All posts by Simratjeet Kaur

Delays in Reporting FDI: Late Submission Fees (LSF)

FDI reporting compliances involve coordination with the authorised dealer bank and the remitter bank; and it also involves compliances under other Regulations, like Companies Act.  Many Companies could not, therefore, make timely reporting under FEMA. These are only procedural lapses and the law only provided for adjudication process, or the company could have gone for compounding.

Now, the RBI vide notification dated 7th November 2017, has laid down a simple procedure for payment of late fees to regularise the instances of delay in reporting.  These sanctions such as late submission fees (LSF) will provide an incentive for the prompt filing of returns and is in the interests of good and efficient administration.

Master Direction on Reporting under Foreign Exchange Management Act, 1999 has laid down the amount of Late Submission Fees (LSF) that shall be laid down on the reporting delays that have taken place post 7th November 2017. The important points with respect to delayed submission and levy of late fees are as follows:

 

  1. Amount of late fees that shall be levied:
Amount involved in reporting (in INR) Late Submission Fees (LSF) as % of the amount involved* Maximum amount of LSF applicable
Up to INR 1,00,00,000

0.05 %

Lower of:

  • INR 10,00,000 or
  • 300% of the amount involved
More than INR 1,00,00,000

0.15 %

Lower of:

  • INR 1,00,00,000 or
  • 300% of the amount involved
*Note:

  1. The %age of LSF will be doubled every 12 months
  2. Minimum applicable LSF shall be INR 100.

 

  1. The payment of LSF is an option for regularizing reporting delays without undergoing compounding procedure.
  2. Calculation of amount of LSF to be done based on the following formula:

Amount involved X time rounded off to the next higher month X 0.05 % or 0.15 % as the case may be

In the case of ARF, the amount involved shall be the amount of inward remittance. And in the case of FC-GPR, the amount involved shall be the amount allotted to the non-resident person.

  1. The final acknowledgement shall be granted after the late submission fee is paid by the applicant.
  2. The date of reporting to the AD bank shall be deemed to be the date of reporting to the Reserve Bank provided the prescribed documentation is complete in all respects.
  3. In case the reporting form (whether in physical or electronic form) is incomplete, then the delay will continue till such time the form is received complete in all respects.
  4. The late submission fee is for reporting delays only and not for contraventions made for non-issue/ late issue of capital instruments or non-transfer/ late transfer of capital instruments etc.
  5. Mode of payment: The Late Submission Fee may be paid by way of a demand draft drawn in favour of “Reserve Bank of India” and payable at the Regional Office concerned.

It is to be noted that the Regional office of RBI has the discretion to levy LSF ranging from Minimum LSF as calculated by the aid of formula to the criteria mentioned for Maximum LSF (as detailed in the table above).

 

The reader can also look through other blogs based on New FEMA Regulations as notified on 7th November 2017, by clicking the following links:

  1. Issue of Securities: A Glimpse into the new FDI Regime
  2. Foreign Direct Investment In LLPs
  3. Reporting Requirements Under FEMA (Part 1)
  4. Reporting Requirements Under FEMA (Part 2)

 

 

Foreign Direct Investment In LLPs

Limited Liability Partnerships or LLPs have been a preferred business vehicle in countries such as United Kingdom, United States of America, Australia, Singapore etc. as it combines pros of a company and negates cons of a partnership firm.

In India, the Limited Liability Partnership Act, 2008 (hereinafter called “the LLP Act, 2008”) was notified on 31 March 2009. The LLP Act 2008 permitted foreign nationals and foreign LLP’s to become partner in LLPs incorporated in India. But the same was not supported by Foreign Exchange Management Act, 1999 and rules and regulations made thereunder. In the year 2011, the regulatory policy for FDI was amended and 100% FDI was allowed in LLPs under approval route.

 

FDI through Automatic Route

Though LLP form of doing business was gaining popularity among Indian residents but Non-residents chose to stay away for obvious reasons of requirement of approval even where 100% FDI was allowed under automatic route (in case of Private limited company). It took four years to realise the need to simplify provisions. The Government in the year 2015, permitted FDI upto 100% through Automatic route in LLPs which are operating in sectors where 100% FDI is allowed through Automatic route.

 

New FDI Regulations

The Government, in its bid to promote ease of business in India, has again revamped the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 [hereinafter referred to as New FDI Regulations]. The New FDI Regulations have simplified many aspects concerning FDI, such as downstream investment and transfer of such FDI in Companies and LLPs alike.

 

Provisions for Foreign Direct Investment in LLPs as given in New FDI Regulations, have been summarised below:

1. 100% FDI Permitted:

A person resident outside India can contribute to the capital of an LLP operating in sectors where 100% foreign investment is permitted under automatic route and no FDI linked performance conditions are applicable.

 

2. Investment by way of “profit share”:

As per the New FDI Regulations, investment by way of “profit share” shall be categorised as reinvestment of earnings.

 

3. Conversion of Company into LLP:

A Company having foreign investment can be converted into LLP under automatic route provided:

  1. It is engaged in a sector where 100% foreign investment is permitted under automatic route
  2. There are no FDI linked performance conditions prescribed

 

4. Conversion of LLP into Company:

An LLP having foreign investment can be converted into a Company under automatic route provided:

  1. It is engaged in a sector where 100% foreign investment is permitted under automatic route
  2. There are no FDI linked performance conditions prescribed

However, the conversion of LLP into Private Limited Company is currently not possible in India, as both LLP Act, 2008 and Companies Act, 2013 are silent on the matter.

 

5. Valuation:
  1. Investment by way of capital contribution or by way of acquisition / transfer of profit shares to be worked out on the basis of fair price valuation.
  2. A Chartered Accountant or Practicing Cost Accountant or Valuer on the panel of the Central Government to issue a valuation certificate to that effect.
  3. Fair price valuation to be carried out as per any Internationally accepted valuation methodology.

 

6. Consideration for transfer of capital contribution / profit share:

The consideration to be worked out as follows:

Transfer from Transfer to Consideration
Person resident in India Person resident outside India Consideration should not be less than the fair price of capital contribution
Person resident outside India Person resident in India Consideration should not be more than the fair price of the capital contribution

 

7. Reporting of investment in and transfer of capital contribution / profit shares:
Purpose Form Name To be filed with Timeline
To report receipt of amount of consideration for capital contribution and acquisition of profit shares LLP (I) Regional Office of RBI Within 30 days from the date of receipt of consideration
To report disinvestment / transfer of capital contribution or profit share between a resident and a non-resident and vice versa. LLP (II) Authorised Dealer bank Within 60 days from the date of receipt of funds.

Please note that above mentioned forms have been integrated into Single Master Form (SMF) w.e.f. 1st September, 2018. To read more about the same, please visit Single Master Form (SMF) And The New Filing Platform FIRMS.

 

Our first blog in the series is related to the changes in New FDI Regulations related to issue of securities. The same can be read at Issue of Securities: A Glimpse into the new FDI Regime.

 

Readers may also like to go through the following blogs:

  1. Foreign Direct Investment (FDI) by a Non-Resident Indian (NRI)
  2. FDI in Limited Liability Partnership
  3. Compounding under LLP Act, 2008
  4. How to close an LLP  in India (Easy Exit / Strike off)
  5. Striking off a Company/LLP: Simplified

 

 

 

Issue of Securities: A Glimpse into the new FDI Regime

To any foreign investor looking into an opportunity to invest in India, one of the primary concerns is the time required to set up a legal entity in India and how simple / difficult it is to get various registrations / approvals, if any, and the compliance regime of the country. Indian Government had been proactively involved for past few years to improve India’s standing in ease of doing business and has achieved remarkable success in doing so. The Government has worked well to reduce the time taken for incorporating a company in India. It introduced steps such as an integrated incorporation form called SPICe. Various forms such as the Name Application form, the DIN Application form for the proposed directors, the Incorporation form and the PAN and TAN application (PAN and TAN are separate registrations required under Income Tax, Act) have been combined into a single form. Such an integrated form has decreased the time taken to properly set up a company from max 30-40 days to a total of 3 – 4 days.

With simplification of incorporation process, the first concern, i.e. the time taken to set up an entity has been effectively dealt with. Next series of changes have been introduced to deal with the complexities in the compliance regime prevalent in India. In a bid to simplify the existing compliances with respect to the Foreign Direct Investment, the Indian Government came out with major notification (Notification No. FEMA 20(R)/ 2017-RB) dated November 07, 2017, which seeks to revamp regulations to regulate investment in India by a Person Resident Outside India. The Regulations are Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 [hereinafter referred to as NEW FDI Regulations].

We have covered the major changes introduced in the NEW FDI Regulations in a series of blogs. The first blog is dedicated to the simplification of issue of securities to Non resident. The existing FEMA Regime and the Companies Act 2013 were not on par with each other. The disconnect was related to the time prescribed for allotment of securities, treatment of expenses incurred for incorporating a new entity in India, issue of securities to NRIs and its subsequent reporting and the consequence of delay in reporting of the compliances mentioned under the FEMA regime. The changes introduced have been listed out below as follows:

 

  1. Issue of Securities:

There was mismatch in time limit with respect to the allotment of securities under the FEMA and the Companies Act, 2013. The earlier FDI regime gave time of 180 days from the date of receipt of consideration to allot the securities. However, the Companies Act, 2013 mandated that the securities be allotted within 60 days from the date of receipt of consideration. This disparity among the two Regulations caused great difficulty as the Companies were not clear if they get additional time to allot securities in cases of FDI. This anomaly has been removed by the RBI and the New FDI Regulations have now been aligned with that of Companies Act, 2013 (60 days).

 

  1. Issue of Capital Instruments against Pre-incorporation expenses:

Pre-incorporation expenses are the expenses generally incurred by founders / promoters on account of Government and professional fees paid to the consultant prior to incorporation. The New FDI Regulations has paved way for issue of Capital Instruments against pre-incorporation expenses of the Wholly Owned Subsidiaries set up in India by a Non-Resident Entity operating in a sector where 100 % FDI is allowed. Investment in almost all the sectors are under 100% automatic route except sectors like retail, real estate, defence, etc. Conditions specified by RBI for the same are as follows:

  • Capital Instruments to be issued up to a limit of 5 % of the Authorised Capital or USD 500,000, whichever is less.
  • Reporting to be made to RBI in form FC-GPR within:
    • 30 days from the date of issue of capital instruments
    • But not later than 1 year form the date of incorporation
  • A Certificate from the Statutory Auditor of the Company to be submitted along with form FC-GPR stating that, the pre-incorporation expenses against which the capital instruments have been issued, have been utilised for the purpose for which it was received.

Please note that Form FC-GPR has been integrated into Single Master Form (SMF) w.e.f. 1st September, 2018. To read more about the same, please visit Single Master Form (SMF) And The New Filing Platform FIRMS.

 

  1. Streamlining of Issue of shares through Rights Issue and Bonus Issue:

The NEW FDI Regulations have streamlined the issue of shares under the right issue and bonus issue. One major change introduced is that the right shares can now be renounced by a person resident outside India in favour of another person resident outside India. Such renunciation of right shares was not possible in the earlier regime. This will result in much convenience in issuing shares through rights issue to a non resident (in whose favour the rights have been renounced), even if he is not an existing shareholder.  Please note that if the shares are issued as preferential issue / private placement, a stringent procedure needs to be followed under Companies Act, 2013 (unlike rights issue).

 

  1. Capital instruments being issued on repatriable or non-repatriable basis to NRI:

There was some ambiguity in the FDI regime prior to issue of 2017 Regulations, on treatment of the shares issued on repatriable and on non-repatriable basis to an NRI. This ambiguity has been resolved now by clearly stating that securities issued on non-repatriation basis to NRI is treated as domestic investment and therefore, no FEMA compliances are required.

 

  1. Delays in Reporting:

Under the previous FDI regime, if the Companies failed to report FDI transactions within the prescribed time, they had to go for compounding of the offences, unless condoned (offence being the delay in reporting). FDI involves coordination with the authorised dealer bank and the remitter bank. It also involves compliances under other Regulations, like Companies Act.  Many Companies could not, therefore, make timely reporting under FEMA. However, the RBI, taking a liberal view on such procedural lapses in line with the provisions of the Companies Act, 2013. Instances of delay in such reporting shall be regularised (without having to go for compounding) subject to payment of late fees.

 

Our next blog in the series is related to the changes in New FDI Regulations for Limited Liability Partnerships. The same can be read at Foreign Direct Investment In LLPs.

 

Readers may also like to go through the following blogs:

  1. Foreign Direct Investment (FDI) by a Non-Resident Indian (NRI)
  2. Reporting Requirements Under FEMA (Part 1)
  3. Reporting Requirements Under FEMA (Part 2)
  4. Company Incorporation in India: a Russian perspective

 

 

Reporting Requirement under FEMA (Part 2)

In continuation to the blog series on reporting requirements under Foreign Exchange and Management Act, 1999, Part 2 of the series covers prescribed reportings for not-so-common transactions, like, issue of sweat equity shares, Employee Stock Options, ADRs, GDRs, conversion of ECB etc.

Part 1 of the series, wherein forms prescribed for reporting very common transactions, like, inward remittance (ARF), issuance of shares (FC-GPR) and transfer of shares (FC-TRS) have been detailed. It is interesting to note that reporting of only these common transactions have been enabled online and  it’s mandatory to do so (through e-biz portal). Physical filing is not an option.

All other forms, as stated below are to be filed physically and online filing is not an option. They are to be filed with the Authorised Persons / Authorised Dealer banks Category – I Banks / Authorised Banks, as the case may be.

Summarised below are the transactions and related forms for the prescribed reporting.

 

1. REPORTING OF ECB TRANSACTIONS
Purpose Form Name To be filed with Timeline
To report actual External Commercial Borrowing  (ECB) transactions Form ECB-2 AD Category 1 Bank to Department of Statistics and Information Management (DSIM) Within 7 working days from the close of month to which the transaction relates

 

2. REPORTING OF CONVERSION OF ECB INTO EQUITY
Purpose Form Name Timeline
Conversion of ECB into Equity (Full and partial conversion) Form FC-GPR and

Form ECB-2

Within 7 working days from the close of month to which the conversion relates

Some pointers while filing ECB-2:

  1. In case of full conversion:
  2. the form ECB-2 should mention “ËCB wholly converted to equity”.
  3. Subsequent filing of form ECB-2 is not required.
  4. In case of partial conversion:
  5. the form ECB-2 should mention “ËCB partially converted to equity”.
  6. Subsequent filing of outstanding balance of ECB to be reported in form ECB-2.

 

3. REPORTING OF EMPLOYEE STOCK OPTIONS (ESOPs) AND SWEAT EQUITY SHARES.
Purpose Form Name Timeline
To report issue of sweat equity shares/ ESOPs/ shares issued against exercise of stock option to persons resident outside India who are:

  • its employees/ directors or
  • employees/ directors of its holding company/ joint venture/ WOS.
Employees’ Stock Option (ESOP): Within 30 days from the date of issue of such shares

Note: All FIRCs and KYC shall be filed as necessary documents along with form ESOP.

 

4. REPORTING OF ISSUE OR TRANSFER OF CONVERTIBLE NOTES
Purpose Form Name Details Timeline
On issue / transfer of Convertible Notes Convertible Notes (CN) To report:

a)  Issue of convertible notes by Indian Startup Company to a person resident outside India

 

b)  Transfer of such convertible notes by a person resident in India to a person resident outside India and vice versa.

 

a)  Within 30 days of such issue.

 

b)  Within 60 days of such transfer.

 

Note: Consolidated statements w.r.t. the issue and transfer of convertible Notes to be submitted by the Authorised Dealer Bank to the RBI.

 
5. REPORTING OF INVESTMENTS BY FPIs ON THE STOCK EXCHANGE
Purpose Form Name To be filed with Timeline
To report purchase (except derivative and IDRs)/ transfer of capital instruments by FPIs on the stock exchanges in India. LEC (FII) RBI No timeline specified

Note:  FPI is defined as investment made in capital instruments, by a person resident outside India in the following:

  1. Less than 10% of the post issue paid up share capital on a fully diluted basis of a listed Indian Company
  2. Less than 10% of the paid up value of each series of capital instruments of a listed Indian Company

Also, to note that 10% limit shall be applicable to each Foreign Portfolio Investor or Investor group.

 

6. REPORTING OF INVESTMENTS BY NRIs ON THE STOCK EXCHANGE
Purpose Form Name Timeline
To report purchase/ transfer of capital instruments by Non-Resident Indians or Overseas Citizens of India stock exchanges in India. LEC (NRI) No timeline specified

  

7. REPORTING OF DOWNSTREAM INVESTMENT
Purpose Form Name To be filed with Timeline
To report downstream investment in another Indian company or LLP which is considered as indirect foreign investment for the investee company in terms of FEMA 20(R) Regulations. Downstream Investment (DI) Secretariat for Industrial Assistance, DIPP Within 30 days of such investment

 

8. REPORTINGS FOR OVERSEAS DIRECT INVESTMENTS
Purpose Form Name Timeline
To report overseas investment ODI-Part I Within 30 days of making such investment
Annual Performance Reports ODI-Part II By 30th of June every year.
To report disinvestment by way of Sale or Transfer of Shares /Closure / Voluntary Liquidation /Winding Up/ Merger /Amalgamation of Joint Venture / Wholly Owned Subsidiary ODI-Part III Reporting to be made immediately on receipt of sale proceeds or within 90 days from the date of sale of the shares /securities and documentary evidence to this effect shall be submitted to the Reserve Bank through the designated Authorised Dealer.

 

Readers may also like to go through the following blogs:

  1. Transfer Of Shares Between Resident And Non-Resident (Private Limited Companies)
  2. FLA Return under FEMA : four important points
  3. Transfer of Shares between Resident and Non-resident: Six Steps FC-TRS
  4. Foreign Direct Investment (FDI) by a Non-Resident Indian (NRI)
  5. Single Master Form (SMF) And The New Filing Platform FIRMS

 

 

Reporting Requirement under FEMA (Part 1)

FDI begins with inward remittance. The most common form of FDI transactions is on account of issue of shares (by an Indian Company) and transfer of shares (of an Indian company) in favour of a Non-resident. The forms involved are basically of following three types,

  1. Form for reporting of inward remittance: ARF
  2. Form for reporting of issuance of shares: FC-GPR
  3. Form for reporting of transfer of shares: FC-TRS

With a view to promoting the ease of reporting of transactions under foreign direct investment (FDI), the filing of the ARF, Form FC-GPR and Form FC-TRS has been enabled under the e-Biz platform of the Government of India. The design of the reporting platform enables the customer to login into the e-Biz portal, download the reporting forms, complete and then upload the same onto the portal using their digital signature certificates. The AD banks will be required to download the completed forms, verify the contents from the available documents, if necessary by calling for additional information from the customer and then upload the same for RBI to process and allot the Unique Identification Number (UIN). Physical filing of FC-GPR, ARF and FCTRS forms has been discontinued from February 8, 2016 and online filing through government’s e-Biz portal has been made mandatory.

Summarised below are the forms ARF, FC-GPR, FC-GPR and the FLA return. As mentioned in FEMA Regulations, all the prescribed reportings to the RBI are to be made through the Authorised Persons / Authorised Dealer banks Category – I Banks / Authorised Banks, as the case may be.

 

1. REPORTING OF FOREIGN INWARD REMITTANCE:
Purpose Form Name Timeline
Compliances for Companies
On receipt of remittance Advance Remittance Form (ARF) Within 30 days from the date of receipt
Compliances for LLPs
On receipt of capital contribution and acquisition of shares LLP (I) Within 30 days from the date of receipt of consideration

 

1.1 The following documents should be submitted along with both the forms ARF and LLP (I):

  1. Copy of Foreign Inward Remittance Certificate (FIRC).
  2. Know Your Customer (KYC) Report on the non-resident investor from the overseas bank remitting the amount.

 

1.2 ARF to be filed on e-Biz portal

  1. The ARF would be acknowledged by the Regional Office concerned, which will allot a Unique Identification Number (UIN) for the amount reported.
  2. Sometimes, the remittance receiving AD Category – I bank (AD bank) is different from the AD bank through which FCGPR is filed. In that case, the KYC check should be carried out by the remittance receiving bank and the KYC report be submitted by the investee to the AD bank carrying out the transaction along with the Form FC-GPR.
  3. The filing/ reporting has to be done on the e-Biz platform at http://www.ebiz.gov.in (Home page → click on Services tab → Click on the appropriate RBI service hyperlink [RBI service page displayed] → Download eform)

 

 

2. REPORTING OF ISSUE OF CAPITAL INSTRUMENTS
Purpose Form Name Timeline
On issue of capital instruments Foreign Currency-Gross Provisional Return (FC-GPR) Within 30 days from the date of issue of capital instruments

 

2.1 REPORTING OTHER THAN ISSUE OF CAPITAL INSTRUMENTS

Besides issue of the capital instruments to a person resident outside India, the following also needs to be reported in the form FC-GPR:

  1. Issue of participating rights / interest in oil fields
  2. Issue of bonus or right shares on amalgamation / merger with an existing Indian Company
  3. Issue of shares on conversion of External Commercial Borrowing (ECB) (full conversion as well as partial conversion) / royalty / lump sum technical know-how fee / import of capital goods by units in SEZ
  4. Investment in capital instruments by Foreign Venture Capital Investor (FVCIs)
  5. Issue of shares against convertible notes

 Note: Allotment of shares under Initial Public Offer or Qualified Institutional Placement need not be reported in form FC-GPR.

 

2.2 REPORTING OF ISSUE OF SHARES TO A PERSON OTHER THE PERSON SENDING THE INWARD REMITTANCE

In circumstances where shares are issued to a person other than the person from whom the inward remittance has been received, the form FC-GPR shall be filed along with the following documents:

  1. KYC reports of both the remitter and the beneficial owner
  2. A NOC from the remitter for issuing capital instruments to the beneficial owner mentioning their relationship
  3. A letter from the beneficial owner explaining the reason for the remitter making remittance on its behalf
  4. A copy of agreement / board resolution from the investee company for issuing capital instruments to a person other than from whom the remittance has been received.

 

 

3. ANNUAL RETURN ON FOREIGN LIABILITIES AND ASSETS
Purpose Form Name To be filed with Timeline
The annual return on Foreign Liabilities and Assets (FLA) is required to be submitted directly by all the Indian companies which have received foreign direct investment and/or made FDI abroad (i.e. overseas investment) in the previous year(s) including the current year Annual Return on Foreign Liabilities and Assets (FLA) Regional Office of RBI via email On or before 15th July of each year

 

For further queries on FLA Return, please refer to the FAQs on FLA Return published by RBI in this regard.

 

 

4. REPORTING ON TRANSFER OF SHARES
Purpose Form Name Timeline
Compliances for Companies
On transfer of capital instruments Foreign Currency-Transfer of Shares (FC-TRS) Within 60 days of transfer of capital instruments or receipt / remittance of funds whichever is earlier
Compliances for LLPs
To report disinvestment / transfer of capital contribution or profit share between a resident and a non-resident and vice versa. LLP (II) Within 60 days from the date of receipt of funds.

 

4.1 TRANSACTIONS FOR WHICH FORM FC-TRS NEEDS TO BE FILED

Form FC-TRS to be filed for the following transactions:

  1. To report transfer of capital instruments:
    • From a person resident outside India holding such capital instruments on repatriable basis to a person resident outside India holding such capital Instruments on a non-repatriable basis.
    • From a person resident outside India holding such capital instruments on a repatriable basis to a person resident in India.
  2. Buy back of shares pursuant to a scheme of merger / de-merger / amalgamation of Indian Companies approved by National Company Law Tribunal.

Note: Transfer of capital instruments by way of sale by a person resident outside India holding such instruments on a non-repatriable basis to a person resident in India is not required to be reported in form FC-TRS.

 

4.2 REPORTING OF TRANSFER OF SHARES WHERE FOREIGN REMITTER AND BENEFICIAL OWNER ARE DIFFERENT

Procedure for reporting transfer of shares where foreign remitter and beneficial owner are different, is same as procedure for reporting of issue of shares to a person other the person sending the inward remittance detailed in point 2.2 above.

 

Please note that above-mentioned forms (FC-GPR, FC-TRS, LLP-I and LLP-II) have been integrated into Single Master Form (SMF) w.e.f. 1st September 2018. To read more about the same, please visit Single Master Form (SMF) And The New Filing Platform FIRMS.

 

Covered under Part 1 of the blog series on Reporting Requirements under FEMA are the most common forms under FEMA such as ARF, FC-GPR, FC-TRS and FLA Return. These forms are the most commonly used forms under FEMA. Part 2 of the blog covers the not-so-common forms used for reporting transactions, like the conversion of ECB into Equity, issue of sweat equity shares, reportings to be made by for transactions on stock exchange etc. Part 2 of the series can be read at Reporting Requirements Under FEMA (Part 2).

 

 

How to close an LLP  in India (Easy Exit / Strike off)

 

There can be many modes of closing an LLP. Strike off, Voluntary Liquidation or filing for bankruptcy are few options depending upon the facts. If the LLP is not doing any business or never did any business after incorporation, it is advisable to follow an easy process of strike off of the LLP. This option can be chosen if the LLP has no assets and no liabilities.

 

Strike off

Here, we are discussing the simplest mode, i.e. Strike off. In a bid to simplify the process for striking off the Limited Liability Partnerships (LLP), the Central Government has amended the LLP Rules, 2009 whereby it will become easy for the defunct LLPs to apply for strike off its name from the Register of Names. It is a long awaited amendment which was actively sought by the LLPs which had either ceased its business activities or prior to filing of LLP Agreement (in Form 3), the Partners of the LLP developed a discord between themselves (LLP agreement is entered between Partners after incorporation).

 

Filings for the prior period mandatory even if no business:

Striking off an LLP was not an easy option prior to this amendment, as earlier LLP Rules (Rule 37) mandated filing of all the overdue forms prior to proceeding for strike off. An LLP, even if not operational, is required to file a minimum of two forms annually, i.e. Annual Return (in e-form 11 by 31st May every year) and Statement of Accounts (in e-form 8 by 30th October every year). In case of delayed filing, there is levied additional fees which increases with each day of delay. There is no upper cap to such additional fees and therefore, it became a significant financial burden for those LLPs which had outstanding filings for years together. The problem multiplied in cases of those LLPs which never commenced any business and all the compliances were ignored, probably, out of discord among the partners. It may be noted that the provisions for strike off of Defunct companies existed as simple procedure where it was possible to close down a company which met certain conditions without having to provide for previous year filings. For details on striking off of Companies, please visit the link Strike Off Under Companies Act, 2013. Industry circles expected similar provisions in case of LLPs as well for past many years.

 

LLP Rules amended w.e.f 20th May, 2017:

W.e.f 20th May 2017, Rule 37 of the LLP Rules, 2009 was amended to bring in much needed relief to the stakeholders who, prior to this amendment, had no means to close a defunct LLP without incurring huge additional fees.

The major highlights of the amendment are as follows:

  • Filing of overdue Form 8 and 11: As per the notification, the LLPs now have to file overdue Statement of Accounts and Annual Return only till the end of financial year in which the LLPs have ceased to carry on its business or commercial operations and not thereafter.
  • Certain attachments have been prescribed to be filed with the form 24 (eForm 24 is required to be filed for striking off the name of LLP) which also underlines the eligibility criteria for strike off, are as follows:
    • Statement of Accounts disclosing nil assets and nil liabilities
      1. The statement is to certified by a CA in practise
      2. The statement should not be older than 30 days from the date of filing
    • Copy of acknowledgement of latest ITR (Income Tax Return) filed, in case LLP has carried out any business
    • Copy of initial LLP Agreement, if entered into and not filed, along with any changes made in it in cases where the LLP has not commenced business or commercial operations since its incorporation.

Detailed Notification can be found at Limited Liability Partnership (Amendment) Rules, 2017.

 

Conclusion:

The amendment in the Rules brings a major reprieve to the LLPs who have not filed Form 3 i.e. the LLP Agreement, as the LLPs can straight away go ahead with the filing of Form 24 for Strike off. Prior to the amendment, the LLPs had to comply with requisite compliance of filing of Form 3, 8 and 11 before filing of Form 24. Also, late filing of such forms incurs huge expenses due to levy of heavy additional fees. Now, the LLPs can easily go ahead with the strike off of its name without having to consider the burden of additional fees for late filing (for years where no business was done).

Now that the Central Government has addressed the issue of easy strike off of LLPs, let’s wait and watch when the second concern regarding the upper cap on additional fees is also addressed.

 

 

“Radical Liberalization” of the Indian Market, Amendments in FDI

The Government of India (GoI) in a meeting held on 20th June, 2016, chaired by Prime Minister Narendra Modi, took radical steps to boost FDI in the Indian economy.

Since last 2 years the Government has brought major reforms in Defence sector, Construction Development, Insurance, Pension Sector, Broadcasting sector etc. To further simplify the FDI Policy the GoI has introduced the major reforms whereby most of the Sectors / Activities have been brought under automatic route of approval for investing in India.

Here is a synopsis of earlier limits of the FDI and the reforms introduced:

S. No. Sector FDI Limits PRIOR to notification dated 20th June, 2016 FDI Limits POST notification dated 20th June, 2016
1. Defence Sector Upto 49% – Automatic Route

Beyond 49% – Cabinet Committee on Security on case to case basis.

Upto 49% – Automatic Route

Beyond 49% till 100% – Government Approval on case to case basis.

 

* Condition of access to ‘state of art’ technology has been done away with.

** FDI for defence has also been made applicable to Manufacturing of Small Arms and Ammunitions covered under Arms Act, 1959.

2. Broadcasting Carriage Services

  • Teleports
  • Direct to Home
  • Cable Networks
  • Mobile TV
  • Headend-in-the Sky Broadcasting Services
Upto 49% – Automatic Route

Beyond 49% upto 100% – Government Approval

100% Automatic Route
3. Pharmaceutical – Brownfield Projects

 

100% – Government approval

 

Upto 74% – Automatic Route

Beyond 74% upto 100% – Government Approval

4. Civil Aviation – Brownfield Airport Projects

 

Upto 74% – Automatic Route

Beyond 74% upto 100% – Government Approval

100% – Automatic Route
5. Civil Aviation – Scheduled Air Transport Service / Domestic Scheduled Passenger Airline and Regional Air Transport Service. Upto 49% – Automatic Route

 

Upto 49% – Automatic Route

Beyond 49% upto 100% – Government Approval

 

* Foreign airlines can invest up to the limit of 49% of their paid up capital and subject to the conditions laid down in the existing FDI policy.

6. Private Security Agencies 49% – Government Approval Upto 49% – Automatic Route

Beyond 49% upto 74% – Government Approval

7. Animal Husbandry 100% – Automatic Route but provided the activity is done under “Controlled Conditions” Requirement of “Controlled Conditions” has been done away with.
8. Single Brand Retail Trading (SBRT)  Upto 49% – Automatic Route

Beyond 49% upto 100% – Government Approval

Upto 49% – Automatic Route

Beyond 49% upto 100% – Government Approval

 

* following conditions have been relaxed:

  • local sourcing norms relaxed upto 3 years
  • Sourcing regime relaxed upto 5 years for entities undertaking SBRT of products having ‘state of the art’ and ‘cutting edge’ technology.

 

  • Keeping in mind the proposals made in Budget 2016-17, FDI has also been permitted upto 100% through Government Approval for trading (including e-commerce) in food products manufactured or produced in India.
  • If a Branch Office, Liaison Office or Project Office is established for doing business in the sector of Defence, Telecom, Private Security or Information and Broadcasting, the approval from RBI or any other separate security clearance is not required post the FDI notification dated 20th June, 2016 provided FIPB has given approval or license from concerned Ministry / Regulator has been given.

The radical changes in the FDI policy have been brought in by the GoI to attract inflow of Foreign Exchange in the Indian market and for creation of employment and job opportunities in India.


 

 

All Directors Resigned; What to Do?

Section 149(1) of the Companies Act, 2013 provides that a minimum of 2 director, in case of Private Company and 3 in case of Public Company, should be present at all times for smooth functioning of the Company. But what to do when the minimum requirement of directors falls below the stipulated limit defined in the Act?

There can be two scenarios:

  1. When there is only 1 director remaining on the Board.
  2. When all the Directors have resigned from the Board.

In Scenario a. the Company can refer Section 174(2) of the Companies Act, 2013 and it’s Articles of Association for the remedy. Section 174(2) provides if the number of directors falls below the quorum then the continuing directors:

  • may appoint a director in the meeting for increasing the number of directors to that fixed for the quorum or
  • Summon a general meeting of the company to appoint a director and for no other purpose.

Clause 69 of Table F provides that if the number of directors falls below the quorum fixed by the Act, the remaining directors can, for increasing the number of directors to that fixed quorum, summon a General Meeting of the Company.

In Scenario b. the Company can refer section 168(3) of Companies Act, 2013. The section provides that when all the directors of a company resign from the Board, the promoter or the Central Government in promoter’s absence, shall appoint the required number of directors who shall hold office till the directors can be appointed in the general meeting.

Generally the Companies where all the directors have resigned face a lot of difficulties while filing the forms for appointment of new directors. Filing of eforms on MCA portal requires digital signatures of the Authorised Signatory Director. When all the directors resign from the Board, there are no authorised signatory director left in the Company (due to deactivation of DSC of resigning director on filing of DIR-11). Therefore eform for appointment of new director can’t be filed.

MCA issued a clarification in this regard vide General Circular No. 3/2015 dated 3rd March, 2015. MCA clarified that in such scenario (as mentioned in scenario b.), the ROC may allow any one of the resigned director (who was an authorised signatory of the Company) to file the eform as applicable and subject to the compliance of other provisions of Companies Act, 2013.


Essential Conditions for Private Placement

Mentioned below are the highlights/essentials for making preferential allotment of shares:

  1. Holding a Board Meeting to consider Preferential Issue of securities.
  1. Holding of General Meeting of shareholders for authorizing preferential issue.
  1. Disclosures w.r.t. the names of proposed allottees, pre and post issue shareholding pattern of the company, the terms of the securities to be issued etc, should be made in the explanatory statement which will be annexed with the Notice of the General Meeting.
  1. An offer letter will be given to the proposed subscribers of the issue. The offer letter shall be approved by the shareholders in the general meeting.
  1. The price of the security has to be justified through a valuation report by a Registered Valuer who shall be a an Independent Merchant Banker who is registered with SEBI or an Independent Chartered Accountant in practice having a minimum experience of 10 years. MCA issued a notification G.S.R. 413(E) on 18th June, 2014 clarifying that price of security to be issued on preferential basis should not be less than the price determined by the Registered Valuer.
  1. The monies which will be received on application shall be kept in a separate bank account. The condition of opening a separate bank account is not required for issue of securities on Rights Basis.
  1. Allotment of securities shall be done within 60 days of receiving share application money.
  1. Prior to the allotment of shares, the share application money cannot be used for any other purposes.

 

You may also want to read:

  1. Issue of shares by Private placement (includes Preferential Issue)
  2. PRIVATE PLACEMENT VS RIGHTS ISSUE UNDER COMPANIES ACT, 2013

 


 

Company Registrations Centralised

Ministry of Corporate Affairs (MCA) in a bid to line its incorporation related services with best international practices, launched Central Registration Centre (CRC) on the occasion of Republic Day 2016 vide notification number S.O. 218(E) dated 22nd January, 2016.

CRC is a part of MCA’s Government Process Re-engineering (GPR) which aims at automating some of the approval processes of the MCA. CRC was established for discharging out the function of processing and disposal of applications for company incorporations. CRC will have territorial jurisdiction all over India.

Prior to establishment of CRC, the approvals or rejections of company incorporation forms were handled by jurisdictional Registrar of Companies (ROCs). At present there are 22 ROCs in India catering to 29 states and 7 union territories of India[1].

The launch of CRC is planned in three phases.

Reservation of names:

In Phase 1(launched on 22nd January, 2016), the CRC was given authority to process applications for reservation of names made under e-from INC-1. Approval of names proposed in e-form INC-29 was still done by the ROCs having respective jurisdiction over incorporation of companies under the Companies Act, 2013.

Company Incorporation / Registration:

In Phase 2 (launched on 23rd March, 2016), CRC was further given authority to process and dispose e-forms related to registration of Companies having territorial jurisdiction all over India. CRC can process e-forms INC-2, INC-7, INC-29 along with linked forms INC-22, DIR-12 and URC-1. The jurisdictional ROC within whose Jurisdiction the registered office of the Company is situated shall continue to have jurisdiction over them for other provisions (other than incorporation) and rules made under the Companies Act, 2013.

Phase 3 is still under process and yet to be notified.

The GPR initiative of MCA was taken with a view to provide greater ease of doing business to corporates. This initiative is expected to speed up the processing of incorporation related applications, have uniformity in application of rules and to eradicate discretion.

You may also like to read:

    1. Basic information about COMPANY INCORPORATION IN INDIA
    2. Company Incorporation in India: a Russian perspective

[1] Looking at the quantum of Companies registered in various regions of India, the ROCs have been distributed in such manner that in states where company registrations are more, like in Maharashtra and Tamil Nadu, there are 2 ROCs serving the state, and in states with less company registrations, they have been clubbed and provided with 1 ROC. For example companies registered in seven sisters of India have been provided with 1 ROC in Shillong; there is 1 ROC serving companies in Andhra Pradesh & Telangana at Hyderabad; companies with registered office in Punjab, Chandigarh & Himachal Pradesh have been clubbed and provided with 1 ROC at Chandigarh; and ROC at Kanpur serves the companies in both Uttar Pradesh & Uttarakhand.


One Person Company (OPC)

What is One Person Company (OPC)?
As per Companies Act, 2013, OPC means a company which has only 1 person as a member. OPC has only 1 member as the Member cum Director and a nominee.
What is the eligibility criterion to incorporate OPC?
Only a natural person who is:

  1.  An Indian Citizen
  2.  Resident in India (stay in India is for not less than 182 days during the immediate preceding 1 calendar year)

 

Are there any restrictions on OPC?
The following restrictions are imposed on OPCs:

  1.    A person can’t form more than 1 OPC.
  2.    A nominee in 1 OPC can’t be appointed as nominee in any other OPC.
  3.    A minor cant become a member or nominee of OPC
  4.    OPC can’t be converted into a Section 8 Company.
  5.    OPC can’t carryout non Banking Financial Investment activities including investment in securities of any body corporate.
  6.    The name of company incorporated as OPC should end with Private Limited (OPC).

 

Can OPC convert to any other kind of Company?
An OPC can convert to any other kind of Company subject to the following conditions:

  1.    2 years should have elapsed from incorporation of OPC prior to its conversion,
  2.    Paid up capital of OPC is increased beyond Rs. 50,00,000.
  3.    Average turnover exceeds Rs. 2,00,00,000 for the relevant period.

 

Can OPC accept FDI?
No, FDI is not allowed for OPC. If the OPC accepts FDI then it will lose its very nature of OPC.

 

 

FDI in Limited Liability Partnership

Limited Liability Partnership or LLP was introduced by Indian government though Limited Liability Partnership Act, 2008. LLP is an entity structure which is a mixture of private limited company and a partnership firm. But unlike the latter it is a separate legal entity and limits the liability of its partners.

The LLP Act 2008 allows foreign national and foreign LLP’s to become partner in LLP but as per Foreign Exchange Management Act, 1999 and rules and regulations made thereunder, FDI in LLP was not allowed. In the year 2011 the regulatory policy for FDI was amended and 100% FDI was allowed in LLPs, but prior approval of Government was needed for it.

The Government of India has further reviewed the FDI policy on 10th November, 2015 where additional changes w.r.t. FDI in LLPs was introduced. The changes are as follows:

  • FDI is permitted upto 100% through Automatic Route in LLPs which are operating in sectors where 100% FDI is allowed through Automatic route.
  • An LLP with FDI is permitted to make downstream investment in another LLP or Company in sectors where 100 % FDI is allowed under Automatic Route.
  • There are no FDI linked performance conditions attached to the changes introduced.

The FDI Policy has further subjected the following conditions to downstream investments by Indian LLPs:

  • The LLP shall notify Secretariat for Industrial Assistance, Department of Industrial Policy and Promotion and Foreign Investment Promotion Board of its downstream investment within 30 days of such investment.
  • Capital contribution shall be valued with applicable SEBI/RBI guidelines.
  • For the purpose of downstream investment, Indian LLP making the investment would have to bring requisite funds from abroad and not take loans from the domestic market.

Allowing FDI in LLP is a welcome move of the Government of India, as it would provide foreign investors an alternate form of business other than company and would entitle them to benefit with inherent flexibility & tax efficient LLP structure.


Updated FDI Policy in India

FAQ’s
fdi-in-india

 

Query No. 1:-

What is the sectoral cap in the sectors where FDI is allowed?

Reply:-

Permitted sectors are as follows:

S. No Sector / Activity Investment Cap Entry Route
1. Agriculture & Animal Husbandry:

·         Floriculture, Horticulture, Apiculture.

·         Development and production of seeds

·         Animal husbandry

·         Services related to agro and allied sectors

Besides the above, FDI is not allowed in any other agriculture sector.

 

100%

 

Automatic Route

2. Mining and Petroleum & Natural Gas exploration 100% Automatic Route
3. Broadcasting Content Services:

·         Up linking of News & Current Affairs TV Channels

 

100%

 

 

Automatic Route

4. Industrial Parks 100% Automatic Route
5. Trading 100% Automatic Route
6. E- commerce Activities

(only B2B e-commerce activities)

100% Automatic Route
7. Railway Infrastructure 100% Automatic Route
8. NBFCs 100% Automatic Route
9. Pharmaceuticals

·         Greenfield

·         Brownfield

 

100%

100%

 

Automatic Route

Government Route

10. Coffee/Rubber/Cardamom/Palm oil & Olive Oil Plantation 100% Automatic Route
11. Duty Free Shops 100% Automatic Route
12. Limited Liability Partnerships 100% Automatic Route
13. Civil Aviation

·         Non-scheduled air transport

·         Ground handling services

 

100%

 

Automatic Route

14. Credit Information Companies 100% Automatic Route
15. White label ATM operations 100% Automatic Route
16. Broadcasting Carriage Services:

·         Teleports, DTH, Mobile TV, Headend-in-the sky Broadcasting Services, Cable services

 

100%

 

 

 

 

Upto 49% Automatic Route
49%-100% Government Route
17. Telecom services 100%
Upto 49% Automatic Route
Beyond 49% Government Route
18. Teleports, DTH and cable networks 100%
Upto 49% Automatic Route
Beyond 49% Government Route
19. Single Brand Product Retail Trading 100%
Upto 49% Automatic Route
Beyond 49% Government Route

Query No. 2:-

What are the different routes to enter into India?

Reply:-

An Indian company may receive Foreign Direct Investment under the two routes as given under:

  • Automatic Route

FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time.

  • Government Route

FDI in activities not covered under the automatic route requires prior approval of the Government which is considered by the Foreign Investment Promotion Board (FIPB).

Application can be made in Form FC-IL, which can be downloaded from this link.

The Indian company having received FDI either under the Automatic route or the Government route is required to comply with provisions of the FDI policy including reporting the FDI to the Reserve Bank.

Query No. 3:-

Which are the sectors where FDI is not allowed in India?

Reply:-

FDI is prohibited under the Government Route as well as the Automatic Route in the following sectors:

  • Lottery Business
  • Gambling and Betting
  • Business of Chit Fund
  • Nidhi Company
  • Real Estate or construction of farm houses.
  • Trading in Transferable Development Rights (TDRs).
  • Manufacture of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes.
  • Services like legal, book keeping, accounting & auditing.
  • Activities / sectors not open to private sector investment e.g Atomic energy and railway Transportation.

Query No. 4:-

What are the modes of payment allowed for receiving Foreign Direct Investment?

Reply:-

An Indian company issuing shares /convertible debentures under FDI Scheme to a person resident outside India shall receive the amount of consideration required to be paid for such shares /convertible debentures by:

  • Inward remittance through normal banking channels.
  • Other modes include debit to NRE/ FCNR account, conversion of Royalty or ECB, conversion of pre incorporation expenses etc.

Query No. 5:-

Is there any time limit to issue shares /convertible debentures under FDI Scheme?

Reply:-

Shares or convertible debentures are mandatorily required to be issued within 180 days from the date of receipt of the inward remittance or date of debit to NRE / FCNR (B). 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), 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.

Query No. 6:-

What are the instruments for receiving FDI in an Indian Company?

Reply:-

Foreign investment will be treated as FDI only if the investment is made in equity shares, fully and mandatorily convertible preference shares and fully and mandatorily convertible debentures with the pricing being decided upfront as a figure or based on  the formula that is decided upfront.

 

Query No. 7:-

What is the procedure to be followed after investment is made under the Automatic route             or with Government Approval?

Reply:-

A two-stage reporting procedure has to be followed:

  1. On receipt of share application money:
  • The Indian Company is required to report to the Foreign Exchange Department, Regional Office concerned of the RBI, under whose jurisdiction its RO is located, within 30 days of receipt of share application money.
  • Reporting needs to be done in Advance Reporting Form which should contain the following details:
    • Name and address of the foreign investors
    • Date of receipt of funds and the rupee equivalent
    • Name and address of the Authorised Dealer, which shall receive the funds
    • Details of Government Approval, if any
    • KYC report on the Non-Resident Investor from the overseas bank remitting the amount of consideration
  • The shares need to be issued within 180 days from the date of inward remittance so as to not violate existing FEMA regulations.
  1. Upon issue of shares to Non-Resident Investors:
  • A report in form FC-GPR – Part A, needs to be filed with Foreign Exchange Department, Regional Office concerned of the RBI, within 30 days from the date of issue of shares.
  • Following documents should be filed along with FC-GPR – Part A;
    • Certificate from the CS of the Company accepting investment, certifying that the Company has complied with the procedure for issue as laid down under the FDI scheme as indicated in the Notification No. FEMA 20/2000-RB dated 3rd May 2000, as amended from time to time.
    • Document certifying the compliance of all the conditions laid down for investments under the Automatic Route and Approval Route where approval is required.
    • Certificate from Statutory Auditors/ SEBI registered Merchant Banker / Chartered Accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India.

Transfer

Query No. 8:-

What are the ways a person Resident in India can transfer securities to a person   Resident outside India? What are the reporting obligations?

Reply:-

A person resident in India can effectuate transfer of securities in the following manner:

  • Transfer requiring government approval
  • Transfer requiring approval of RBI in certain cases for acquisition / transfer of security.

 The transaction should be reported in the form FC-TRS to the AD Category – I Bank,     within 60 days from remitting the consideration. The onus of submission of such form would be on the person residing in India, transferor or transferee, as the case may be.

Query No. 9:-

What are the guidelines for transfer of existing shares from Non Resident to Residents     and vice versa where government approval is not required?

Reply:-

General permission has been granted to non residents for acquisition of shares by way     of transfer subject to the following conditions:

  • A person resident outside India (other than NRI and erstwhile OCB) may transfer securities by way of sale, to any person resident outside India (including NRIs).
  • NRIs may transfer securities by way of sale, held by them to another NRI.
  • A person resident outside India can sell the securities of an Indian company on a recognized Stock Exchange in India through a stock broker registered with stock exchange or a merchant banker registered with SEBI.
  • A person resident in India can transfer securities by way of sale, of an Indian company under private arrangement to a person resident outside India.
  • General permission is also available for transfer of shares/convertible debentures, by way of sale under private arrangement by a person resident outside India to a person resident in India.

Query No. 10:-

Can a foreign investor invest in Preference Shares? What are the regulations applicable   in case of such investments??

Reply:-

Yes. Foreign investment through preference shares is treated as foreign direct   investment. However, the preference shares should be fully and mandatorily convertible    into equity shares within a specified time to be reckoned as part of share capital under   FDI. Investment in other forms of preference shares requires to comply with the ECB norms.

Query No. 11:-

Can a company issue debentures as part of FDI??

Reply:-

Yes. Debentures which are fully and mandatorily convertible into equity within a    specified time would be reckoned as part of share capital under the FDI Policy.

Query No. 12:-

Can shares be issued against Lump sum Fee, Royalty, ECB , Import of capital goods/machineries / equipments (excluding second-hand machine) and Pre-operative/pre- incorporation expenses (including payments of rent)?

Reply:-

An Indian company is eligible to issue shares under the FDI policy to a person resident  outside India against Lump Sum fee, Royalty, ECB , Import of capital goods / machineries / equipments and Pre-operative / pre-      incorporation expenses, provided that the foreign equity in the company, after such conversion, is within the sectoral cap.

Further, on a review in September 2014, it has been decided that an Indian investee company may issue equity shares against any other funds payable by them, remittance  of which does not require prior permission of the Government of India or Reserve Bank  of India under FEMA, 1999 or any rules/ regulations framed or directions issued  thereunder, provided that:

  • The equity shares shall be issued in accordance with the extant FDI guidelines.
  • the issue of equity shares under this provision shall be subject to tax laws as applicable to the funds payable and the conversion to equity should be net of applicable taxes

Query No. 13:-

What are the other modes of issues of shares for which general permission is available  under RBI?

Reply:-

Other modes of issue of shares are as follows:

  • Under ESOP by Indian company to its employees or employees of its JV or WOS abroad who are resident outside directly or through a trust.
  • Under scheme of compromise and arrangement of Indian Companies.
  • Under right issue by an Indian company to a person resident outside India.

 

eBIZ INITIATIVE

Besides simplifying the FDI Policy, the eBiz initiative, piloted by Department of Industrial Policy and Promotion on 19th February, 2015, was launched by the Government of India to simplify the process of starting a business in India through eBiz portal. eBiz is India’s one-stop-shop of convenient and efficient online Government-to-Business (G2B) services. The core theme of eBiz lies in radical shift by Government in its service approach, from being department-centric to customer-centric, in providing services to the business community.

eBiz is a collaborative effort involving government at the Central, State and municipal levels. It will dramatically reduce the complexity in obtaining information and services related to starting and operating a business in India.

Using eBiz one will be able to:

  • Obtain information about the various licenses, clearances and registrations required to establish a new business in India;
  • Apply online for new or renewal of licenses, permissions, approvals, clearances and registrations
  • File tax returns and other regulatory reports;
  • Make electronic payments towards statutory (processing) fees, (stamp) duties, taxes, service fee etc.;
  • Track status of the application online;
  • Receive alerts via email and SMS on the progress of submitted application;
  • Interact online with the various Government departments such as responding to queries/clarifications, submit additional documentary artifacts;
  • Obtain electronic copies of approved licenses, registration certificates and other clearance letters

Below is the list of 11 services currently available on eBiz portal:

  1. Ministry of Corporate Affairs
  • Director Identification Number(DIN)
  • Name Availability
  • Certificate of Incorporation
  • Commencement of Business (as per Companies Amendment Act, 2015)
  1. Central Board of Direct Taxes
  • Issue of Tax Collection and Deduction Account Number (TAN)
  • Issue of Permanent Account Number (PAN)
  1. Petroleum and Explosives Safety Organization
  • Issue of explosive License
  1. Directorate General of Foreign Trade
  • Importer Exporter Code
  1. Employees Provident Fund Organization
  • Employer Registration
  1. Reserve Bank India
  • ARF (Advance Foreign remittance)
  • FC-GPR (Foreign collaboration – General Permission Route)

Buy Back of shares

SECTION 68, 69 and 70 of COMPANIES ACT, 2013

Essential preliminary conditions to fulfill before opting for buy back:-

  • It must be authorized by the Articles
  • It must be authorized by the shareholders by way of Special Resolution in a General meeting.
  • It should not exceed 25% of the aggregate of paid up equity capital and free reserves.
  • Debt equity ratio post buy back should be upto 2:1.
  • Shares or other securities to be bought back should be fully paid up.
  • If securities are
    • Listed – the buy back must be as per SEBI regulations.
    • Unlisted – the buy back must be as per Share Capital and Debenture Rules, 2014
  • There should be no offer of buy back within 1 year of closure of preceding offer of buy back.

Buy back must be from the company’s:-

  • free reserves
  • securities premium account
  • proceeds of issue of any other security

A company does not require shareholders approval for buy back if:-

  • it is for or less than 10% of the total capital.
  • it is authorized by the Board of Directors.
Here capital  = Paid up capital + Free Reserves

Declaration of Solvency

Declaration of solvency needs to be filed:-

  • before commencement of Buy back
  • with the Registrar and SEBI
  • in SH-9 (prescribed form)

It should be:-

signed by at least 2 Directors, one of whom should be Managing Director.

It contains as Affidavit from the Board that states the following:-

  • the company is capable of meetings its liabilities
  • the company will not be rendered insolvent within 1 year from the date of adoption of such Declaration.

Extinguishment of Securities

To be extinguished and physically destroyed within 7 days of the last date of completion of buy back.

No further issue of securities within 6 Months of buy back except for

  • issue of
    • bonus issue
    • conversion of warrants
    • stock option scheme
    • sweat equity
  • conversion of preference shares or debentures into equity.

Prohibition on buy back

A company can’t directly or indirectly buy back its securities through:-

  1. any subsidiary company including its own subsidiaries
  2. any investment company or group of investment companies.
A company can’t buy back its securities if it commits the following defaults in:-

  1. Repayment of deposits and payment of interest thereon
  2. Redemption of debentures or preference shares
  3. Payment of dividends
  4. Repayment of any term loan or interest payable thereon
A Company also can’t buy back its securities if it has not complied with the following provisions of Companies Act, 2013:-

  1. Section 92 : Annual Return
  2. Section 123 : Declaration and payment of Dividend
  3. Section 127 : Failure to pay Dividend
  4. Section 129 : Failure to give true and fair statement in the Financial Statement of the Company

COMPANIES ACT 1956 VS COMPANIES ACT 2013

Particulars Provisions of Companies Act, 1956 Provisions of Companies Act, 2013
Definition of Free Reserves has been changed. Free Reserves include Free Reserves include

Free reserves for distribution as dividend

+

Credit of the securities premium account

Free reserves for distribution as dividend

+

Securities premium account

Gap between 2 offers of buyback clearly defined in the New Act Minimum gap of 365 days from the date of preceding offer of buy back. Minimum gap of 1 year from the date of closure of the preceding offer of buy back.
Buy back from odd lots has been dispensed with in the Companies Act 2013. Buy back could be done from:

  • Existing shareholders
  • Open market
  • Odd lots
  • employees
Buy back can be done from:

  • Existing Shareholders
  • Open market
  • employees
Penalty has been increased in the New Act For company and any officer in default:

  • fine – INR 50,000, or
  • Imprisonment upto 2 years,

Or both

  1. For Company:
    • Fine – INR 1,00,000 to 3,00,000
  2. Officer in default:
    • Imprisonment upto 3 years
    • Fine – INR 1,00,000 to 3,00,000

Or both

TAXATION ASPECT OF BUY BACK

Taxation for companies

Listed company

Unlisted company

Provisions for Capital Gains shall apply on the shareholders of the Company Chapter XII DA shall apply on the Company

 

Chapter XII DA (Additional Tax):- (Section 115 QA – 115QC)

Rate of Tax                 = 20% + 10% surcharge + 3% cess

Effective Rate             = 22.66%

Tax Liability of the Company = Buy back price * 22.66%

Provision is mandatory in nature irrespective of whether the company is liable to tax or not or not.

Tax shall be deposited within 14 days from the date of payment of consideration to the shareholder.

The Company is not liable to pay Stamp Duty.