FEMA -Direct investment Outside India – Economic, Business and Commercial Laws Important Questions

Question 1.
An Indian company engaged in the financial sector is interested in making an investment in the banking business abroad. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [June 2010 (l Mark)]
Answer:
As per Regulation 6(1) of the FEM (Transfer or Issue of Foreign Securities) Regulation, 2004, an Indian Party may make an investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS) subject to conditions specified in Regulation 6(2).

Thus, an Indian company can make direct investment in a joint venture outside India subject to compliance with the above-stated provisions.

Question 2.
An Indian resident wants to purchase foreign securities by making | remittances from his resident foreign currency (RFC) account. Advice with f reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [June 2010 (1 Mark)]
Answer:
As per Regulation 4 of FEM (Transfer or Issue of Foreign Securities) Regulations, 2004, a person resident in India may purchase foreign security out of funds held in RFC Account.

Thus, an Indian resident can purchase foreign securities by making remittances from his RFC Account.

Question 3.
Shyam, an Indian resident, wishes to acquire qualification shares for becoming a director of a company outside India and the consideration is the US $ 30,000. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [Dec 2011 (1 Mark)]
Answer:
As per Regulation 24 of the FEM (Transfer or Issue of Foreign Securities) Regulations, 2004, a person resident in India being individual may acquire foreign security as qualification shares issued by an entity incorporated outside India for holding the post of a director in the entity.

Conditions:

1. The extent of acquiring the qualification shares is as per the law of the host country where the entity is located.
2. The limit of remittance for acquiring such qualification shares shall be within the overall ceiling prescribed for the resident individuals under the Liberalized Remittance Scheme in force at the time of acquisition.

Thus, Shyam can acquire foreign securities as qualification shares issued by a company incorporated outside India for holding the position of a director subject to compliance with the above-stated provisions.

Question 4.
Aadarsh Education Society, engaged in the education sector, intends to make an investment in the education sector in a joint venture in the USA. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [June 2012 (1 Mark)]
Answer:
As per Regulation 9A of the FEM (Transfer or Issue of Foreign Security) Regulations, 2004, Registered Trusts and Societies engaged in the manufacturing/educational sector satisfying the criteria as per Schedule III may invest in the same sector in JV/WOS outside India with the prior approval of the RBI.

Thus, the Aadarsh Education Society, engaged in the education sector can make the investment in the education sector in a joint venture in the USA by taking prior approval of RBI.

Question 5.
Rajiv, a person resident in India, wishes to acquire foreign securities as qualification shares issued by a company incorporated outside India for holding the position of a director in the company. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [Dec 2012 (1 Mark)]
Answer:
As per Regulation 24 of the FEM (Transfer or Issue of Foreign Securities) Regulations, 2004, a person resident in India being individual may acquire foreign security as qualification shares issued by an entity incorporated outside India for holding the post of a director in the entity.

Conditions:

1. The extent of acquiring the qualification shares is as per the law of the host country where the entity is located.
2. The limit of remittance for acquiring such qualification shares shall be within the overall ceiling prescribed for the resident individuals under the Liberalized Remittance Scheme in force at the time of acquisition.

Thus, Shyam can acquire foreign securities as qualification shares issued by a company incorporated outside India for holding the position of a director subject to compliance with the above-stated provisions.

Question 6.
Ashok, a person resident in India, has been offered bonus shares of the value of US $ 20,000 by a company incorporated outside India. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [Dec. 2012 (1 Mark)}
Answer:
As per Regulation 4 of the FEM (Transfer or Issue of Foreign Security) Regulations, 2004, a person resident in India may acquire bonus shares on the foreign securities.

Thus, Ashok may acquire bonus shares of the value of US$ 20,000 of a company incorporated outside India.

Question 7.
An Indian company intends to make direct investment in a joint venture outside India. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [Dec. 2012 (1 Mark)]
Answer:
As per Regulation 6(1) of the FEM (Transfer or Issue of Foreign Security) Regulations, 2004, an Indian Party may make an investment in Joint j Ventures (JV)/Wholly Owned Subsidiaries (WOS) subject to conditions j specified in Regulation 6(2).

Thus, an Indian company can make direct investment in a joint venture j outside India subject to compliance with the above-stated provisions.

Question 8.
Zenith Ltd., a foreign company is interested in purchasing its shares issued to some of its employees, who are residents in India, under the ESOP scheme. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [June 2013 (1 Mark)]
Answer:
As per the RBI circular, foreign companies are permitted to repurchase the shares issued to residents in India under any ESOP Scheme provided:

1. The shares were issued in accordance with provisions of FEMA.
2. The shares are being repurchased in terms of the initial offer document.
3. An annual return is submitted through the Authorized Bank giving details of remittances/beneficiaries, etc.

Thus, Zenith Ltd., a foreign company can re-purchase the shares issued to its employees; who are residents in India, under the ESOP scheme.

Question 9.
What is direct investment outside India? Discuss the regulations in respect of acquisition and transfer of immovable property outside India. [Dec. 2016 (7 Marks)]
Answer:
Direct investment outside India means investments, either under the Automatic Route or the Approval Route, by way of contribution to the capital or subscription to the Memorandum of a foreign entity or by way of purchase of existing shares of a foreign entity either by market purchase or private placement or through the stock exchange, signifying a long-term interest in the foreign entity (JV or WOS).

As per Section 6(4) of the Foreign Exchange Management Act, 1999, a person resident in India may hold, own, transfer or invest in foreign currency, foreign 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.

Provisions relating to the transfer of immovable property outside India are contained in the FEM (Acquisition and Transfer of Immovable Property Outside India) Regulations, 2015.

Restriction on acquisition or transfer of immovable property outside India [Regulation 3]: No person resident in India shall acquire or transfer any immovable property situated outside India without general or special permission of the RBI.

Acquisition and transfer of immovable property outside India [Regulation 5]:
1. A person resident in India may acquire immovable property outside India
(a) By way of gift or inheritance from a person referred to in Section 6(4) of the Act, or referred to in Regulation 4(b);

(b) By way of purchase out of foreign exchange held in Resident Foreign Currency (RFC) account maintained in accordance with the FEM (Foreign Currency Accounts by a Person Resident in India) Regulations, 2015;

(c) Jointly with a relative who is a person resident outside India, provided there is no outflow of funds from India.
1. A person resident in India may acquire immovable property outside India, by way of inheritance or gift from a person resident in India who has acquired such property in accordance with the foreign exchange provisions in force at the time of such acquisition.

2. A company incorporated in India having overseas offices may acquire immovable property outside India for its business and for residential purposes of its staff, in accordance with the direction issued by the Reserve Bank of India from time to time.

Explanation: ‘Relative’ in relation to an individual means husband, wife, brother or sister, or any lineal ascendant or descendant of that individual.

Question 10.
What are the obligations of the Indian Party which have made direct investment outside India? [Dec. 2018 (4 Marks)]
Answer:
An Indian Party which has made direct investment outside India is required to comply with the following:
1. Receive share certificates or any other documentary evidence of investment in the foreign JV/WOS as evidence of investment and submit the same to the designated AD within 6 months.

2. Repatriate to India, all dues receivable from the foreign JV/WOS, like dividend, royalty, technical fees, etc.

3. Submit to the RBI through the designated Authorized Dealer, every year, an Annual Performance Report in Part III of Form ODI in respect of each JV or WOS outside India set up or acquired by the Indian party.

4. Report the details of the decisions taken by a JV/WOS regarding diversification of its activities/setting up of step down subsidiaries/ alteration in its shareholding pattern within 30 days of the approval of those decisions by the competent authority concerned of such JV/ WOS in terms of the local laws of the host country. These are also to be included in the relevant Annual Performance Report.

5. In case of disinvestment, sale proceeds of shares/securities are to be repatriated to India immediately on receipt thereof and in any case not later than 90 days from the date of sale of the shares/securities, and documentary evidence to this effect is to be submitted to the RBI through the designated Authorized Dealer.

6. Submit an Annual Performance Report (APR) in Form ODI Part III to the RBI by 30th of June every year in respect of each Joint Venture (JV)/Wholly Owned Subsidiary (WOS) outside India set up or acquired by the Indian Party/Resident Individual.

Question 11.
State the sources within which the Indian mutual funds registered with SEBI are permitted to invest in overseas direct investment. [June 2019 (5 Marks)]
Answer:
As per Regulation 6C of the FEM (Transfer or Issue of Foreign j Security) Regulations, 2004, Mutual funds registered with the SEBI may 1 invest within specified limits, in the shares or rated bonds/fixed income securities of an overseas company listed on a recognized stock exchange or in exchange-traded funds or in other securities as may be stipulated by j the RBI from time to time.

Every transaction relating to the purchase and sale of foreign security by mutual funds shall be routed through the designated branch of an authorized dealer in India.

Indian Mutual Funds registered with SEBI are permitted to invest within the overall cap of US$ 7 billion in:

• ADR/GDR of the Indian and foreign companies.
• Equity of overseas companies listed on recognized overseas stock ex-changes; initial and follow on public offerings for listing at recognized overseas stock exchanges.
• Foreign debt securities- short term as well as long term with rating not below investment grade – in the countries with fully convertible currencies.
• Money market investments not below investment grade; repost where the counterparty is not below investment grade.
• Government securities where countries are not rated below investment grade.
• Derivatives traded on recognized stock exchanges overseas only for hedging and portfolio balancing with underlying as securities.
• Short-term deposits with banks overseas where the issuer is rated not below investment grade.
• Units/securities issued by overseas Mutual Funds/Unit Trusts registered with overseas regulators.

Question 12.
What is the eligibility criteria for overseas investment by proprietorship concerns and registered trust [Dec 2019 (4 marks)]
Answer:
Proprietorship Concerns: The proposal for overseas direct investment (or financial commitment), by a proprietorship concern/unregistered partnership firm in India, are to be considered by the Reserve Bank under the approval route are subject to the following terms and conditions:
(a) The proprietorship concern/unregistered partnership firm in India is classified as ‘Status Holder’ as per the Foreign Trade Policy issued by the Ministry of Commerce and Industry, Government of India from time to time.

(b) The proprietorship concern/unregistered partnership firm in India has a proven track record, ie., the export outstanding does not exceed 10% of the average export realization of the preceding 3 years and consistently high export performance.

(c) The Authorised Dealer bank is satisfied that the proprietorship concern/ unregistered partnership firm in India is KYC compliant, engaged in the proposed business, and has turnover as indicated.

(d) The proprietorship concern/unregistered partnership firm in India has not come under the adverse notice of any Government agency like the Directorate of Enforcement, Central Bureau of Investigation, Income-tax Department, etc., 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.

(e) The amount of proposed investment (or financial commitment) outside India does not exceed 10% of the average of last 3 years export realization or 200% of the net owned funds of the proprietorship concern/ unregistered partnership firm in India, whichever is lower. Registered Trusts: Registered Trusts engaged in the educational/hospital sector are allowed to make an investment (or financial commitment) in the same sector(s) in a JV/WOS outside India, with the prior approval of the Reserve Bank.

Eligibility Criteria for Trust:

• The Trust should be registered under the Indian Trusts Act, 1882.
• The Trust deed permits the proposed investment overseas.
• The proposed investment should be approved by the trustee.
• The AD Category -1 bank is satisfied that the Trust is KYC (Know Your Customer) compliant and is engaged in a bona fide activity.
• The Trust has been in existence at least for a period of 3 years.
• The Trust has not come under the adverse notice of any Regulatory/ Enforcement agency like the Directorate of Enforcement, Central Bureau of Investigation (CBI), etc.