FEMA – Foreign Direct investment in India – Economic, Business and Commercial Laws Important Questions

FEMA – Foreign Direct investment in India – Economic, Business and Commercial Laws Important Questions

Question 1.
A Bangladeshi millionaire is interested to invest in India subject to the FDI policy of the Government of India. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [June 2010 (1 Mark)]
Answer:
As per Rule 6 of the FEM (Non-Debt Instrument) Rules, 2019, a person resident outside India may subscribe, purchase or sell capital instruments of an Indian company in the manner and subject to the terms and conditions specified in Schedule 1.

A person who is a citizen of Bangladesh/Pakistan or is an entity incorporated in Bangladesh/Pakistan cannot purchase capital instruments without prior approval from the Government of India.

A person who is a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defense, space, atomic energy, and sectors/activities prohibited for foreign investment.

Thus, citizens of Bangladesh are prohibited from making FDI. They can do so only with prior approval of the Government of India.

Question 2.
An Indian public limited company wants to issue bonus shares to an existing non-resident shareholder. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [June 2010 (4 Mark)]
Answer:
As per Rule 7 of the FEM (Non-Debt Instrument) Rules, 2019, A person resident outside India and having investment in an Indian company may make an investment in capital instruments (other than share warrants) issued by such company as a rights issue or a bonus issue provided that:

  • Companies Act, 2013: The offer made by the Indian company is in compliance with the provisions of the Companies Act, 2013.
  • Sectoral Cap: Issue shall not result in a breach of the sectoral cap applicable to the company.
  • Shareholding: Shareholding on the basis of which the rights issue or the bonus issue has been made must have been acquired and held as per the provisions of these rules.
  • Price Determination for Listed company: The rights issue to a person resident outside India shall be at a price determined by the company.
  • Price Determination for the unlisted company: The rights issue to persons resident outside India shall not be at a price less than the price offered to persons resident in India.
  • Conditions at the time of issue: Such investment made through rights issue or bonus issue shall be subject to the conditions as are applicable at the time of such issue.
  • Banking channel: The amount of consideration shall be paid as inward remittance from abroad through banking channels or out of funds held in NRE/FCNR(B) account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.

Renunciation of rights: A person resident in India and a person resident outside India may subscribe for additional shares over and above the shares offered on a rights basis by the company and also renounce the shares % offered either in full or part thereof in favor of a person named by them, x A person resident outside India who has acquired a right from a person fr who has renounced it may acquire capital instruments (other than share I warrants) against the said rights.

Question 3.
Distinguish between: Automatic Route & Government Route [Dec. 2010 (3 Marks)]
Answer:
Following are the main points of difference between automatic & government route:

Points Automatic Route Government Route
Meaning Automatic Route means the entry route through which investment by a person resident outside India does not require the prior RBI approval or Government approval. Government Route means the entry route through which investment by a person resident outside India requires prior Government approval.
Conditions The foreign investment received under this route shall be in accordance with the FEM (Non-Debt Instrument) Rules, 2019. The foreign investment received under this route shall be in accordance with the FEM (Non-Debt Instrument) Regulations, 2019 along with additional conditions stipulated by the Government in its approval.
Citizen of Bangladesh/Pakistan A person resident outside India who is a citizen of Bangladeshi Pakistan or is an entity incorporated in Bangladesh/Pakistan cannot avail of the Automatic Route. A person resident outside India who is a citizen of Bangladeshi Pakistan or is an entity incorporated in Bangladesh/Pakistan can make an investment in India in permitted activities/sector only under Government Route.
Procedure The investors are only required to notify the regional office concerned of RBI after receipt of inward remittances and file the required documents with that office. Such proposals are considered by the Government body that offers single-window clearance for proposals on foreign investment in the country that are not allowed access through the automatic route.

Question 4.
Desire Ltd., a company incorporated outside India, wants to buy shares up to 10% of the paid-up capital of an Indian company engaged in infrastructure development. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made. [Dec. 2010 (1 Mark)]
Answer:
As per Schedule I of the FEM (Non-Debt Instrument) Rules, 2019, 100% FDI is allowed in infrastructure development. Thus, Desire Ltd., a company incorporated outside India, can buy shares up to 10% of the paid-up capital of an Indian company engaged in infrastructure development subject to fulfillment of other conditions laid down in Regulation.

Question 5.
Aadarsh Ltd., an Indian company, wants to issue FCCBs for the purpose of investing in the stock market. [Dec. 2010 (1 Mark)]
Answer:
As per RBI FDI Policy and clarification, Indian Party has been prohibited from making end-use of proceeds received by issuing foreign securities in the following activities or area:

  • Investment in real estate-excluding integrated townships.
  • On-lending.
  • Investment in capital markets.
  • Acquisitions.
  • As working capital.
  • For general corporate purposes.
  • For repayment of rupee loans.

Thus, Aadarsh Ltd. cannot use the issue of FCCB for the purpose of investing in the stock market.

Question 6.
A foreign investor is interested to invest in an Indian company which is a small-scale industrial unit. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [June 2011 (1 Mark)]
Answer:
As per Rule 6 of the FEM (Non-Debt Instrument) Rules, 2019, a person resident outside India may subscribe, purchase or sell capital instruments of an Indian company in the manner and subject to conditions specified in Schedule 1.

Any investment made by a person resident outside India shall be subject to
(a) entry routes,
(b) sectoral caps or the investment limits.

A company which is reckoned as Micro & Small Enterprise (MSE) [earlier Small Scale Industrial Unit in terms of the Micro, Small & Medium Enterprises Development Act, 2006 and which is not engaged in any prohibited activity/sector may issue shares or convertible debentures, subject to the prescribed limits in accordance with the Entry Routes specified and the provision of the FDI Policy.

Thus, subject to compliance of sectorial cap/investment limits and other prescribed conditions by the RBI, an Indian company that is a small-scale industrial unit may issue shares to the foreign investor.

Question 7.
Infotech Ltd., an Indian company owning a small enterprise, intends to issue shares against foreign direct investment. [Dec. 2011 (1 Mark)]
Answer:
As per Rule 6 of the FEM (Non-Debt Instrument) Rules, 2019, a person resident outside India may subscribe, purchase or sell capital instruments of an Indian company in the manner and subject to conditions specified in Schedule 1.

Any investment made by a person resident outside India shall be subject to
(a) entry routes,
(b) sectoral caps or the investment limits.

A company which is reckoned as Micro & Small Enterprise (MSE) [earlier Small Scale Industrial Unit in terms of the Micro, Small & Medium Enterprises Development Act, 2006 and which is not engaged in any prohibited activity/sector may issue shares or convertible debentures, subject to the prescribed limits in accordance with the Entry Routes specified and the provision of the FDI Policy.

Thus, subject to compliance of sectorial cap/investment limits and other prescribed conditions by the RBI, an Indian company that is a small-scale industrial unit may issue shares to the foreign investor.

Question 8.
Write a short note on Depository Receipts [Dec. 2012 (3 Marks)]
Answer:
The Depository Receipts are physical certificates, which allow investors to hold shares in the equity of other countries. These types of instruments first started in the USA in the late 1920 and are commonly known as American Depository Receipt (ADR). Later on, these have become popular in other parts of the world also in the form of Global Depository Receipts (GDRs).

ADRs are typically traded on a US National Stock Exchange, such as the New York Stock Exchange (NYSE) or the American Stock Exchange, while GDRs are commonly listed on European Stock Exchanges such as the London Stock Exchange. Both ADRs and GDRs are usually denominated in US dollars, but these can also be denominated in Euros.

A domestic custodian may purchase eligible instruments on behalf of a person resident outside India, for the purpose of converting the instruments so purchased into depository receipts in terms of DR Scheme, 2014.

Any person resident outside India can invest in depository receipt of Indian j company by complying with Schedule IX of FEM(Non-Debt Instrument) Rules, 2019

Eg: Tata motors want to sell shares in US Stock Exchange then Tata Motors will deposit shares with the custodian bank and the bank will issue ADR to the American citizen and company for investment

Question 9.
Write a short note on Person of Indian Origin [June 2013 (3 Marks)]
Answer:
As per FDI Policy, a person of Indian origin means a citizen of any country other than Bangladesh or Pakistan, if

  1. He at any time held an Indian Passport.
  2. He or either of his parents or any of his grandparents was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955, or
  3. The person is a spouse of an Indian citizen or a person referred to in clause (1) or (2).

Question 10.
Distinguish between: Depository Receipt & Foreign Currency Convertible Bonds [June 2013 (5 Marks)]
Answer:
Following are the main points of difference between Depository Receipt & Foreign Currency Convertible Bonds:

Points Bonds Depository Receipt Foreign Currency Convertible
Meaning Depository Receipts are physical certificates, which allow investors to hold shares in the equity of other countries and arc commonly known as American Depository Receipts (ADRs) & Global Depository Receipts (GDRs). Foreign Currency Convertible Bonds (FCCBs) means a bond issued by an Indian company expressed in foreign currency, and the principal and interest in respect of which is payable in foreign currency.
Trading ADRs are typically traded on a US national stock exchange, such as the New York Stock Exchange while GDRs are commonly listed on European stock exchanges such as the London Stock Exchange. FCCBs are not traded in foreign stock exchanges.
Type of instrument Depository Receipts are is basically a negotiable instrument denominated in foreign currency i.e. US dollars. A Foreign Currency Convertible Bond (FCCB) is a quasi debt instrument.
Nature Depository Receipts represent the beneficial interest in shares issued by the company. FCCBs can be exchanged for equity shares at later date after the issue of the bond.
Investors option Depository Receipts are nothing but shares denominated in foreign currency and investors get the return just like dividends. Investors can also sell or transfer it to another person and get back the money invested by him. Investors have the option to convert FCCBs into shares or GDRs. If investors choose to hold the bond till maturity, the company has to redeem them at the maturity date.

Question 11.
ABC Ltd., a company incorporated in India, is eligible to issue shares to a person resident outside India under the FDI policy and intends to retain the share subscription amount in a foreign currency account, [June 2013 (1 Mark)]
Answer:
RBI may on an application made to it and on being satisfied that it is necessary so to do, permit an Indian company issuing shares to persons resident outside India, to retain the subscription amount in a foreign currency account, subject to such terms and conditions as it may stipulate. Thus, ABC Ltd. can retain the share subscription amount in a foreign currency account with the approval of RBI.

Question 12.
Discuss the method of funding foreign direct investment under the Foreign Exchange Management Act, 1999. [Dec. 2014 (5 Marks)]
Answer:
Foreign Direct Investment can be done through non-debt instruments like:
(a) Equity Instrument (Public, Private, Unlisted, Listed)
(b) Capital contribution in LLP
(c) All instrument recognized by FDI policy
(d) Investment into units Alternate Investment Funds, Real Estate Investment Trust, Infrastructure Investment Trust
(e) Contribution to Trust
(f) Investment in Mutual Fund (which invest more than 5096 in equity)
(g) Acquisition of Immovable Property
(h) Depository receipts against equity instrument

Question 13.
What is meant by ‘person of Indian origin’? [June 2015 (3 Marks)]
Answer:
As per FDI Policy, a person of Indian origin means a citizen of any country other than Bangladesh or Pakistan, if-

  1. He at any time held an Indian Passport.
  2. He or either of his parents or any of his grandparents was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955, or
  3. The person is a spouse of an Indian citizen or a person referred to in clause (1) or (2).

Question 14.
What is meant by Foreign Currency Convertible Bond (FCCB)? [June 2015 (3 Marks)]
Answer:
Meaning: Foreign Currency Convertible Bonds (FCCBs) means a bond issued by an Indian company expressed in foreign currency, the principal and interest of which is payable in foreign currency.

Issued by: Indian Company Subscribed by- Non Resident

Scheme: FCCBs are issued in accordance with the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and subscribed by a non-resident entity in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole or in part.

Guidelines: Indian Company can raise foreign currency resources abroad through the issue of FCCB/Depository receipts in accordance with the scheme and guidelines issued by Government.

Example: ABC Ltd. (Indian company) issued FCCB in the US Stock market to US residents at USD 70/Bond.

Question 15.
Mention the activities/sectors in which Foreign Direct Investment (FDI) is prohibited. [Dec. 2015 (5 Marks)]
Answer:
Investment by a person resident outside India is prohibited in:

  • Lottery Business including Government / private lottery, online lotteries.
  • Gambling and betting including casinos.
  • Chit funds.
  • Nidhi company.
  • Trading in Transferable Development Rights (TDRs).
  • Real estate business or construction of farmhouses.
  • Manufacturing of cigars, cheroots, cigarillos, and cigarettes, of tobacco or of tobacco substitutes.
  • Activities/sectors are not open to private sector investment e.g. atomic energy & railway operations.
  • 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.

Question 16.
What is the ‘intent and obligation’ of foreign direct investment in India under the Foreign Exchange Management Act, 1999? [Dec. 2016 (3 Marks}]
Answer:
Intent and Objective It is the intent and objective of the Government of India to attract and promote foreign direct investment in order to supplement domestic capital, technology, and skills, for accelerated economic growth.

Meaning of FDI: Foreign Direct Investment (FDI) is a category of cross border investment made by a resident in one economy (the direct investor) with the objective of establishing a ‘lasting interest’ in an enterprise (the direct investment enterprise) i.e. resident in an economy other than that of the direct investor.

Government of India: Foreign Direct Investment (FDI) in India is undertaken in accordance with the FDI Policy which is formulated and announced by the Government of India.

FEMA Act, 1999: The FDI Policy governed by the provisions of the Foreign Exchange Management Act (FEMA), 1999 and prescribes amongst other things the mode of investments i.e. issue or acquisition of shares/ convertible debentures and preference shares, manner of receipt of funds, pricing guidelines, sectoral cap and reporting of the investments to the Reserve Bank of India.

Policy Declaration: The Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce & Industry, Government of India makes policy pronouncements on FDI through Press Notes/Press Releases.

Rules and Regulation: The government has notified Foreign Exchange Management(Non-Debt Instrument) Rules, 2019.

Question 17.
Prior approval of RBI is not mandatory for the transfer of Capital instruments from resident to non-residents by way of sale. Comment. [Dec. 2018 (5 Marks)]
Answer:
This is governed by Rule 9 of FEM (Non-Debt Instrument) Rules, 2019
(a) A person resident in India holding equity instruments of an Indian company or units, may transfer the same to a person resident outside India by way of sale, subject to:

  1. the adherence to entry routes, sectoral caps or investment limits, pricing guidelines, and other attendant conditions as applicable for investment by a person resident outside India.
  2. Documentation and reporting requirements for such transfers as may be specified by the Reserve Bank in consultation with the Central Government from time to time.

(b) A person resident in India holding equity instruments or units of an Indian company on a non-repatriation basis may transfer the same to a person resident outside India by way of gift subject to the following conditions:

  1. Prior approval of RBI is taken.
  2. The donee is eligible to hold such a security under the Schedules of these Rules.
  3. The gift does not exceed five percent of the paid-up capital of the Indian company or each series of debentures or each mutual fund scheme.
  4. Sectoral Cap: The applicable sectoral cap in the Indian company is not breached.
  5. Relative: The donor and the donee shall be “relatives” within the meaning in clause (77) of section 2 of the Companies Act, 2013.
  6. Value of Security: The value of security to be transferred by the donor together with any security transferred to any person residing outside India as a gift during the financial year does not exceed the rupee equivalent of fifty-thousand US Dollars.
  7. Other Conditions: Such other conditions as considered necessary in the public interest by the Central Government.

Question 18.
What are the eligibility criteria for forming the trust under the Indian Trust Act, 1882? [Dec. 2018 (4 Marks)]
Answer:
(a) Governing Law: Trust is governed by the Indian Trust Act, 1882.

(b) Who can create trust:

  1. by every person competent to contract, and
  2. with the permission of a principal Civil Court of original jurisdiction, by or on behalf of a minor.

(c) Elements of Valid Trust
(a) Author.
(b) Beneficiary
(c) Trustee
(d) Trust Object
(e) Trust Deed
(f) Trust property
(d) Author of trust can himself be the Trustee as well.
(e) Example: Debenture trust is created for the benefits of debenture holder and company property is kept as a mortgage in the name of debenture trust.

Question 19.
What are the conditions for the Indian Company to allot sweat equity shares of its holding company to its employees, who are resident outside India? [June 2019 (5 Marks)]
Answer:
As per Rule 8 of the FEM (Non-Debt Instrument) Rules, 2019, an Indian company may issue “employees’ stock option” or “sweat equity shares” to its employees/directors or employees/directors of its holding company or joint venture or wholly-owned overseas subsidiary who are resident outside India subject to compliance of following conditions:
1. SEBI Rules: The scheme has been drawn either in terms of regulations issued under the SEBI Act, 1992 or the Companies (Share Capital & Debentures) Rules, 2014 notified by the Central Government under the Companies Act, 2013.

2. Sectoral Cap: The ‘employees stock option’ or ‘sweat equity shares’ so issued under the applicable rules/regulations are in compliance with the sectoral cap applicable to the said company.

3. Government Approval: Issue of ‘employees stock option’ or ‘sweat equity shares in a company where investment by a person resident outside India is under the approval route shall require prior Government approval.

4. Citizen of Bangladesh/Pakistan: Issue of ‘employees stock option’ or ‘sweat equity shares’ to a citizen of Bangladesh/Pakistan shall require prior Government approval.

An individual who is a person resident outside India exercising an option which was issued when he /she was a person resident in India shall hold the shares so acquired on exercising the option on a non-repatriation basis.

Question 20.
Under what conditions ‘Foreign Direct Investment’ in a limited liability partnership is permitted. [June 2019 (4 Marks)]
Answer:
As per FEM (Non-Debt Instrument) Rules, 2019, A Non-Resident Indian or an Overseas Citizen of India may, on a non-repatriation basis, purchase or sell capital instruments of an Indian company or purchase or sell units or contribute to the capital of an LLP or a firm or proprietary concern, in the manner and subject to the terms and conditions specified in Schedule VI.

Schedule VI provided the following criteria and conditions:
(a) 100% FDI is permitted under automatic route: Contribution to the capital of an LLP operating in sectors or activities is permitted where foreign investment up to 100 percent is permitted under automatic route.

(b) FDI linked Performance: There should not be FDI linked performance conditions.

(c) LLP Act: Investment in an LLP is subject to compliance with the conditions of the Limited Liability Partnership Act, 2008.

(d) Investment by way of profit share: Investment by way of “profit share” shall fall under the category of reinvestment of earnings.

(e) Conversion of Company into LLP: A company having foreign investment, engaged in a sector where foreign investment up to 100 percent is permitted under the automatic route and there are no FDI linked performance conditions, may be converted into an LLP under the automatic route.

(f) Conversion into the company: A LLP having foreign investment, engaged in a sector where foreign investment up to 100 percent is permitted under the automatic route and there are no FDI linked performance conditions, may be converted into a company under the automatic route.

(g) Mode of Payment: The mode of payment and other attendant conditions for remittance of sale or maturity proceeds shall be specified by the Reserve Bank.

(h) Sale/maturity proceeds: The sale/maturity proceeds (net of applicable taxes) of capital instruments purchased or disinvestment proceeds of an LLP shall be credited only to the NRO account of the investor, irrespective of the type of account from which the consideration was paid.

The amount invested in capital instruments of an Indian company or the consideration for contribution to the capital of an LLP and the capital appreciation thereon shall not be allowed to be repatriated abroad.

Question 21.
Enumerate the sectors/activities where foreign direct investment is prohibited under the Foreign Direct Investment Policy in India. [Dec. 2019 (5 marks)]
Answer:
Investment by a person resident outside India is prohibited in:

  • Lottery Business including Government /private lottery, online lotteries
  • Gambling and betting including casinos
  • Chit funds
  • Nidhi company
  • Trading in Transferable Development Rights (TDRs)
  • Real estate business or construction of farmhouses
  • Manufacturing of cigars, cheroots, cigarillos, and cigarettes, of tobacco or of tobacco substitutes
  • Activities/sectors not open to private sector investment e.g. atomic energy & railway operations
  • Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for lottery business and gam

Economic, Business and Commercial Laws Questions and Answers

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