ISSUE OF UNSECURED NON-CONVERTIBLE DEBENTURES TO A PRIVATE SECTOR BANK

Facts in Brief:

A Company issue Unsecured Unlisted Non-Convertible Debentures of maturity of three years to private sector bank against the Corporate Guarantee of its holding Company. The Company will appoint a Debenture Trustee and will execute a Debenture Trust Deed.

Query: Whether raising money from a private sector bank by way of issue of unsecured non-convertible debentures would be treated as Deposits?

Relevant Provisions:

Before replying to the query, it is pertinent to understand and analyze the position under the provisions of Companies Act, 2013.

Debenture:

Section 2(30) provide inclusive definition of debentures as follow:

“Debenture include debenture stock, bonds, or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.

The debenture is a note of thanks, a certificate issued by a company to lenders that offer loan to the company in exchange of the fixed rate of interest for a long term. These bonds bear the seal of the company and contain the details of the contract for the repayment of the principal sum on a date after the time period of the debentures with the payment of interest at a rate which is also specified in the certificate. The obligations are the responsibility of the company and are reflected as such in the financial statements of the company.

In other words we can say Debenture is a statement by the company that the company will pay a certain some of money on a given day, and will also pay periodical interest at certain time and at certain place.

Thus in term debenture simply means a document acknowledging a loan made to the company and providing for the payment of interest on the sum borrowed until the debenture is redeemed, i.e., repayment of principle sum.

Deposit:

Section 2(31) of the Companies Act defines deposit as under “deposit” includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India;

By reading of the definition of debentures and deposits its seems that debentures and deposits both are borrowing and all borrowing or loan or receipts of money or in any other form are deposit except excluded categories. Further borrowing from a bank is excluded from the ambit of deposit vide deposit rules 2(1)(c)(iii).

Refer to Section 73 of the Companies Act, 2013 “Prohibition on acceptance of Deposits from Public”

and

Rule 2(1)(c)(iii) and Rule 2(1)(c)(vii) of Companies (Acceptance of Deposits) Rules, 2014,

“Deposit” includes any receipt of money by way of deposit or loan or in any other form, by a company, but it does not include:

·Any amount received as a loan or facility from any banking company or from the State Bank of India or any of its subsidiary banks or from a banking institution notified by the Central Government under section 51 of the Banking Regulation Act, 1949 (10 of 1949), or a corresponding new bank as defined in clause (d) of section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970) or in clause (b) of section (2) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980) , or from a co-operative bank as defined in clause (b-ii) of section 2 of the Reserve Bank of India Act, 1934 (2 of 1934) (sub-rule iii of rule 2 (1) (c) of the Companies (Acceptance of Deposits) Rules, 2014);

·Any amount received and held pursuant to an offer made in accordance with the provisions of the Act towards subscription to any securities, including share application money or advance towards allotment of securities pending allotment, so long as such amount is appropriated only against the amount due on allotment of the securities applied for. {sub-rule 7 of rule 2 (1) (c) of Companies(Acceptance of Deposits) Rules, 2014}.

   Further also we refer to Section 58A of the Companies Act, 1956 “Deposits not to be invited without issuing an advertisement” and Rule 2(b)(ii), 2(b)(vii) and 2(b)(x) of Companies (Acceptance of Deposits) Rules, 1975,

·any amount received as a loan from any banking company or from the State Bank of India or any of its subsidiary banks or from a banking institution notified by the Central Government under section 51 of the Banking Regulation Act, 1949 (10 of 1949), or a corresponding new bank as defined in clause (d) of section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or from a co-operative bank as defined in clause (b-ii) of section 2 of the Reserve Bank of India Act, 1934 (2 of 1934); {sub rule ii of rule 2(b) of Companies(Acceptance of Deposits) Rules, 1975}.

In the current scenario, the money raised from the bank is a sort of a debt by issuing debentures which although is not secured by furnishing any asset of the company as security, but secured by providing Corporate Guarantee by the promoters of the Company. Thus the raising of the money is protected from being treated as deposit by operation of rule 2(1) (c) iii of the Companies (Acceptance of Deposits) Rules, 2014.

Moreover Section 73 and Section 76 talks about prohibition of deposits from public and acceptance of deposits from public respectively. The underlying principle behind these Sections is to protect the public who are depositing the marginal saving from their regular income into the Company by way of deposits. These are not to protect the bank whose principal business is to accept deposits and grant loans. It is a regular feature of the Bank to provide loan and other facility as its regular business activities as per the prescribed terms and condition in accordance with the guidelines and regulations issued by the Reserve Bank of India for the purpose of lending amount. Therefore bank could not be treated as public for the purpose of section 73 to section 76 of Companies Act 2013. Accordingly the any amount received as a loan or facility from any banking company or from the State Bank of India or any of its subsidiary banks or from a banking institution notified by the Central Government has been excluded from the ambit of deposits vide rule 2(1) (c) iii of the Companies (Acceptance of Deposits) Rules, 2014.

Further, since the money raised shall be in form of securities which shall be issued by the Company pursuant to an offer made in accordance with the provisions of the Act towards subscription to any securities shall keep such an issue out of the ambit of being treated as Deposit. Moreover, it is clear as per the definition of Securities as laid down under Section 2 (h) of Securities Contracts (Regulation) Act, 1956 that “securities” include— (i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; (ia) derivative; (ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes; (ic) security receipt as defined in clause (zg) of section 2 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; (id) units or any other such instrument issued to the investors under any mutual fund scheme; (ii) Government securities; (iia) such other instruments as may be declared by the Central Government to be securities; and (iii) rights or interest in securities.

As per the definition of securities, it includes debentures. Debentures are transferable and tradable/marketable also, if get listed. In contrary to the receipts which are to be issued against deposits which is never be treated as securities and neither transferable nor tradable and not eligible for being listed as securities with a recognized stock exchanges because only a security can be listed on stock exchanges, not deposits.

Inferences Drawn

Therefore in light of the above observations and examination of the provisions of the Companies Act, 2013 and the rules framed there under, we are of the opinion that the amount as proposed to be borrowed by the Company shall not be considered as deposit as per the provisions of the Companies Act, 2013.

Regards

CS Ravi Bhushan Kumar

Partner

SR & Associates

Noida

9990339200

Cs.ravibhushan@gmail.com

Striking off of name of a company under Companies Act 2013

Ministry of Corporate Affairs (MCA) has recently announced Form STK-2 for removal of name/ Strike off of Company. This is is not a alternative to winding up of a Company but yes it is a simple process of strike off name of a company from the register of the Registrar subject to statutory criterion specified under the section 248 of the Companies Act , 2013. This has replaced Section 560 (Form FTE) of erstwhile Companies Act, 1956.

A. Following Companies can not be removed under these provisions:
i. Listed Companies
ii. Companies registered under section 8
iii. Companies having charges which are pending for satisfaction
iv. Companies whose application for Compounding is pending
v. Companies against which any prosecution for an offence is pending in any court
vi. Vanishing Companies
vii. Companies that have been delisted due to non-compliance of listing regulations or listing agreement or any other statutory laws;
viii. Companies where inspection or investigation is ordered and being carried out or actions or such order are yet to be taken up or were complete but prosecutions arising out of such inspection or investigation are pending in the court.
ix. Companies which have accepted public deposits which are either outstanding or the company is in default in repayment of the same;
x. Companies where notices under section 234 of CA 1956 or 206 or 207 of the Act, 2016 have been issued by the Registrar or Inspector and reply thereto is pending or report under section 208 is pending or where any prosecution arising out of such inquiry or scrutiny, if any, is pending with the court.

B. Companies which can file form:
(i.) Any active company; or
(ii.) Dormant company.

C. Removal of company name from the register of companies:
The Registrar of Companies has the following powers to remove name of company from the register of companies, if the Registrar has reasonable cause to believe that:
i. A company has failed to commence its business within one year of its incorporation. OR
ii. A company is not carrying on any business or operation for a period of two immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant company under section 455.
D. Form STK-2:
The process for removing a company name from the register of companies can also be initiated by the company by filing Form STK-2 (fee Rs. 5,000/-). 6. Attachment – STK-2:
1.     Indemnity Bond from Every Director in Form STK-3
2.     Statement of Accounts certified by CA comprising assets and liabilities of a company made upto a day, not exceeding 30 days from the date of application.
3.     An Affidavit from every Director in Form STK-4
4.     Copy of Special Resolution duly signed by each Director
5.     Statement regarding pending litigations, if any, involving Company.

Certification- STK-2:
E-form STK-2 shall be signed by a Director. Director should be [3]authorized by the Board for such purpose. In case director don’t have DSC, Physical copy of STK-2 manually signed by the director authorized shall be attached with the form STK-2.

Certification:
The e-form STK-2 shall be certified by Company Secretary in Whole time Practice or Chartered Accountant or Cost Accountant in whole time practice.

Place of application on Website:
The Company will place the copy of application on its website till the disposal of the application. . Rule 7(1).

Undertaking from Director – Discharge of
Liability:
The Registrar, if feel necessary, obtain necessary undertakings from the managing director, director or other persons in charge of the management of the company that the sufficient provision has been made for the realization of all amount due to the company and for the payment or discharge of its liabilities and obligations by the company.
Declaration from any Director:
The directors will give following below mentioned declarations:
· The application has been in accordance with the conditions mentioned under sub section (1) and (2) of section 248 and sub section (1) of section 249:
·  There is no inspection or investigation ordered and carried out or yet to be carried out or being carried out against the company and where inspection or investigation have been carried out , no prosecution pending in any court arising out of such inspection or investigation;
·  The company is neither having any public deposit which are outstanding nor the company is in default in its repayment or interest thereon ;
· The company does not have any outstanding loans, secured or unsecured;
·  The company does not have any dues towards income tax .VAT, excise duty, service tax or any other duty, by whatever name called, payable to the central government or state government, statutory authority or local authority;
· All other liabilities of the company have been settled or discharged or extinguished;
·  All the requirements of the act and rules made thereunder relating to removing the name of the company from the register of companies and matters incidental or supplemental thereto have been complied with;
·  To the best of my knowledge and belief, the information given in this application and its attachment is correct and complete;
·   the requisite fee has been paid.

Issue notice of Striking off and dissolution of Companies:
If no objections received then ROC shall issue a notice u/s 248(5) of striking off of Company and publish the same in official gazette in form No. STK-7. The copy of notice shall also be placed on the official website of the MCA.

Other Provisions:
Liability of Directors:
The liability, if any, of every director, manager or other officer who was exercising any power of management, and of every member of the company dissolved under sub-section (5), shall continue and may be enforced as if the company had not been dissolved.

Effect of Strike off:
It shall on and from the date mentioned in the notice under sub-section (5) of section 248 cease to operate as a company and the Certificate of Incorporation issued to it shall be deemed to have been cancelled from such date except for the purpose of realising the amount due to the company and for the payment or discharge of the liabilities or obligations of the company.
Appeal to Tribunal:
Any person aggrieved by an order of the Registrar, notifying a company as dissolved under section 248, may file an appeal to the Tribunal (NCLT) within a period of three years from the date of the order of the Registrar and if the Tribunal is of the opinion that the removal of the name of the company from the register of companies is not justified in view of the absence of any of the grounds on which the order was passed by the Registrar, it may order restoration of the name of the company in the register of companies.
Conclusion:

This form does not make mandatory for company to have statutory annual filings done for strike off of companies. But since the forms is Non-STP (i.e. through approval route) the ROC concerned would definitely ask and peruse all the filings and compliances made by the company.

CS Ravi Bhushan Kumar
9990339200
cs.ravibhushan@gmail.com

FREQUENTLY ASKED QUESTIONS UNDER FEMA

I. Foreign Investments

Q 1: How can an Indian company receive foreign investment?

Answer: The routes under which foreign investment can be made is as under:

1. Automatic Route: Foreign Investment is allowed under the automatic route without prior approval of the Government or the Reserve Bank of India, in all activities/ sectors as specified in the Annex B of Schedule 1 to Notification No. FEMA 20.
2. Government Route: Foreign investment in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance. Application can be made in Form FC-IL, which can be downloaded from http://www.dipp.gov.in. Plain paper applications carrying all relevant details are also accepted. No fee is payable.

Q 2: What are the instruments for receiving foreign investment in an Indian company?

Answer: An Indian Company can receive foreign investment by issue of

1. Equity shares issued in accordance with the provisions of the Companies Act, 2013;
2. Fully and mandatorily convertible preference shares, and fully and mandatorily convertible debentures. The price/ conversion formula of convertible instruments should be determined upfront at the time of issue of the instruments and should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with FEMA 20
3. Partly paid equity shares and warrants issued by an Indian company in accordance with the provision of the Companies Act, 2013 and the SEBI guidelines, as applicable, The pricing and receipt of balance consideration shall be as stipulated in terms of A.P.(DIR Series) Circular No.3 dated July 14, 2014 as modified from time to time.

The above shall be known as “FDI compliant instruments” and can contain an optionality clause subject to a minimum lock-in period of one year or as prescribed for the specific sector, whichever is higher, but without any option or right to exit at an assured price.

Non-convertible/ optionally convertible/ partially convertible preference shares issued as on and up to April 30, 2007 and optionally convertible/ partially convertible debentures issued up to June 7, 2007 till their original maturity are reckoned to be FDI compliant instruments. Non-convertible/ optionally convertible/ partially convertible preference shares issued after April 30, 2007 and optionally convertible/ partially convertible debentures issued after June 7, 2007 shall be treated as debt and shall require conforming to External Commercial Borrowings guidelines regulated under Foreign Exchange Management (Borrowing and Lending in Foreign Exchange Regulations), 2000, as amended from time to time.

Q 3: Whether extension of compulsorily convertible preference shares (CCPS) or compulsorily convertible debentures (CCDs) requires RBI approval?

Answer: Tenor of convertible instruments will be guided by the instructions framed under the Companies Act, 2013 and the rules framed thereunder. However, the investee company should ensure that the price/ conversion formula of convertible capital instruments is determined upfront at the time of issue of the instruments. The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the extant FEMA regulations.

Q 4: What is a convertible Note?

Answer: A Convertible Note is an instrument issued by a start-up company evidencing receipt of money initially as debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of such startup company, within a period not exceeding five years from the date of issue of the convertible note, upon occurrence of specified events as per the other terms and conditions agreed to and indicated in the instrument.

Q 5: Who can invest in a convertible Note and what are the instructions in this regard?

Answer: A person resident outside India (other than an individual who is citizen of Pakistan or Bangladesh or an entity which is registered/ incorporated in Pakistan or Bangladesh), may purchase convertible notes issued by an Indian start-up company for an amount of twenty five lakh rupees or more in a single tranche. A start-up company engaged in a sector where foreign investment requires Government approval may issue convertible notes to a non-resident only with approval of the Government. The amount of consideration should be received by inward remittance through banking channels or by debit to the NRE/ FCNR (B)/ Escrow account maintained by the person concerned.

Q 6: What are the modes of payment allowed for receiving Foreign Direct Investment in an Indian company?

Answer: An Indian company issuing shares/ convertible debentures to a person resident outside India shall receive the amount of consideration by:

1. inward remittance through normal banking channels;
2. debit to NRE/ FCNR (B) account of a person concerned maintained with an AD Category I bank;
3. debit to non-interest bearing Escrow account in Indian Rupees in India which is opened with the approval from AD Category – I bank and is maintained with the AD Category I bank on behalf of residents and non-residents towards payment of share purchase consideration;
4. conversion of royalty/ lump sum/ technical know-how fee due for payment or conversion of ECB;
5. conversion of pre-incorporation/ pre-operative expenses incurred by the a non-resident entity up to a limit of five percent of its capital or USD 500,000 whichever is less;
6. conversion of import payables/ pre incorporation expenses/ can be treated as consideration for issue of shares with the approval of FIPB;
7. against any other funds payable to a person resident outside India, the remittance of which does not require the prior approval of the Reserve Bank or the Government of India: and
8. Swap of capital instruments, provided where the Indian investee company is engaged in a Government route sector, prior Government approval shall be required

If the shares or convertible debentures are not issued within 180 days from the date of receipt of the inward remittance or date of debit to NRE/ FCNR (B)/ Escrow account, the amount shall be refunded. Further, Reserve Bank may on an application made to it and for sufficient reasons permit an Indian Company to refund/ allot shares for the amount of consideration received towards issue of security if such amount is outstanding beyond the period of 180 days from the date of receipt.

Q 7: Which are the sectors where foreign investment is prohibited?

Answer: Foreign investment is prohibited in the following 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. (I) Atomic energy and (II) Railway operations (other than permitted activities mentioned in entry 18 of Annex B).

Note: 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.

Q 8: What are the guidelines for transfer of existing shares from non-residents to residents or residents to non-residents?

Answer: The term ‘transfer’ is defined under FEMA, 1999 as "sale, purchase, acquisition, mortgage, pledge, gift, loan or any other form of transfer of right, possession or lien” {Section 2 (ze) of FEMA, 1999}.

The following share transfers are allowed without the prior approval of the Reserve Bank of India subject to the conditions laid down in FEMA 20:

1. Transfer by way of sale or gift between a person resident outside India (not being a NRI or an OCB) and any person resident outside India;
   
   Prior Government approval shall be obtained for any transfer in case the company is engaged in a sector which requires Government approval.
2. Transfer of shares by way of sale or gift by a NRI to any NRI;
   
   Prior Government approval shall be obtained for any transfer in case the company is engaged in a sector which requires Government approval
3. Transfer by way of gift by a person resident outside India to a resident;
4. Transfer by way of sale on a recognized stock exchange by a person resident outside India;
5. Transfer by way of sale or gift by a resident to a person outside India subject to conditions prescribed in Regulation 10 of FEMA 20;

Q 9: What if the transfer of shares from resident to non-resident does not fall under the above category?

Answer: The cases have to be approved by Government of India or the Reserve Bank

(a) Transfer of Shares by Resident which requires Government approval

(1) Transfer of shares of companies engaged in sector falling under the Government Route.

(2) Transfer of shares resulting in foreign investments in the Indian company, breaching the sectoral cap applicable.

(b) Transfer of shares requiring prior permission of the Reserve Bank

(1) A person resident in India, who intends to transfer any security, by way of gift to a person resident outside India, has to obtain prior approval from the Reserve Bank.

(2) Any other case not covered by General Permission.

Q 10: What is the method of payment and remittance/ credit of sale proceeds in case of transfer of shares between resident and non-resident?

Answer:

1. The sale consideration in respect of the shares purchased by a person resident outside India shall be remitted to India through normal banking channels.
2. In case the buyer is a Foreign Institutional Investor (FII) / Foreign Portfolio Investor (FPI), payment can be made by debit to its Special Non-Resident Rupee Account.
3. In case the buyer is an NRI, the payment shall be remitted to India through normal banking channel or by way of debit to his NRE/FCNR (B) accounts. If the shares are acquired on non-repatriation basis by NRI, the consideration can also be paid by debit to his NRO account.
4. The sale proceeds of shares (net of taxes) sold by a person resident outside India) may be remitted outside India.
5. In case of FII/ FPI the sale proceeds may be credited to its special Non-Resident Rupee Account.
6. In case of NRI, if the shares sold were held on repatriation basis, the sale proceeds (net of taxes) may be credited to his NRE/ FCNR (B) accounts and if the shares sold were held on non-repatriation basis, the sale proceeds should be credited only to his NRO account subject to payment of taxes.
7. The sale proceeds of shares (net of taxes) sold by an erstwhile OCB may be remitted outside India directly if the shares were held on repatriation basis and if the shares sold were held on non-repatriation basis, the sale proceeds may be credited to its NRO (Current) Account subject to payment of taxes, except in the case of erstwhile OCBs whose accounts have been blocked by Reserve Bank.

Q 11: Are the investments and profits earned in India repatriable?

Answer: All foreign investments are repatriable (net of applicable taxes) except in cases where the investment is made or held on non-repatriation basis or where the sectoral condition specifically mentions non-repatriation.

Further, dividends/ profits (net of applicable taxes), on foreign investments, being current income can be remitted outside India through an Authorised Dealer bank.

Q 12: What are the guidelines on issue and valuation of shares in case of existing companies?

Answer: The pricing shall be as per the following guidelines:

(1) The price of shares issued by an Indian company or transferred from a person resident in India to a person resident outside India shall not be less than:

1. the price worked out in accordance with the relevant SEBI guidelines in case of a listed Indian company;
2. the valuation of capital instruments done as per any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a Chartered Accountant or a SEBI registered Merchant Banker, in case of an unlisted Indian Company.

Note: in case of convertible capital instruments, the price/conversion formula of the instrument should be determined upfront at the time of issue of the instrument. The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the extant FEMA regulations.

(2) The price of shares transferred by a person resident outside India to a person resident in India shall not exceed:

1. the price worked out in accordance with the relevant SEBI guidelines in case of a listed Indian company;
2. the valuation of capital instruments done as per any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a Chartered Accountant or a SEBI registered Merchant Banker, in case of an unlisted Indian Company.

Note: The guiding principle would be that the person resident outside India is not guaranteed any assured exit price at the time of making such investment/ agreement and shall exit at the price prevailing at the time of exit.

(3) In case of swap of shares, subject to the condition that irrespective of the amount, valuation involved in the swap arrangement will have to be made by a Merchant Banker registered with SEBI or an Investment Banker outside India registered with the appropriate regulatory authority in the host country.

(4) Where shares in an Indian company are issued to a person resident outside India in compliance with the provisions of the Companies Act, 2013, by way of subscription to Memorandum of Association, such investments shall be made at face value subject to entry route and sectoral caps.

These pricing guidelines shall not be applicable for investment by a person resident outside India on non-repatriation basis.

Q 13: What are the other modes of issues of shares for which general permission is available?

Answer: FDI compliant instruments, as applicable can be issued by Indian companies as follows:

1. ESOP
2. Sweat Equity
3. Bonus
4. Rights
5. Swap of Shares
6. On merger/ de-merger/ amalgamation etc of Indian companies
7. Against any other funds payable to a person resident outside India, the remittance of which does not require the prior approval of the Reserve Bank or the Government of India.

Q 14: Can a foreigner set up a partnership/ proprietorship concern in India?

Answer: Only NRIs are allowed to set up partnership/ proprietorship concerns in India on non-repatriation basis.

Q 15: Can a foreign investor invest in Rights shares issued by an Indian company at a discount?

Answer: There are no restrictions under FEMA for investment in Rights shares issued at a discount by an Indian company, provided the rights shares so issued are being offered at the same price to residents and non-residents. The offer on right basis to the persons resident outside India shall be:

1. in the case of shares of a company listed on a recognized stock exchange in India, at a price as determined by the company; and
2. in the case of shares of a company not listed on a recognized stock exchange in India, at a price which is not less than the price at which the offer on right basis is made to resident shareholders.

Q 16: Can an AD bank allow pledge of shares of an Indian company held by non-resident investor in favour of an Indian bank or an overseas bank or NBFC?

Answer: Yes, the same has been allowed vide the instructions and subject to compliance with the terms and conditions as mentioned in the AP (Dir. Series) Circular No 57 dated May 2, 2011 and A.P. (DIR Series) Circular No.141 dated June 6, 2014.

Q 17: Is a non-resident permitted to acquire shares on stock exchange?

Answer: The following persons can acquire FDI compliant instruments on the stock exchanges:

1. FPIs and FIIs registered with SEBI
2. NRIs
3. A non-resident, other than portfolio investor, is eligible to acquire shares on stock exchange through a registered broker subject to the condition that the non-resident investor has already acquired and continues to hold the control in accordance with SEBI (Substantial Acquisition of Shares and Takeover) Regulations i.e. he has complied with the minimum stake requirement under SEBI Regulations as per instructions contained in AP (DIR Series) Circular No. 38 dated September 6, 2013.

Q 18: What will be the modes of payment for non-residents permitted to acquire shares on stock exchange?

Answer: Non-Residents permitted to acquire shares under the scheme can use following modes for payment of shares:

1. by way of inward remittance through normal banking channels, or
2. by way of debit to the NRE/ FCNR account of the person concerned maintained with an authorised dealer/ bank;
3. by debit to non-interest bearing Escrow account (in Indian Rupees) maintained in India with the AD bank in accordance with Foreign Exchange Management (Deposit) Regulations, 2000;
4. the consideration amount may also be paid out of the dividend payable by Indian investee company, in which the said non-resident holds control, provided the right to receive dividend is established and the dividend amount has been credited to specially designated non-interest bearing rupee account for acquisition of shares on the floor of stock exchange.

Q 19: What are the instructions for transfer of shares against deferred payment?

Answer: In case of transfer of shares between a resident buyer and a non-resident seller or vice-versa, not more than twenty five per cent of the total consideration can be paid by the buyer on a deferred basis within a period not exceeding eighteen months from the date of the transfer agreement. The amount deferred can also be either in the form of an indemnity or an Escrow. In all cases the pricing guidelines should be complied with.

Q 20: What is the concept of downstream investment and Indirect Foreign Investment?

Answer: Downstream investment is investment by one Indian company in another Indian company. If the investor company is not owned and not controlled by resident Indian citizens or owned or controlled by persons resident outside India then such investment shall be “Indirect Foreign Investment” for the investee company.

Q 21: What will be the composition of ‘direct foreign investment’?

Answer: The concept ‘direct foreign investment’ means foreign investment received by an Indian company from a person resident outside India in terms of Schedules 1, 2, 2A, 3, 6, 8 and 10 of the Notification No. FEMA.20/2000-RB dated May 3, 2000, as amended from time to time.

Q 22: Whether an Indian company (owned and controlled by non-residents) investing in non-FDI compliant instruments issued by another Indian company will be considered as Indirect Foreign Investment for the investee company?

Answer: This investment shall not be considered as indirect foreign investment for the investee company.

Q 23: Since the instructions were issued by RBI in 2013 for the period commencing from February 13, 2009, what is the status of investment made prior to the issue of the instructions?

Answer: Downstream investment made in accordance with the guidelines in existence prior to February 13, 2009 would not require any modification to conform to these regulations. All other investments, after the said date, would come under the ambit of these regulations. Downstream investments made between February 13, 2009 and June 21, 2013 which is not in conformity with these regulations should have been intimated to the Reserve Bank by October 3, 2013 for treating such cases as compliant with these regulations.

II. Foreign Portfolio Investment

Q 24: What are the regulations regarding Portfolio Investments by registered Foreign Portfolio Investors (FPIs)?

Answer: Investment by FPI registered in accordance with SEBI guidelines including deemed RFPI [erstwhile FII) is permitted. Investment by individual FPIs should be less than 10 per cent of the paid up capital of the Indian company on a fully diluted basis. The aggregate investment by FPIs should not exceed 24 per cent of the paid up capital of an Indian Company on a fully diluted basis. The aggregate limit of 24 percent can be increased by the Indian company concerned up to the sectoral cap/ statutory ceiling, as applicable, with the approval of its Board of Directors and its General Body through a resolution and a special resolution, respectively.

Q 25: What are the regulations regarding Portfolio Investments by NRIs?

Answer: Non- Resident Indian (NRIs) can purchase or sell FDI compliant instruments of Indian companies on the Stock Exchanges under the Portfolio Investment Scheme. For this purpose, the NRI has to apply to a designated branch of a bank, which deals in Portfolio Investment. All sale/ purchase transactions are to be routed through the designated branch.

An NRI can purchase shares up to 5 per cent of the paid up capital of an Indian company on a fully diluted basis. All NRIs taken together cannot purchase more than 10 per cent of the paid up value of the company. The aggregate limit of 10 percent can be increased by the Indian company concerned up to 24 percent, with the approval of its Board of Directors and its General Body through a resolution and a special resolution, respectively.

III. Investment in other securities

Q 26: Can persons resident outside India invest in Government Securities/ Treasury bills/ corporate debt/ other securities?

Answer: Foreign Portfolio Investors (FPIs), Non-Resident Indians (NRIs), Foreign Central Banks, Multilateral Development Bank, Long term investors like Sovereign Wealth Funds (SWFs), Multilateral Agencies, Endowment Funds, Insurance Funds, Pension Funds which are registered with SEBI Long Term Investors may invest in other securities as specified in Schedule 5 to Notification No FEMA 20.

IV. Foreign Venture Capital Investment

Q 27: Where can a Foreign Venture Capital Investor (FVCI) invest?

Answer: A SEBI registered Foreign Venture Capital Investor may purchase

1. securities, issued by an Indian company engaged in any sector mentioned at the answer to question 28 and whose securities are not listed on a recognised stock exchange at the time of issue of the said securities;
2. securities issued by a start-up, irrespective of the sector in which it is engaged;
3. units of a Venture Capital Fund (VCF) or of a Category I Alternative Investment Fund (Cat-I AIF) or units of a scheme or of a fund set up by a VCF or by a Cat-I AIF, subject to the terms and conditions as may be laid down by the Reserve Bank.

Q 28: How can an FVCI make the investment?

Answer: An FVCI may

1. purchase the securities/ instruments mentioned above either from the issuer of these securities/ instruments or from any person holding these securities/ instruments;
2. invest in securities on a recognized stock exchange subject to the provisions of the SEBI (FVCI) Regulations, 2000, as amended from time to time;
3. acquire, by purchase or otherwise, from, or transfer, by sale or otherwise, to, any person resident in or outside India, any security/ instrument it is allowed to invest in, at a price that is mutually acceptable to the buyer and the seller/ issuer; and
4. receive the proceeds of the liquidation of VCFs or of Cat-I AIFs or of schemes/ funds set up by the VCFs or Cat-I AIFs.

Q 29: Which are sectors in which a Foreign Venture Capital Investor is allowed to invest?

Answer: An FVCI can invest in an Indian company engaged in

1. Biotechnology
2. IT related to hardware and software development
3. Nanotechnology
4. Seed research and development
5. Research and development of new chemical entities in pharmaceutical sector
6. Dairy industry
7. Poultry industry
8. Production of bio-fuels
9. Hotel-cum-convention centres with seating capacity of more than three thousand.
10. Infrastructure sector.

Q 30: How can the FVCI make payment for the investment?

Answer: The amount of consideration for all investment by an FVCI has to be made through inward remittance from abroad through banking channels or out of funds held in a foreign currency account and/ or a Special Non-Resident Rupee (SNRR) account maintained by the FVCI with an AD bank in India. The foreign currency account and SNRR account shall be used only and exclusively for transactions under the relevant Schedule.

Q 31: How can the sale/ maturity proceeds taken by the FVCI?

Answer: The sale/ maturity proceeds (net of taxes) of the securities may be remitted outside India or credited to the foreign currency account or a Special Non-resident Rupee Account of the FVCI maintained.

V. Investment in Investment Vehicle

Q 32: What is an investment vehicle?

Answer: Investment Vehicle is an entity registered and regulated under relevant regulations framed by SEBI or any other authority designated for the purpose and shall include Real Estate Investment Trusts (REITs) governed by the SEBI (REITs) Regulations, 2014, Infrastructure Investment Trusts (InvIts) governed by the SEBI (InvIts) Regulations, 2014 and Alternative Investment Funds (AIFs) governed by the SEBI (AIFs) Regulations, 2012.

Q 33: Who can invest in an investment vehicle and what is the manner of investment?

Answer:

1. Any person resident outside India may invest in units of Investment Vehicles subject to the conditions laid down in Schedule 11 to Notification No FEMA 20.
2. A person resident outside India who has acquired or purchased units of an investment vehicle may sell or transfer in any manner or redeem the units as per regulations framed by SEBI or directions issued by the Reserve Bank.
3. Units may be issued against swap of capital instruments of a Special Purpose Vehicle (SPV) proposed to be acquired by such Investment Vehicle.
4. The consideration for such investment shall be made by an inward remittance through banking channels or swap of shares of a Special Purpose Vehicle or out of funds held in NRE or FCNR (B) account maintained by the investor, if eligible to maintain the same.
5. The sale/ maturity proceeds (net of taxes) of the units may be remitted outside India or may be credited to the NRE or FCNR (B) account, as the case may be.

Q 34: What are the provisions with regard to Downstream investment for an investment vehicle?

Answer:

1. Investment made by an Investment Vehicle into an Indian company or an LLP will be indirect foreign investment for the investee company or the LLP, as the case may be, if either the Sponsor or the Manager or the Investment Manager (i) is not owned and not controlled by resident Indian citizens or (ii) is owned or controlled by persons resident outside India. The extent of investment by persons resident outside India in the corpus of the Investment Vehicle will not be a factor to determine as to whether downstream investment of the Investment Vehicle concerned is indirect foreign investment or not.
2. An Alternative Investment Fund Category III with foreign investment shall make portfolio investment in only those securities or instruments in which an FPI is allowed to invest under the Act, rules or regulations made thereunder.

VI. Reporting Requirements

Q 35: What are the various reporting formalities for foreign investments?

Answer: The reporting requirements are laid down in the Master Direction on Reporting under Foreign Exchange Management Act, 1999.

Republished the information published by the authority

Ravi Bhushan Kumar

9990339200

cs.ravibhushan@gmail.com