOUNDING OF CONTRAVENTIONS – Section 15

Powers for compounding of offences – RBI has been given powers for compounding all cases of contraventions other than cases under section 3(a) of FEMA. Cases of contravention under section 3(a) relate to dealing in or transfer of foreign exchange and foreign security to any person other than an authorised dealer. For these, Enforcement Directorate will be responsible. Powers of compounding with RBI should give confidence to public.

Depending on the amount involved, various officers have been designated to look into applications for compounding. The compounding authority can call for any information, record or any other documents relevant to the compounding proceedings. The compounding authority is required to pass an order within 180 days from the date of application. The sum for which the contravention is compounded has to be paid within 15 days from the date of order of compounding.

The Regional Offices of the Reserve Bank of India have now been delegated powers to compound the contraventions of FEMA involving (i) delay in reporting of inward remittance, (ii) delay in filing of form FC-GPR after allotment of shares, (iii) delay in issue of shares beyond 180 days, (iv) violation of pricing guidelines, (v) issue of ineligible instruments such as non-convertible debentures, partly paid shares, shares with optionality clause, etc., (vi) issue of shares without approval of RBI or FIPB respectively, wherever required, (vii) delay in submission of form FC-TRS on transfer of shares from Resident to Non-Resident, (viii) delay in submission of form FC-TRS on transfer of shares from Non-Resident to Resident and (ix) taking on record transfer of shares by investee company, in the absence of certified Form FC-TRS. However, Regional Offices in Panaji & Kochi can entertain compounding applications where the amount involved does not exceed ₹ 1 crore. All violations other than those mentioned above will continue to be compounded by the Cell for Effective Implementation of FEMA (CEFA), Mumbai.

Similarly, FED, CO Cell, Reserve Bank of India, 6, Sansad Marg, New Delhi – 110 001 will deal with all contraventions relating to / falling under (i) acquisition and transfer of immovable property outside India, (ii) acquisition and transfer of immovable property in India, (iii) establishment in India of Branch office, Liaison Office or Project Office and (iv) Foreign Exchange Management (Deposit) Regulations, 2000.

RBI has clarified that whenever a contravention is identified by it (i.e., RBI) or brought to its notice by the entity involved in contravention by way of a reference other than through the prescribed application for compounding, the Bank will continue to decide (i) whether a contravention is technical and/or minor in nature and, as such, can be dealt with by way of an administrative/cautionary advice; (ii) whether it is material and, hence, is required to be compounded for which the necessary compounding procedure has to be followed or (iii) whether the issues involved are sensitive/serious in nature and, therefore, need to be referred to the Directorate of Enforcement (DOE). However, once a compounding application is filed by the concerned entity suo motu, admitting the contravention, the same will not be considered as ‘technical’ or ‘minor’ in nature and the compounding process shall be initiated as per procedure.

STOP PRESS: RBI has issued a notification on Compounding Proceedings Rules. With an intention to ensure more transparency and greater disclosure, RBI will now upload on its web site www.rbi.org.in  all compounding orders passed on or after June 1, 2016. Further, annexed to this circular are the guidelines, along with examples, used by RBI for calculating the amount imposed under Section 13 of FEMA. For Annex Click here

7. PERMISSIBLE TRANSACTIONS BY RESIDENTS

7.1 Current Account Transactions (See para 2.2 for meaning)

Unless the transaction falls within the below mentioned restrictions, FX can be drawn for the same without any limit.

Broad categories of current account transactions can be classified as under:

1. Transactions for which FX withdrawal is totally prohibited such as payment for lotteries, transactions with residents of Nepal and Bhutan, etc.
2. Transactions for which FX can be withdrawn only with prior approval of Government, such as specified transactions by PSUs, lump-sum knowhow payments exceeding US $ 2 million, etc. However, payments from EEFC, RFC (D) and RFC A/c do not require any approval.
3. Transactions for which FX can be withdrawn only with prior approval of Government even if payment is made from EEFC A/c.
4. Transactions for which FX can be withdrawn only with prior approval of RBI such as FX for business travel exceeding US $ 25,000, etc. However, payments from EEFC, RFC (D) and RFC A/c do not require any approval.
5. Transactions for which FX can be withdrawn only with prior approval of RBI even if payment is made from EEFC A/c.

Residents are permitted to remit US $ 250,000 for any current and capital account purpose (except those transactions which are prohibited altogether – refer paragraph A below), without any limit. (See para 7.2.6 below for further details on investments abroad by individuals).

The details of restrictions on Current Account Transactions are as follows:

A. Payments or withdrawal of FX for following purposes are totally prohibited:

1. Travel to Nepal and Bhutan.
2. Transactions with a person resident in Nepal and Bhutan.
3. Remittance out of lottery winnings.
4. Remittance of income from racing/riding, etc., or any other hobby.
5. Remittance for purchase of lottery tickets, banned / proscribed magazines, football pools, sweepstakes, etc.
6. Payment of commission on exports made towards equity investment in Joint Ventures / Wholly Owned Subsidiaries abroad of Indian companies.
7. Payment of commission on exports under Rupee State Credit Route, except commission up to 10% of invoice value of exports of tea and tobacco.
8. Payment related to “Call Back Services” of telephones.
9. Remittance of interest income on funds held in NRSR Scheme Account.
10. Remittance towards participation in lottery schemes involving money circulation or for securing prize money / awards, etc.

B.1. The following payments will require prior approval from the Government of India, except where the payment is made from the RFC or RFC(D) or EEFC Account of the remitter: -

B. 2. Remittance for membership of P&I Club would require prior approval from the Ministry of Finance except where the payment is made from RFC or RFC(D) Account of the remitter.

C.1. The following payments will require prior approval of RBI, except where the payment is made from the RFC or RFC(D) or EEFC Account of the remitter:

1. Release of exchange exceeding the limits mentioned under LRS (presently US $ 250,000) in one calendar year, for one or more private visits to any country (except Nepal and Bhutan).
2. Exchange facilities exceeding the limits mentioned under LRS (presently US $ 250,000) for persons going abroad for employment.
3. Exchange facilities for emigration exceeding the limits mentioned under LRS (presently US $ 250,000) or amount prescribed by country of emigration.
4. Remittance for maintenance of close relatives abroad,
   1. Exceeding the net salary (after deduction of taxes, contribution to provident fund and other deductions) of 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 or subsidiary or joint venture in India of such foreign company.
   2. Exceeding US $ 100,000 per year per recipient.

   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 the length thereof) or for a specific job or assignment; the duration of which does not exceed three years, is a resident but not permanently resident.

5. Release of foreign exchange, exceeding the limits mentioned under LRS (presently US $ 250,000) to a person, irrespective of period of stay, for business travel, or attending a Conference or specialised training or for maintenance expenses of a patient going abroad for medical treatment or check-up abroad, or for accompanying as attendant to a patient going abroad for medical treatment/Check-up.
6. Release of exchange for meeting expenses for medical treatment abroad exceeding the estimate from the doctor in India or hospital/doctor abroad. However, an amount up to the limits mentioned under LRS (presently US $ 250,000) or its equivalent can be released without insisting on any estimate from a hospital/doctor.
7. Release of exchange for studies abroad exceeding the estimates from the institution abroad or the limits mentioned under LRS (presently US$ 250,000) per academic year, whichever is higher.
8.  
   1. Remittances exceeding US $ 1,000,000 per project, for any consultancy services procured from outside India.
   2. Remittances exceeding US $ 10 million per project, consultancy services procured from outside India by Indian companies executing infrastructure projects.

C. 2. The following payments will require prior approval of RBI, except where the payment is made from the RFC or RFC(D) Account of the remitter:

1. Commission to agents abroad for sale of residential flats/commercial plots in India, exceeding US $ 25,000 or 5% of the inward remittance (whichever is higher) per transaction.
2. Remittance exceeding US $ 100,000 or 5% of the investment brought into India, whichever is higher, by an entity in India by way of reimbursement of pre-incorporation expenses in India.
3. Donations in excess of US $ 5,000 by Indian corporates & non-corporates (other than individuals) – Companies, partnership firms, trusts etc.
4. Donations by Indian corporates, in exceeding 1% of the foreign exchange earnings during the previous 3 financial years or US $ 5 million, whichever is less, for
   1. Creation of Chairs in reputed educational institutes.
   2. Donations to funds (not being an investment fund) promoted by educational institutes.
   3. Donation to technical institution or body or association in the field of activity of the donor Company.
5. Payment for purchase of Trade Mark(s) / Patent(s).
6. Remittance towards cash calls to the operator for the purpose of oil exploration in India either by credit to the foreign currency or Rupee account in India subject to the condition that the payment is made as per the production sharing agreement and the copy is available on records of the AD.

7.2 Investments abroad by Indian Residents

7.2.1 Joint Ventures Abroad

Indian investments abroad in Joint Ventures (JV) and Wholly Owned Subsidiaries (WOS) are permitted by RBI.

Investments can be made under the automatic route up to 400% of the net worth (subject to a maximum investment of ₹ 1 billion, investment exceeding ₹ 1 billion will be under the approval route) of the Indian party as on the date of the last balance sheet, in which case prior permission is not required, or the non-automatic route, in which case prior permission is required. There are various options available for investment under both the routes.

General Guidelines:

1. Indian companies, Limited Liability Partnership (LLP) and partnership firms registered under the Indian Partnership Act, 1932 are allowed to invest abroad. Unregistered Partnership Firms (except in certain cases), Proprietary Concerns (except in certain cases), HUFs, AOPs, etc. are not allowed to invest abroad. Investments can be made either directly, or through Special Purpose Vehicles (intermediate companies).
2. Proprietary concern and Unregistered Partnership firm can invest abroad only after obtaining prior approval from RBI.
3. Registered Trusts and Societies engaged in manufacturing / educational sector or who have set up hospital(s) in India can invest in a JV / WOS outside India, in the same sector, after obtaining prior permission of RBI.
4. Investments can be made in existing companies or new companies or for acquiring overseas business.
5. The foreign entity can be engaged in any industrial, commercial, trading, agriculture, service industry, financial services such as insurance, mutual funds, etc. However, any overseas entity having equity participation directly / indirectly of Indian parties cannot offer financial products linked to Indian Rupee (e.g., non-deliverable trades involving foreign currency, rupee exchange rates, stock indices linked to Indian market, etc.) without obtaining specific approval of RBI since the Indian Rupee is currently not fully convertible and such products could have implications for the exchange rate management of the country.
6. Overseas investments in following activities are not permitted:
   • Portfolio Investment by Indian parties.
   • Investment in banking and real estate sectors.
7. Investment can be in equity, loans, or by way of guarantees. Further, these guarantees can be – corporate or personal / primary or collateral and can be given by the promoter company / group company / sister concern / associate company in India. The amount and period of guarantee should be specified upfront. Form ODI will have to be filed with RBI for all guarantees given. All the guarantees will be considered while computing the overall limit of 100% of the new worth.
8. Remittance can be by way of cash, or export of goods and services. For contribution by way of exports, no agency commission will be payable to the wholly owned subsidiary / Joint Venture Company.
9. Investment under automatic route will not be permitted to parties on RBI Caution List, or who have defaulted to the banking system in India and whose names appear on the Defaulter’s list.
10. Shares certificates/other documents where share certificates are not issued should be submitted within the specified time and dividends, royalties, etc. due to Indian investor should be repatriated to India in accordance with the prevailing time limits.
11. Authorised dealers have been permitted to release FX for feasibility studies prior to actual investment.
12. In case of partial/full acquisition of an existing foreign company, where the investment is more than US $ 5 million or investment by way of swap of shares, irrespective of the amount, valuation of the shares of the company shall 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. In all other cases valuation can be by a Chartered Accountant or a Certified Public Accountant. Approval of the (FIPB) will also be a prerequisite for investment by swap of shares in cases where FDI is not permitted under the Automatic Route.
13. Annual Performance Report (APR) in Form ODI through the designated AD should be submitted on or before June 30 every year for pre/post commencement of commercial operation. Audited Annual Accounts, Directors' Report of the Overseas Company are also required to be submitted. APR is to be certified by the Statutory Auditors of the Indian Investor company in case the host country does not mandate audit of accounts.
14. In the event of changes proposed in the JV/WOS regarding activities, investment in another concern / subsidiary or alterations of share capital, there are reporting requirements to RBI.
15. Disinvestment can be either under the automatic route or approval route. All such proposals should be accompanied by a Chartered Accountant's valuation report. The Indian Party is required to submit details of such disinvestment through its designated AD within 30 days from the date of disinvestment
16. Resident Indian does not need permission to accept appointment as Director on boards of overseas company or to act as Trustee of an overseas Trust.
17. Investment in Nepal can be made in Indian Rupees only. Investment in Bhutan can be made either in freely convertible currencies or in Indian Rupees. However, if investment is made in freely convertible currencies than all dues receivable on such investments as well as their sale/ winding up proceeds are required to be repatriated to India also in freely convertible currencies.
18. Regulated Entities in the Financial Services Sector who wish to invest overseas in any activity will have to comply with the conditions stipulated in Regulation 7 of Notification No. FEMA 120/RB-2004 dated July 7, 2004.
19. Unregulated Entities in the Financial Services Sector who wish to invest overseas in non-financial sector activities will have to comply with the conditions stipulated in Regulation 7 of Notification No. FEMA 120/RB-2004 dated July 7, 2004.
20. Entities setting up Branch/JV/WOS overseas for trading in Commodities Exchanges Overseas will have to obtain clearance from the Forward Markets Commission.
21. Shares held in the overseas JV/WOS or Step Down Subsidiary (SDS) can be pledged by way of security for availing fund based and/or non-fund based facilities for itself or the JV/WOS from a Bank in India or abroad.
22. Creation of charge on moveable/immovable property and other financial assets of the Indian entity and their group companies allowed under approval route within the overall limit of 400% of the net worth.
23. Investment in Compulsory Convertible Preference Shares will be treated at par with equity shares.
24. An Indian party can open/hold/maintain foreign currency account abroad, subject to certain conditions, for its investment overseas.
25. An Indian Party can invest in an entity in Pakistan under the Approval Route.

Note:

1. For arriving at the net worth of an Indian party, the net worth of its holding company or its subsidiary may be taken into account to the extent it (the holding / subsidiary company) has not undertaken overseas investment and has issued a letter of disclaimer in favour of the Indian party.
2. Application/intimation/APR/disinvestments in all cases have to be in Form ODI.

7.2.2 Investments by Employees

An employee or Director in India of an Indian office or branch of a foreign company or of a subsidiary in India of foreign company or of an Indian company in which foreign equity holding is not less than 51% (whether directly or through a SPV or step down subsidiary) may purchase equity shares without any monetary ceiling. The shares so acquired can also be repurchased by the foreign company/sold without obtaining RBI permission provided the sales proceeds are repatriated to India.

An employee or Director of the Indian promoter company of an overseas JV/WOS engaged in the field of software can purchase shares up to US $ 10,000 or its equivalent in a block of 5 calendar years. The shares so acquired should not exceed 5% of the paid-up capital of the JV/WOS. The percentage of shares held by the Indian promoter company together with the shares allotted to its employees is not less than the percentage of shares held by the Indian promoter company prior to the allotment of shares to the employees.

Further, a resident employee (including working director) of companies based in the knowledge-based sectors (information technology, pharmaceuticals, biotechnology) can purchase foreign securities under the ADR/GDR linked Employees’ Stock Option Scheme up to US $ 50,000 or its equivalent in a block of five calendar years.

7.2.3 Portfolio Investments – Automatic Route

1. A listed Indian company can invest up to 50 % of its net worth as on the date of its last audited balance sheet:
   1. In shares of overseas companies listed on a recognised foreign stock exchange.
   2. In rated bonds / fixed income securities issued by above companies.
2. Indian Mutual Fund registered with SEBI can invest up to the ceiling prescribed by SEBI from time-to-time (the present ceiling is US $ 7 billion, in addition to this, certain qualified mutual funds can also invest in aggregate up to US $ 1 billion) in:
   1. Shares or rated bonds/fixed income securities of an overseas company listed on a recognised stock exchange.
   2. Exchange Traded Funds.
   3. Other securities as may be permitted by RBI from time-to-time.
3. An Indian Venture Capital Fund registered with SEBI can invest up to US $ 500 million in equity and equity-linked investments of off-shore Venture Capital undertakings, after obtaining prior approval of SEBI.

7.2.4 Investment in Agricultural Operations Overseas

An Indian company or a partnership firm registered under the Indian Partnership Act, 1932 are permitted to undertake agricultural operations including purchase of land incidental to such activity. Investment can be made either directly (through a branch) or through an overseas subsidiary / joint venture up to 400% of its net worth.

7.2.5 Investment by recognised star exporters

A proprietary concern/unregistered partnership firm engaged in the business of exports are permitted to invest up to 10% of the average three years export realisation or 200% of their net owned funds, whichever is lower after obtaining prior approval of RBI, subject to the following conditions: -

1. The exporter should have exports exceeding ₹ 15 crore per annum.
2. The exporter should be KYC compliant and must engaged in the proposed business.
3. Export outstanding should not exceed 10 % of the average export realization of the preceding three years.
4. The exporter should not be on any caution list or RBI, etc.

Investment can be through an overseas subsidiary / joint venture. Application for approval will have to be made in form ODI.

7.2.6 Remittance under the Us $ 250,000 Scheme

An individual resident in India is permitted to remit up to US $ 250,000 per financial year for any legal and lawful purpose without obtaining prior permission of RBI. The individual can use said facility for any current account transaction, acquisition of any moveable property, , remittance towards gift (including gift by way of credit to the NRO account in India of the overseas relative) and donation, investment in overseas companies (including incorporation of a new company) or opening of a bank account outside India or for non-business related travel overseas. He is permitted to acquire qualification shares and shares in lieu of professional fees or directors remuneration under this scheme. Even minors are eligible under this scheme but the LRS form needs to be countersigned by the minor’s natural guardian. However, remittance facility under the Scheme cannot be used for the following: -

1. Remittance for any purpose specifically prohibited under Schedule-I (like purchase of lottery tickets/sweep stakes, proscribed magazines, etc.) or any item restricted under Schedule II of Foreign Exchange Management (Current Account Transactions) Rules, 2000.
2. Remittance from India for margins or margin calls to overseas exchanges / overseas counterparty.
3. Remittances for purchase of FCCBs issued by Indian companies in the overseas secondary market.
4. Remittance for trading in foreign exchange abroad.
5. Capital account remittances, directly or indirectly to countries identified by the Financial Action Task Force (FATF) as “non- cooperative countries and territories”, from time to time.
6. Remittances directly or indirectly to those individuals and entities identified as posing significant risk of committing acts of terrorism as advised separately by the Reserve Bank to the banks.

The updated list can be seen at the website of FATF - http://www.fatf-gafi.org. An application cum declaration form is required to be filed with the AD.

7.3 Acquisition and Transfer of Immovable Property Outside India

Immovable property outside India can be acquired by following persons:

A. INDIVIDUALS

B. OTHERS

7.4 Borrowings from Non-Residents

7.4.1 External Commercial Borrowings [ECB]

ECB is an important component of India’s overall external debt. ECB refers to commercial loans raised by eligible resident entities from recognised non-resident entities and should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc. The parameters apply in totality and not on a standalone basis.

ECB cannot be raised by Individuals, partnership firms & LLP. Entities engaged in micro-finance activities can raise ECB:

1. If they have a satisfactory borrowing relationship for at least 3 years with a bank in India.
2. If they have a certificate of due diligence on ‘fit and proper’ status from a bank in India.

ECB can be raised in any freely convertible foreign currency as well as in Indian Rupees. Change of currency of ECB from one convertible foreign currency to any other convertible foreign currency as well as to INR is freely permitted. Change of currency from INR to any foreign currency is, however, not permitted.

Depending on the currency of borrowing and maturity period ECB is divided in the following three tracks:

ECB can be in the following forms:

1. Loans including bank loans.
2. Securitised instruments – floating rate notes and fixed rate bonds, non-convertible (except those issued to Registered Foreign Portfolio Investors (RFPI)), optionally convertible or partially convertible preference shares / debentures.
3. Buyers’ credit.
4. Suppliers’ credit.
5. Foreign Currency Convertible Bonds (FCCB).
6. Financial Lease.
7. Foreign Currency Exchangeable Bonds (FCEB) – only under the Approval Route.

Track I

A. Minimum Average Maturity

1. 3 years for ECB up to US $ 50 million or its equivalent.
2. 5 years for ECB beyond US $ 50 million or its equivalent.
3. 5 years for eligible borrowers – Companies in infrastructure sector, Non-Banking Financial Companies (Infrastructure Finance Companies (NBFC-IFC), NBFC-Asset Finance Companies (NBFC-AFC), Holding Companies and Core Investment Companies (CIC)) – irrespective of the amount of borrowing.
4. 5 years for Foreign Currency Convertible Bonds (FCCB) / Foreign Currency Exchangeable Bonds (FCEB) irrespective of the amount of borrowing. The call and put option, if any, for FCCBs shall not be exercisable prior to 5 years.

B. Eligible Borrowers

1. Companies in manufacturing and software development sectors.
2. Shipping and airlines companies.
3. Small Industries Development Bank of India (SIDBI).
4. Units in Special Economic Zones (SEZs).
5. Export Import Bank of India (Exim Bank) (only under the approval route).
6. Companies in infrastructure sector, Non-Banking Financial Companies – Infrastructure Finance Companies (NBFC-IFC), NBFC-Asset Finance Companies (NBFC-AFC), Holding Companies and Core Investment Companies (CIC).

C. Recognised Lenders

1. International banks.
2. International capital markets.
3. Multilateral financial institutions (such as, IFC, ADB, etc.) / regional financial institutions and Government owned (either wholly or partially) financial institutions.
4. Export credit agencies.
5. Suppliers of equipment.
6. Foreign equity holders.
7. Overseas long term investors such as:
   1. Prudentially regulated financial entities;
   2. Pension funds;
   3. Insurance companies;
   4. Sovereign Wealth Funds;
   5. Financial institutions located in International Financial Services Centres in India
8. Overseas branches/subsidiaries of Indian banks.

D. All-in-Cost (AIC)

1. The all-in-cost ceiling is prescribed through a spread over the benchmark as under:
   1. For ECB with minimum average maturity period of 3 to 5 years – 300 basis points per annum over 6 month LIBOR or applicable bench mark for the respective currency.
   2. For ECB with average maturity period of more than 5 years – 450 basis points per annum over 6 months LIBOR or applicable bench mark for the respective currency.
2. Penal interest, if any, for default or breach of covenants should not be more than 2 per cent over and above the contracted rate of interest.

E. Permitted End-Use

1. ECB proceeds can be utilised for capital expenditure in the form of:
   1. Import of capital goods including payment towards import of services, technical know-how and license fees, provided the same are part of these capital goods;
   2. Local sourcing of capital goods;
   3. New project;
   4. Modernisation / expansion of existing units;
   5. Overseas direct investment in Joint ventures (JV) / Wholly owned subsidiaries (WOS);
   6. Acquisition of shares of public sector undertakings at any stage of disinvestment under the disinvestment programme of the Government of India;
   7. Refinancing of existing trade credit raised for import of capital goods;
   8. Payment of capital goods already shipped / imported but unpaid;
   9. Refinancing of existing ECB provided the residual maturity is not reduced.
2. SIDBI can raise ECB only for the purpose of on-lending to the borrowers in the Micro, Small and Medium Enterprises (MSME sector), where MSME sector is as defined under the MSME Development Act, 2006, as amended from time-to-time.
3. Units of SEZ can raise ECB only for their own requirements.
4. Shipping and airlines companies can raise ECB only for import of vessels and aircrafts respectively.
5. ECB proceeds can be used for general corporate purpose (including working capital) provided the ECB is raised from the direct / indirect equity holder or from a group company for a minimum average maturity of 5 years.
6. ECB for the following purposes will be considered only under the approval route:
   1. Import of second hand goods as per the Director General of Foreign Trade (DGFT) guidelines;
   2. On-lending by Exim Bank.

Track II

1. Minimum Average Maturity
   10 years irrespective of the amount.
2. Eligible Borrowers
   1. All entities listed under Track I.
   2. Companies in infrastructure sector.
   3. Holding companies.
   4. Core Investment Companies (CIC).
   5. Real Estate Investment Trusts (REIT) and Infrastructure Investment Trusts (INVIT) coming under the regulatory framework of the Securities and Exchange Board of India (SEBI).
3. Recognised Lenders
   All entities listed under Track I - except overseas branches / subsidiaries of Indian banks.
4. All-in-Cost (AIC)
   1. The maximum spread over the benchmark will be 500 basis points per annum.
   2. Penal interest, if any, for default or breach of covenants should not be more than 2 per cent over and above the contracted rate of interest.
5. Permitted End-Use
   1. The ECB proceeds can be used for all purposes excluding the following:
      1. Real estate activities
      2. Investing in capital market
      3. Using the proceeds for equity investment domestically;
      4. On-lending to other entities with any of the above objectives;
      5. Purchase of land
   2. Holding companies can also use ECB proceeds for providing loans to their infrastructure SPV.

Track III

1. Minimum Average Maturity
   1. 3 years for ECB up to US $ 50 million or its equivalent.
   2. 5 years for ECB beyond US $ 50 million or its equivalent.
   3. 5 years for eligible borrowers – Companies in infrastructure sector, Non-Banking Financial Companies (Infrastructure Finance Companies (NBFC-IFC), NBFC-Asset Finance Companies (NBFC-AFC), Holding Companies and Core Investment Companies (CIC)) – irrespective of the amount of borrowing.
   4. 5 years for Foreign Currency Convertible Bonds (FCCB) / Foreign Currency Exchangeable Bonds (FCEB) irrespective of the amount of borrowing. The call and put option, if any, for FCCBs shall not be exercisable prior to 5 years.
2. B. Eligible Borrowers
   1. All entities listed under Track II.
   2. All Non-Banking Financial Companies (NBFC) coming under the regulatory purview of the Reserve Bank.
   3. NBFC-Micro Finance Institutions (NBFC-MFI), Not for Profit companies registered under the Companies Act, 1956/2013, Societies, trusts and cooperatives (registered under the Societies Registration Act, 1860, Indian Trust Act, 1882 and State-level Cooperative Acts / Multi-level Cooperative Act / State-level mutually aided Cooperative Acts respectively), Non-Government Organizations (NGO) which are engaged in micro finance activities.
   4. Companies engaged in miscellaneous services viz., research and development (R&D), training (other than educational institutes), companies supporting infrastructure, companies providing logistics services.
   5. Developers of Special Economic Zones (SEZ) / National Manufacturing and Investment Zones (NMIZ).
3. Recognized Lenders
   All entities listed under Track I – except overseas branches / subsidiaries of Indian banks.
   NBFC-MFI, other eligible MFI, not for profit companies and NGO, can also raise ECB from overseas organizations and individuals.
4. All-in-Cost (AIC)
   The all-in-cost should be in line with the market conditions.
5. Permitted End-Use
   1. NBFC can use ECB proceeds only for:
      1. On-lending for any activities, including infrastructure sector as permitted by the concerned regulatory department of RBI;
      2. Providing hypothecated loans to domestic entities for acquisition of capital goods / equipment; and
      3. Providing capital goods/equipment to domestic entities by way of lease and hire-purchases.
   2. Developers of SEZ / NMIZ can raise ECB only for providing infrastructure facilities within SEZ / NMIZ.
   3. NBFC-MFI, other eligible MFI, NGO and not for profit companies registered under the Companies Act, 1956/2013 can raise ECB only for on-lending to self-help groups or for micro-credit or for bona fide micro finance activity including capacity building.
   4. For other eligible entities under this track, the ECB proceeds can be used for all purposes excluding the following: -
      1. Real estate activities
      2. Investing in capital market
      3. Using the proceeds for equity investment domestically;
      4. On-lending to other entities with any of the above objectives;
      5. Purchase of land.

Automatic Route

Eligible entities under all the 3 Tracks can raise ECB as under:

1. Up to US $ 750 million or equivalent for the companies in infrastructure and manufacturing sectors, Non-Banking Financial Companies – Infrastructure Finance Companies (NBFC-IFC), NBFC-Asset Finance Companies (NBFC-AFC), Holding Companies and Core Investment Companies;
2. Up to US $ 200 million or equivalent for companies in software development sector;
3. Up to US $ 100 million or equivalent for entities engaged in micro finance activities; and
4. Up to 500 million or equivalent for remaining entities.

Notes:

1. For computation of individual limits under Track III, exchange rate prevailing on the date of agreement has to be considered.
2. If ECB is raised from direct equity holder – ECB liability of the borrower (including all outstanding ECB and the proposed one) towards the foreign equity holder must not be more than four times of the equity contributed by the latter. This ratio will not be applicable if total of all ECB raised by an entity is up to US $ 5 million or equivalent.
3. Although ECB may have been raised under the Automatic Route any draw-down as well as payment of any fees / charges for raising an ECB can happen only after obtaining LRN from RBI.

Approval Route

ECB proposals for amounts exceeding that permitted under the Automatic Route will come under the approval route.

ECB can be raised by way of issue of FCEB only under the approval route.

Notes: -

1. For computation of individual limits under Track III, exchange rate prevailing on the date of agreement has to be considered.
2. If ECB is raised from direct equity holder – ECB liability of the borrower (including all outstanding ECB and the proposed one) towards the foreign equity holder must not be more than seven times of the equity contributed by the latter. This ratio will not be applicable if total of all ECB raised by an entity is up to US $ 5 million or equivalent.

Parking of ECB proceeds abroad: ECB proceeds meant only for foreign currency expenditure can be parked abroad pending utilisation. Till utilisation, these funds can be invested in the following liquid assets (a) Deposits or Certificate of Deposit or other products offered by banks rated not less than AA (-) by Standard and Poor / Fitch IBCA or Aa3 by Moody’s; (b) Treasury bills and other monetary instruments of one year maturity having minimum rating as indicated above and (c) Deposits with overseas branches / subsidiaries of Indian banks abroad.

Parking of ECB proceeds in India: ECB proceeds meant for Rupee expenditure must be repatriated immediately for credit to the Rupee accounts with banks in India. ECB borrowers are also allowed to park ECB proceeds in term deposits with banks in India for a maximum period of 12 months. These term deposits have to be kept in an unencumbered position.

TRADE CREDITS

Trade Credits (TC) refer to credits extended for imports directly by the overseas supplier, bank and financial institution for maturity of less than five years. Trade Credits can be suppliers trade credits or buyer's trade credits.

Supplier's Trade Credit – credit for imports into India extended by the overseas supplier.

Buyer's Trade Credit – loans from overseas bank or financial institution.

1. Amount and Maturity
   Up to US $ 20 million per import transaction under the Automatic Route and beyond US $ 20 million per import transaction under the Approval Route.
   For import of permissible non-capital goods the maturity period is up to one year from the date of shipment or the operating cycle whichever is less. For import of permissible capital goods the maturity period is up to five years from the date of shipment. No roll-over/extension will be permitted beyond the permissible period. The maturity period is the same for transactions under the Automatic Route or the Approval Route.
2. All-in-cost ceilings for Trade Credits is 350 basis points over 6 months LIBOR for the respective currency of credit or applicable benchmark
   The all-in-cost ceilings include arranger fee, upfront fee, management fee, handling/processing charges, out of pocket and legal expenses, if any.

7.4.2 Borrowings Through Loans / Deposits

Indian Companies, other Body Corporates, Indian Proprietary Concerns and Firms can accept fresh deposits from NRI only if the deposit is by way of debit to the NRO account of the lender and the amount deposited does not represent inward remittances or transfer from NRE/FCNR (B) Accounts into the NRO Account of the lender. However, they are permitted to hold and renew on maturity existing deposits received by them on repatriation as well as non-repatriation basis.

Resident Individuals are permitted to avail of interest free loans up to US $ 250,000 from their NRI / PIO relative(s) (as defined under the Companies Act, 2013) subject to certain conditions.

Special permission of the RBI will be required in case where deposits / loans do not fulfil the specified criteria or where the deposits/loans are on repatriation basis in the case of proprietary concerns and firms.

Banks can grant loans without any ceiling but subject to usual margin requirements (in Indian Rupees in India and in foreign currency in India or overseas) against NRE and FCNR(B) deposits either to the depositors or third parties in India or overseas.

Resident entities/companies in India, with prior approval of the Government of India, can issue tax-free, secured, redeemable, non-convertible bonds in Rupees to persons resident outside India and use such borrowed funds for the following purposes:

1. For on lending/re-lending to the infrastructure sector; and
2. For keeping in fixed deposits with banks in India pending utilisation by them for permissible end-uses.

8. PERMISSIBLE TRANSACTIONS BY NON-RESIDENTS

8.1 Investments and Collaborations in India

8.1.1 Foreign Investment in India

The Industrial Policy governs the Foreign Direct Investment in India. Both – FEMA and industrial Policy (including consolidated FDI Policy) – should be read together to have a full picture. Sectoral limits for Foreign Direct Investments and Investments by NRIs are almost at par excepting the sector of Housing and Real Estate Development, and Domestic Airlines. Various avenues and policy for foreign investment are covered in brief. For FDI purposes an 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.

Investment is generally allowed in an Indian company, which in turn does actual business. Branches, liaison offices and project offices can be opened for limited purposes. In SEZs, non-residents can invest as a branch/unit, Joint Venture or a Wholly Owned subsidiary on automatic basis. Investment in a proprietorship, partnership or Association of Persons, is subject to RBI permission in certain cases.

Investment can be made by an incorporated entity, or individuals. Unincorporated entities cannot invest. However, citizens and incorporated entities of Pakistan are permitted to invest under the Foreign Direct Investment Scheme only after obtaining prior permission from the FIPB. However, the Indian Company in which the investment is proposed should not be engaged/should not engage in sectors/activities pertaining to space and atomic energy and sectors/activities prohibited for foreign investment. Citizens and incorporated entities of Bangladesh can invest only after obtaining prior approval of FIPB. Investment can be by way of subscription to the capital of the company or by way of acquisition from existing shareholders.

Investment in India can be made in almost ANY sector without any approval from any authority. This is known as the “Automatic route”. Even for the small list of sectors or investment exceeding permissible sectorial caps, which are not under the “automatic route”, a specific approval can be taken from Secretariat of Industrial Assistance (SIA)/Foreign Investment Promotion Board (FIPB).

Banks are permitted, subject to certain terms and conditions, to open and maintain, without prior approval of the Reserve Bank, 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. Similarly, SEBI authorised Depository Participants, subject to certain terms and conditions, can also open and maintain, without prior approval of the Reserve Bank, Escrow accounts for securities. These facilities are available for both issue of fresh shares to the non-residents as well as transfer of shares from/to the non- residents.

FDI is prohibited in the following activities/sectors:

1. Lottery Business including Government /private lottery, online lotteries, etc.
2. Gambling and Betting including casinos etc.
3. Chit funds
4. Nidhi company
5. Trading in Transferable Development Rights (TDRs)
6. Real Estate Business or Construction of Farm Houses
7. Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
8. Activities / sectors not open to private sector investment e.g., Atomic Energy.

Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities.

List of activities which require prior permission

1. Foreign investment exceeding 24% in case of items which are reserved for MSME.
2. The investment is not within the sectoral guidelines.
3. The investment in certain sectors, though within the sectoral guidelines, requires prior approval of the Government e.g., sectors where an industrial licence is required – cigars and cigarettes manufacture.

In case the foreign investment falls within the above-restricted list or does not fall within the sector specific investment limits prescribed for automatic approval, an approval needs to be obtained from SIA / FIPB by satisfying them about the benefits to India. Powers of SIA / FIPB are discretionary.

Investments can be made in Indian companies’ by way of fully / partly paid equity shares and / or fully / partly paid compulsorily convertible preference shares / debentures only.

Investment in retail trading companies engaged in retail trade of ‘Single Brand’ products can be made up to 100 % under the approval route (after obtaining prior approval from the Secretariat of Industrial Assistance (SIA)) subject to the following conditions: -

1. Products to be sold should be of a ‘Single Brand’ only.
2. Products should be sold under the same brand internationally.
3. ‘Single Brand’ product retailing will cover only products that are branded during manufacturing.

Automatic Route is also available for acquisition of existing shares if the specified conditions are satisfied.

In case of investments under “Automatic Route” intimation has to be made to RBI about details of investors within 30 days of receipt of funds. In all cases (whether under Automatic Route or Approval Route), Form FC-GPR – Part ‘A’ has to be filed with RBI, through the company’s bankers, within 30 days of allotment of securities. A company secretary’s certificate also has to be filed in the specified format confirming fulfilment of various legal requirements. A Chartered Accountant’s or statutory auditor’s certificate indicating the manner of arriving at the price at which the securities have been issued, is also required to be submitted.

Thereafter, every year before July 15, Annual return on Foreign Liabilities and Assets has to be filed directly with the Director, Balance of Payment Statistical Division, RBI detailing all investments by way of direct / portfolio / re-invested earnings / others in the Indian company during the preceding financial year.

Allotment of shares has to be done within 60 days from the date of receipt of inward remittance or debit to NRE / FCNR(B) account, as the case may be.

With a view to promoting ease of reporting of transactions under foreign direct investment, the Reserve Bank of India, under the aegis of the e-Biz project of the Government of India has enabled the filing of the following returns with the Reserve Bank of India viz.

• Advance Remittance Form (ARF) – used by the companies to report the foreign direct investment (FDI) inflow to RBI; and
• FCGPR Form – which a company submits to RBI for reporting the issue of eligible instruments to the overseas investor against the above mentioned FDI inflow.
• FCTRS – which the non-resident has to submit to the AD at the time of transfer of shares / debentures between a resident and a non-resident along with other necessary documents.

The Forms are to be digitally signed. The forms are required to be filed online. The certificates and other documents to be filed will have to be scanned and uploaded together.

8.1.2 Euro Issues, ADR/GDR Issues

• No end-use restrictions except prohibition on investment in stock market & real estate
• A broker can purchase shares on behalf of non-residents and convert the shares so purchased into ADR/GDR
• Two-way fungibility allowed in case of ADR/GDR issues i.e., ADR/GDR can be converted into underlying equity shares in India and shares already issued in India can be converted into ADR/GDR and issued abroad.
• Funds raised can be brought into India or retained abroad for meeting future foreign exchange requirements.

8.1.3 Technical Know-how Fees and royalty

Technical know-how fees and Royalty can be remitted without RBI permission. The lump-sum shall be paid in three instalments as detailed below, unless otherwise stipulated in the approval letter: First 1/3 after the collaboration agreement is filed with the Authorised Dealer in Foreign Exchange. Second 1/3 on delivery of know how documentation. Third and final 1/3 on commencement of commercial production, or four years after the agreement is filed with the Authorized dealer in Foreign Exchange, whichever is earlier. The lumpsum can be paid in more than three instalments, subject to completion of activities as specified above.

Further, royalty on domestic sales and export sales can be paid (net of taxes), without any limitation as to the period of payment. Even wholly owned subsidiaries can make payments for royalty and Know-how payments to their parents. The royalty will be calculated on the basis of the net ex-factory sale price of the product, exclusive of excise duties, minus the cost of the standard bought-out components and the landed cost of imported components, irrespective of the source of procurement, including ocean freight, insurance, custom duties, etc. The payment of royalty will be restricted to the licensed capacity plus 25% in excess thereof for such items requiring industrial licence or on such capacity as specified in the approval letter. This restriction will not apply to items not requiring industrial licence. In case of production in excess of this quantum, prior approval of Government would have to be obtained regarding the terms of payment of royalty in respect of such excess production. The royalty would not be payable beyond the period of the agreement if the orders had not been executed during the period of agreement. However, where the orders themselves took a long time to execute, then the royalty for an order booked during the period of agreement, but executed after the period of agreement, would be payable only after a Chartered Accountant certifies that the orders in fact have been firmly booked and execution began during the period of agreement, and the technical assistance was available on a continuing basis even after the period of agreement. No minimum guaranteed royalty would be allowed.

The lumpsum fees and royalty payable above or under 8.1.4 below can be paid in kind i.e., equity shares can be issued by the concerned company instead of paying the same in foreign exchange.

8.1.4 Royalty Payment for trademarks and brands

Royalty is allowed to be paid to the foreign collaborator under the automatic route for use of his trademarks and brand name even if there is no transfer of technology. For this purpose, royalty on brand name/trade mark shall be paid as a percentage of net sales, viz., gross sales less agents’/dealers’ commission, transport cost, including ocean freight, insurance, duties, taxes and other charges, and cost of raw materials, parts, components imported from the foreign licensor or its subsidiary/affiliated company.

8.1.5 Conversion into equity

An Indian company can issue, subject to certain terms and conditions, equity shares / preference shares under the Approval Route: -

1. By way of conversion of ECB (other than import dues deemed as ECB or Trade Credit), lump sum technical knowhow fees, royalty or any other funds payable by the investee company, remittance of which does not require prior permission of the Government of India or RBI.
2. By way of conversion of monies payable against import of capital goods/machineries/equipment (other than second-hand machineries).
3. Against receipt of money from overseas investor towards pre-operative/pre-incorporation expenses (including payments of rent, etc.).

8.1.6 Registered Foreign Portfolio Investor (RFPIs)

RFPIs such as Pension Funds, Investment Trusts, Asset Management Companies, etc., who have obtained registration from SEBI, are permitted to invest on full repatriation basis under FDI Policy as well as under in the Indian Primary & Secondary Stock Markets (including OTCEI) including in unlisted, dated Government Securities, Treasury Bills, ‘to be listed’ debt securities, Units of Domestic Mutual Funds and commercial paper without any lock-in period.

Limits on Investments are:

1. The total holdings of all RFPIs in any Company will be subject to a ceiling of 24% of its total paid-up capital. The Company concerned can raise this ceiling of 24% up to the sectoral cap/statutory ceiling as applicable.
2. A single RFPI cannot hold more than 10% of the paid-up capital of any Company.
3. A RFPI may trade in all exchange trade derivative contracts approved by SEBI from time-to-time subject to the limits as prescribed in by SEBI.

8.1.7 Foreign Venture Capital Investor (FVCI)

A registered Foreign Venture Capital Investor (FVCI) may, through the Securities and Exchange Board of India, apply to the Reserve Bank for permission to invest in Indian Venture Capital Undertaking (IVCU) or in a VCF or in a scheme floated by such VCFs. The registered FVCI may purchase equity/equity linked instruments/debt/debt instruments, debentures of an IVCU or of a VCF through Initial Public Offer or Private Placement or in units of schemes/funds set up by a VCF. The amount of consideration for investment in VCFs/IVCUs shall be paid out of inward remittance from abroad through normal banking channels or out of funds held in an account maintained with the designated branch of an authorised dealer in India. There is no limit on investments. However, if the FVCI intends to invest in a IVCU which is registered as Trust then the FVCI has to obtain prior permission of the Government. Form FC-GPR – Part ‘A’ has to be filed with RBI, through the company’s bankers, within 30 days of allotment of securities. Form FC-TRS will be applicable in case of transfer of shares between a resident and non-resident.

8.1.8 International Financial Institutions

Multilateral Development Banks, which are specifically permitted by the Government to float rupee bonds in India, are permitted to purchase Government dated securities.

8.1.9 Investments by Non-Resident Employees of Indian Companies, etc.

An Indian Company can issue shares up to 5% of its paid-up capital to its employees or employees of its overseas joint venture or wholly owned subsidiary resident outside India, under a SEBI approved Employees Stock Options Scheme. These shares cannot however be issued to employees who are citizens of Pakistan.

9. SECTOR SPECIFIC GUIDELINES FOR FOREIGN DIRECT INVESTMENT

9.1 Prohibition On Investment In India.

FDI is prohibited in the following activities / sectors:

1. Lottery Business including Government /private lottery, online lotteries, etc.
2. Gambling and Betting including casinos etc.
3. Chit funds
4. Nidhi company
5. Trading in Transferable Development Rights (TDRs)
6. Real Estate Business or Construction of Farm Houses
7. Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
8. Activities / sectors not open to private sector investment e.g. Atomic Energy .

Besides the above Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities.

9.2 In sectors/activities not listed above, FDI is permitted up to 100% on the automatic route subject to applicable laws/sectoral rules/regulations.

Notes:

1. In sectors/activities not listed above or not prohibited or not requiring prior Government approval, FDI is permitted up to 100% under the automatic route subject to sectoral rules/regulations applicable.

2. In sectors where 100% foreign investment is not permitted i.e., where sectoral caps on foreign ownership are prescribed, prior approval of FIPB will be required to obtained if foreign ownership in the Indian company is 50% or more or control is exercised with the power to appoint a majority of the Directors on the Board of the Indian Company in the following circumstances when:

1. At the time of incorporation of the Indian Company.
2. Shares in the Indian Company are transferred from a resident Indian to a non-resident entity through amalgamation, merger, acquisition, etc.

In case of transfer of shares from a resident Indian to a non-resident entity Form FC-TRS has to be filed with the Bank where the transaction takes place.

10. BRANCH / LIAISON / PROJECT OFFICES IN INDIA

10.1 Branch Offices

A body corporate incorporated outside India (including a firm or other association of individuals) can make an application in Form FNC-1 to RBI, Central Office, through a designated Bank in India, for seeking permission to open a Branch Office (BO) in India. The applicant must have a profit making track record during the immediately preceding five financial years in the home country and a net worth of US $ 100,000 or its equivalent as per the latest Audited Balance Sheet or Account Statement certified by a Certified Public Accountant or any Registered Accounts Practitioner. Applicants who do not satisfy the eligibility criteria and are subsidiaries of other companies can submit a Letter of Comfort from their parent company, subject to the condition that the parent company satisfies the eligibility criteria as prescribed above.

Normally, the BO must be engaged in the activity in which the parent company is engaged. However, when a company incorporated outside India and engaged in manufacturing or trading activities set-up a BO, the BO can undertake the following activities:

1. Export & Import of goods – only on wholesale basis.
2. Rendering professional or consultancy services.
3. Carrying out research work, in areas in which the parent company is engaged.
4. Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
5. Representing the parent company in India and acting as buying/selling agent in India.
6. Rendering services in information technology and development of software in India.
7. Rendering technical support to the products supplied by parent/group companies.
8. Foreign airline/shipping company.

The BO cannot undertake retail trading activities of any nature and also cannot carry out manufacturing or processing activities in India, directly or indirectly.

The BO can freely remit profits earned from India, subject to payment of applicable taxes.

Branch Office in SEZ

RBI has granted General Permission to foreign companies for establishing branch/unit in Special Economic Zones (SEZ) to undertake manufacturing and service activities, subject to the following conditions:

1. BO must function in those sectors where 100 per cent FDI is permitted;
2. BO must comply with part XI of the Companies Act, 1956 (Sections 592 to 602);
3. BO must function on a standalone basis.

Branches of Foreign Banks

Foreign banks do not require separate approval under FEMA, for opening branch office in India provided obtained necessary approval under the provisions of the Banking Regulation Act, 1949, from Department of Banking Operations & Development, Reserve Bank.

10.2 Liaison Offices

A body corporate incorporated outside India (including a firm or other association of individuals) can make an application in Form FNC-1 to RBI, Central Office, through a designated Bank in India, for seeking permission to open a Liaison Office (LO) in India. The applicant must have a profit making track record during the immediately preceding three financial years in the home country and a net worth of US $ 50,000 or its equivalent as per the latest Audited Balance Sheet or Account Statement certified by a Certified Public Accountant or any Registered Accounts Practitioner. Permission to set up such offices is initially granted for a period of 3 years and this may be extended from time-to-time.

LO or 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. All its expenses must be met entirely through inward remittances of foreign exchange from the Head Office outside India. LO can undertake the following activities in India:

1. Representing in India the parent company/group companies.
2. Promoting export/import from/to India.
3. Promoting technical/financial collaborations between parent/group companies and companies in India.
4. Acting as a communication channel between the parent company and Indian companies.

Liaison Offices 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 Regulations (DBR), Reserve Bank of India.

The Hon’ble Supreme Court vide its interim orders dated July 4, 2012 and September 14, 2015 has directed RBI not to grant any permission to any foreign law firm, on or after the date of the said interim order, for opening of LO in India No foreign law firm shall be permitted to open any LO in India till further orders/notification in this regard. However, foreign law firms which have been granted permission prior to the date of interim order for opening LOs in India may be allowed to continue provided such permission is still in force.

10.3 UIN & PAN

BO / LO are granted a Unique Identification Number by RBI. They are, upon setting-up office, required to obtain PAN under Income-tax Act, 1961.

10.4 Annual Activity Certificate

Every BO / LO is required to file an Annual Activity Certificate (AAC) at the end of March 31 along with the audited Balance Sheet with RBI, through its Bank as well as with the Director General of Income Tax (International Taxation), 3rd floor, E-2 Block, Pratyakshkar Bhavan, Dr. S. P. Mukherjee Centre, Jawaharlal Nehru Marg, New Delhi 110002, on or before September 30 of that year. The certificate is to be obtained from a Chartered Accountant.

10.5 Project Offices

RBI has granted general permission to those foreign companies to establish Project Offices in India who have secured a contract from an Indian company to execute a project in India, and:

1. The project is funded directly by inward remittance from abroad; or
2. The project is funded by a bilateral or multilateral International Financing Agency; or
3. The project has been cleared by an appropriate authority; or
4. 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 in respect of funding are not met, the foreign entity has to approach the Central Office of RBI for approval to set-up a Project Office (PO) in India.

PO can, subject to certain conditions, open two non-interest bearing foreign currency accounts. Similarly, PO can, subject to certain conditions, make remittances pending winding up/ completion of the project.

10.6 General

Any foreign Non-Government Organisation/Non-Profit Organisation/Foreign Government Body/Department, by whatever name called, can set-up a BO/LO/PO in India only under the Approval Route.

Every BO/LO/PO has to file the following report (in the prescribed format) with the Director General Police (DGP) of the State whether the BO/LO/PO is located:

1. A report within five working days of the LO/BO/PO becoming functional; if there is more than one office of such a foreign entity, in such cases to each of the DGP concerned of the State where it has established office in India.
2. A report has to be filed on annual basis along with a copy of the Annual Activity Certificate/Annual report required to be submitted by LO/BO/PO concerned, as the case may be.
3. A copy of report filed as above has also be filed with the Bank by the LO/BO/PO concerned.

Banks can allow transfer of assets of LO/BO/PO, subject to compliance with the following stipulations by the concerned LO /BO/PO: -

1. The LO/BO must have complied with the operational guidelines such as (i) submission of AAC (up to the current financial year) at regular annual intervals with copies endorsed to DGIT (International Taxation), (ii) obtained PAN from IT Authorities and (iii) got registered with ROC under Companies Act 1956 (now Companies Act 2013). The PO must have complied with the guidelines regarding initial reporting requirements and submission of CA certified annual report indicating project status.
2. They must submit a certificate from their Statutory Auditors furnishing details of assets to be transferred indicating their date of acquisition, original price, depreciation till date, present book value or WDV value and sale consideration to be obtained. The Statutory Auditor must also confirm that the assets were not re-valued after their initial acquisition. The sale consideration must not be more than the book value in each case.
3. The assets must have been acquired by the LO / BO / PO from inward remittances and no intangible assets such as goodwill, pre-operative expenses must be included. Also, no revenue expenses must be capitalised and transferred to JV/WOS.
4. All applicable taxes must have been paid before the transfer of assets.
5. Transfer of assets is permitted only when the foreign entity intends to close their LO/BO/PO operations in India.
6. Amounts received as a result of such transfer of assets can be credited to the bank account of the LO/BO/PO as a permissible credit.

11. INVESTMENTS BY NRI / PIO

NRI can invest in shares and convertible debentures of Indian companies. OCB are barred from investments. They can invest as any other foreign company i.e., additional investment facilities available to NRIs now cannot be exercised through OCB. However, OCB who have existing investments in India, can be granted case-by-case approval by RBI for additional investments.

Foreign investment policy for foreigners applies equally to NRI for repatriable investment. There are only two sectors – Real Estate Development and Domestic Airlines – where investment facilities are different for NRI and foreigners.

NRI investment in foreign exchange is made fully repatriable whereas investments made in Indian Rupees through NRO accounts are non-repatriable. It should be noted that while capital remains non-repatriable, income on the investment can be repatriated. Further, NRI are allowed to remit overseas / transfer to their NRE account up to US $ 1 million per calendar year, subject to payment of tax, out of their funds in NRO account, or sale of non-repatriable investments, this can also be by way of transfer from NRO account to NRE account.

RBI has granted general permission to NRI / PIO to acquire shares from other NRI / PIO.

NRIs from Nepal are also permitted to make direct investments on repatriation basis if they remit funds in foreign exchange.

Portfolio Investment in companies, other than those engaged in the print media sector, listed on Stock Exchanges permitted up to 5% for each NRI subject to overall ceiling of 10% of the company's capital. The company concerned can increase this limit of 10% to 24%.

NRI may invest in exchange traded derivative contracts approved by SEBI from time-to-time out of INR funds held in India on non-repatriation basis subject to the limits prescribed by SEBI.

NRIs are permitted to invest up to 100% in PSE Capital/PSU Bonds, Government Securities (other than Bearer Securities), units of UTI & instruments of domestic Mutual Funds (referred to in Sec. 10 (23D) of the Income-tax Act, 1961).

Purchase of shares by NRIs from existing resident shareholders is permitted under the automatic route if the specified conditions are satisfied.

NRI/PIO can invest on non-repatriation basis in all sectors except plantations, nidhis, chit funds and real estate trading. In such cases restrictions placed on investments made on repatriation basis will also not apply. Investments in Companies, Partnership Firms or Proprietary Concerns can be made up to 100 % of the capital of these entities. These entities can in turn carry on permitted business activity. No prior permission from RBI is required. If they want to invest on repatriation basis they will have to seek prior approval of SIA/FIPB, which may grant it at its discretion.

NRIs can repatriate their investments which were originally made non-repatriation basis under the automatic route if:

1. The original investment was made in foreign exchange under the FDI Scheme, and
2. The sector / activity in which the investment was made is proposed to be converted into repatriable equity is on the automatic route for FDI.

If the above two conditions are not met approval will have to be obtained from FIPB for conversion of non-repatriable equity into repatriable equity.

NRIs are now permitted to credit the sale proceeds of FDI investment in their NRE/FCNR (B) accounts, provided the investment was received by way of remittance from abroad or by way debit to NRE/FCNR (B) account of the investor.

12. ACQUISITION AND TRANSFER OF IMMOVABLE PROPERTY IN INDIA

Immovable property in India can be acquired / transferred by following persons:

Table A

Notes:

1. Persons of Indian Origin do not include citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan.
2. NRI/PIO can borrow money from banks/approved housing finance companies for acquisition/repairs/renovation/ improvement of residential accommodation in India.
3. NRI/PIO can repatriate equivalent to the amount of foreign exchange remitted into India at the time of purchase.
4. Payment by NRI/PIO for purchase of immovable property cannot be by way of foreign currency notes or travellers cheques.
5. NRI/PIO employees of Indian companies in India or their branches outside India can also take loans from their employers for purchasing housing property in India or abroad or for any other purpose other than for utilising in the following activities: -
   1. Chit fund business
   2. Nidhi company
   3. Agricultural or plantation activity or in real estate business or construction of farm houses
   4. Trading in TDR
   5. Investment in capital market including margin trading and derivatives.

Table B

13. REMITTANCES OF PROCEEDS OF ASSETS BY FOREIGN NATIONALS AND ASSETS ACQUIRED BY NRI/PIO BY WAY OF INHERTIANCE / LEGACY / SETTLEMENT

Foreign nationals, NRI / PIO can remit up to US $ 1 million per financial year out of balances held in NRO accounts/out of sale proceeds of assets/assets acquired by him by way of inheritance/legacy/settlement. As in the case of inheritance/legacy, remittance in case of settlement will be permitted only after the death of the settler. The person making the remittance will have to obtain a Chartered Accountants certificate and/or give an undertaking in the prescribed form, as the case may be.

This facility is not available to citizens of Pakistan, Bangladesh, Sri Lanka, China, Afghanistan, Iran, Nepal and Bhutan.

14. TEMPORARY FOREIGN CURRENCY ACCOUNTS IN INDIA

Organizers of International Seminars, Conferences, Conventions, etc., who have been permitted by the concerned Administrative Ministry of the Government of India to hold such seminars, etc. are permitted to open temporary foreign currency accounts in India. The account is to be operated for receipt of delegate fees from abroad and payment of expenses including payment to special invitees from abroad. The said account has to be closed immediately after the conference/event is over.

DIPP time schedule

DIPP has put the following Time schedule for processing proposals under NRI / EOU / RT schemes

Investments Facilities in Brief