DueDiligenceunder ForeignExchangeManagementAct,1999–AnOverview
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DueDiligenceunder ForeignExchangeManagementAct,1999
Anoverview
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ReasonsofDueDiligence Indian Currency is partially convertible currency FEMA has extra territorial jurisdiction It is very dynamic law It is complex Triggers early corrective action May render the transaction void ab initio Cost of non compliance is high
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CA. Sudha G. Bhushan
IndianCurrencyispartially convertiblecurrency
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FEMAhasextraterritorial Jurisdictional Rights
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DynamicLaw
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Complex 7 Regulators under FEMA Central Government Section 46 –Power to make Rules Ministry of Commerce and Industry Department for Promotion of Industry and InternalTrade (DPIIT) Ministry of Finance Department of Revenue Enforcement Directorate Department of Economic Affairs Foreign Investment Promotion Board FIPB was abolished on 24 May 2017 Reserve Bank of India Authorized Person Authorised Dealers Category I Category II Category III Full Fledged Money Changers Off shore Banking Units Section 47Power to make Regulations
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TransactionVoidabinitio
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Netherlands Sale of products/services India Payment Global Collect B.V., Overseas Merchants Global Collect India Private Limited Transaction void ab initio CA. Sudha G. Bhushan
• X Ltd, Exporter, services rendered to DPX • X Holding is holding co. of X Ltd. • XX Holding LLC is group co. of X Ltd. • Master Agreement between DPX and X Holding • Money received from X Holding • Money received within 9 months XX Holding LLC Money Master Agreement USA X Holding DPX Invoice Raised Service rendered India X Ltd Transaction void ab initio CA. Sudha G. Bhushan
Triggers Earlycompliance
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Not Realisation of Export Proceeds Maximum possible efforts Set off of export receivable against import payables Application to AD Bank for Extension of Time Application to RBI for Extension of Time 4 Reduction in Invoice Value Self Write off Application to RBI 1 2 3 5 6 7
Costofnoncomplianceis high 13 Penalty Provisions General Penalty Confiscation others In case of contravention of section 4 Penalty Confiscation of equivalent Indian Assets Imprisonment
CA. Sudha G. Bhushan
Due Diligence
IMPORTANT DOCUMENTS TO BE VETTED Balance Sheet Charter Documents of Company 1. MOA 2. Shareholder Agreement 3. Foreign Collaboration agreement Statutory Registers of the Company Form 3CEB Compliance Certificate Managerial Remuneration Contracts 1. ESOP 2. Insurance Financial Agreement
How to approach everyTransaction under FEMA? Understand the Transaction Categorise the transaction Current It is allowed Check for current Account Rules for any Prohibition Capital It is prohibited Check for Specific Regulations through which is it allowed 16
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Definition Characterisation Allowability
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All current account transactions are allowed until prohibited All capital account transactions are prohibited until permitted
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Duediligence ||Using Balance sheetApproach
Equity and Liabilities Nature under FEMA, 1999 Governing Regulation as per FEMA 1999
(1) SHAREHOLDERS’
FUND
a) Share capital Equity Share Capital
(a) Issued and subscribed
Fully paid up capital Equity
Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 & Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 read with FDI Policy, 2020.
(b) Partly Paid up shares Equity
Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 & Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 read with FDI Policy, 2020.
(c) Equity Share capital
(issued by way of Right issue/Bonus shares) Equity
Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 & Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 read with FDI Policy, 2020.
Duediligence
Equity and Liabilities Nature under FEMA, 1999 Governing Regulation as per FEMA 1999
Preference Capital
(i) Compulsory Convertible preference share Equity
Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 & Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 read with FDI Policy, 2020.
(ii)Non-Convertible preference share Debt as per FEMA, 1999
Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 read with Master Direction - External Commercial Borrowings, Trade Credits and Structured Obligations (FED Master Direction No.5/2018-19)
(b) Reserves and surplus
Dividend
Repatriation of dividend Foreign Exchange Management (Current Account Transactions) Rules, 2000 read with Current Account Transaction Amendment Rules, 2015
Share Premium Account Valuation of shares
Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 & Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 read with FDI Policy, 2020.
Duediligence
Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 & Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 read with FDI Policy, 2020.
Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 & Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 read with FDI Policy, 2020. (2)
Warrants Warrants
Share
Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 & Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 read with FDI Policy, 2020.
Equity and Liabilities Nature under FEMA, 1999 Governing Regulation as per FEMA 1999
Share option outstanding Account Employees stock option
(c) Money received against share Warrants
SHARE APPLICATION MONEY PENDING ALLOTMENT
Application Money Share Capital
Duediligence
Equity and Liabilities Nature under FEMA, 1999 Governing Regulation as per FEMA 1999
(3) NON- CURRENT LIABILITY
(a) Long-term borrowings
Debt from foreign institution/foreign equity holder
External Commercial Borrowings
Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 read with Master Direction - External Commercial Borrowings, Trade Credits and Structured Obligations (FED Master Direction No.5/2018-19)
Bonds
Foreign Currency Convertible Bonds/ Foreign Currency Exchangeable Bonds
Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 read with Master Direction - External Commercial Borrowings, Trade Credits and Structured Obligations (FED Master Direction No.5/2018-19)
(b) Deferred tax liabilities (Net)
Gain/loss arising out of foreign exchange transactions
Hedging of gain/loss arising out of foreign exchange transactions
Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000 read with amendments
(c) Other long-term liabilities
Equity and Liabilities Nature under FEMA, 1999 Governing Regulation as per FEMA 1999 Fully and mandatorily convertible debentures Equity for the purpose of FEMA Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 & Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 read with FDI Policy, 2020. (d) Long-term provisions (4) CURRENT LIABILITY (a) Short-term borrowings Trade Credit Suppliers credit/Buyers credit Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 read with Master Direction - External Commercial Borrowings, Trade Credits and Structured Obligations (FED Master Direction No.5/2018-19) (b) Trade payables Invoice Payable Import payment Foreign Exchange Management (Current Account Transactions) Rules, 2000 read with amendments
Duediligence
Duediligence
Equity and Liabilities Nature under FEMA, 1999 Governing Regulation as per FEMA 1999 (c) Other current liabilities Advance Payments Advance Payments received against Exports Foreign Exchange Management (Export of Goods and Services) Regulations, 2015 read with Master Direction – Export of Goods and Services (FED Master Direction No. 16/201516) (d) Short-term provisions TOTAL ASSETS Nature as per FEMA, 1999 Governing Regulation (1) NON-CURRENT ASSETS (a) Fixed assets Tangible Assets Immovable Property outside India FEM (Acquisition and transfer of immovable property outside India) Regulations, 2015 and FEM (Foreign Currency Accounts by a person resident in India) Regulations, 2015 and FEM (Remittance of Assets) Regulations, 2016
Duediligence
Equity and Liabilities
Nature under FEMA, 1999 Governing Regulation as per FEMA 1999
(b) Non-current investments
Investment in Equity Instruments of foreign Company Overseas Direct investment
Foreign Exchange Management (Overseas Investment) Rules, 2022, Foreign Exchange Management (Overseas Investment) Regulations, 2022 read with Foreign Exchange Management (Overseas Investment) Directions, 2022
Investment in equity instrument of Indian Company
Downstream Investment
(c) Deferred tax assets (net)
Gain/loss arising out of foreign exchange transactions
(d) Long-term loans and advances
Hedging of gain/loss arising out of foreign exchange transactions
Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 & Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 read with FDI Policy, 2020.
loan/ advance
Loan/advance to the foreign entity
Foreign Exchange Management (Foreign exchange derivative contracts) Regulations, 2000 read with amendments
Foreign Exchange Management (Overseas Investment) Rules, 2022, Foreign Exchange Management (Overseas Investment) Regulations, 2022 read with Foreign Exchange Management (Overseas Investment) Directions, 2022
Duediligence
Equity and Liabilities Nature under FEMA, 1999 Governing Regulation as per FEMA 1999
(e) Other non-current assets
Assets on lease Export of goods on lease rentals/hire charges
(2) CURRENT ASSETS
FEM (Export of Goods and Services) Regulations, 2015 read with Master Direction – Export of Goods and Services (FED Master Direction No. 16/201516)
Foreign Exchange Management (Overseas Investment) Rules, 2022, Foreign Exchange Management (Overseas Investment) Regulations, 2022 read with Foreign Exchange Management (Overseas Investment) Directions, 2022 Investment in debt instruments of overseas company Overseas investment
Foreign Exchange Management (Overseas Investment) Rules, 2022, Foreign Exchange Management (Overseas Investment) Regulations, 2022 read with Foreign Exchange Management (Overseas Investment) Directions, 2022
(b) Inventories
(a) Current investments Investment in listed overseas companies Portfolio investment overseas
(c) Trade receivables
Duediligence
and Liabilities Nature
1999
Regulation
1999
Export Proceeds
(Export of Goods and Services) Regulations, 2015 read
Master Direction – Export of Goods and Services
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debts Writing off of exports proceeds
(Export of Goods and Services) Regulations, 2015 read with Master Direction – Export of Goods and Services (FED
16) (d) Cash and cash equivalents Bank Account Foreign Currency account in India or Bank Account outside India FEM (Foreign Currency Accounts by a person resident in India) Regulations, 2015 (e) Short-term loans and advances Prepaid Invoice Advance remittances for imports FEM (Current Account Transactions) Rules, 2000 read with amendments
Equity
under FEMA,
Governing
as per FEMA
Debtors
FEM
with
(FED Master Direction No. 16/2015-
Bad
FEM
Master Direction No. 16/2015-
Duediligence Equity and Liabilities Nature under FEMA, 1999 Governing Regulation as per FEMA 1999 (f) Other current assets Pre-operative expense Pre incorporation expenses FEM (Current Account Transactions) Rules, 2000 read with amendments TOTAL CONTINGENT LIABILITY AND COMMITMENTS Contingent liability Guarantee Contingent liability FEM (Guarantees) Regulations, 2000 read with amendments Security Contingent Liability (pledge of immovable property, securities etc.) Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 read with Master Direction - External Commercial Borrowings, Trade Credits and Structured Obligations (FED Master Direction No.5/2018-19)
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