Start-Up Funding — FDI Route

COMPLIANCES UNDER FEMA ACT

How does a foreign company invest in India? What are the regulations pertaining to issue of shares by Indian companies to foreign collaborators/investors?

Automatic Route

FDI up to 100% is allowed under the automatic route in all activities/sectors except the following which require prior approval of the government:

• Where provisions of Press Note 1 (2005 Series) issued by the Government of India are attracted.
• Where more than 24% foreign equity is proposed to be inducted for manufacture of items reserved for the Small Scale sector.
• FDI in sectors/activities to the extent permitted under Automatic Route does not require any prior approval either by the government or the Reserve Bank of India.
• The investors are only required to notify the Regional Office concerned of the Reserve Bank of India within 30 days of receipt of inward remittances and file the required documents along with form FC-GPR with that Office within 30 days of issue of shares to the non-resident investors.

Government Route

FDI in activities not covered under the automatic route requires prior Government approval and are considered by the Foreign Investment Promotion Board (FIPB), Ministry of Finance. Application can be made in Form FC-IL, which can be downloaded from www.dipp.gov.in. Plain paper applications carrying all relevant details are also accepted. No fee is payable.

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

• Retail Trading (except single brand product retailing)
• Atomic Energy
• Lottery Business
• Gambling and Betting
• Business of Chit Fund
• Nidhi Company
• Agricultural or plantation activities (cf Notification No. FEMA 94/2003-RB dated June 18, 2003).
• Housing and real estate business (except development of townships, construction of residential/commercial premises, roads or bridges to the extent specified in Notification No. FEMA 136/2005-RB dated July 19, 2005 )
• Trading in Transferable Development Rights (TDRs).

Modes of Payment allowed for receiving FDI:

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:

a) Inward remittance through normal banking channels.

b) Conversion of import payables / pre incorporation expenses/ share swap can be treated as consideration for issue of shares with the approval of FIPB.

c) Debit to NRE / FCNR account of a person concerned maintained with AD category-I bank.

d) Conversion of royalty / lump sum / technical know-how fee due for payment or conversion of ECB, shall be treated as consideration for issue of shares.

e) Debit to non-interest bearing Escrow account in Indian rupees in India which is opened with the approval of from AD category-I bank and is maintained with AD category-I bank on behalf of residents and non-residents towards payment of share purchase consideration.

Note:

i. 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 / ESCROW account, the amount shall be refunded.

ii. Further, RBI 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.

What should be done after investment is made under the Automatic Route or with Government approval?

A two-stage reporting procedure has been introduced for this purpose.

On receipt of money for investment:

• Within 30 days of receipt of money from the non-resident investor, the Indian company will report to the regional office of the Reserve Bank of India, under whose jurisdiction its registered office is located, containing details such as:
• Name and address of the foreign investor/s
• Date of receipt of funds and their rupee equivalent
• Name and address of the authorised dealer through whom the funds have been received, and
• Details of the Government approval, if any.
• Amount:
• Amount received in Foreign Currency
• Currency Type like USD, GBP etc
• Exchange Rate for Conversion
• Amount in Indian Rupees
• Whether Investment is under Automatic Route or Approval Route
• If it is automatic route (pre-approved by govt for all the users of some sectors), then click on automatic route and proceed
• If it requires an approval from the RBI, then click on approval route and mention the date and reference number of the approval
• Details of AD Bank: The name of the Bank in which the money has been received, the branch name also has to be mentioned
• Address & Contact Details of the AD Bank
• Attachments:
• KYC — It will be shared by the Remitter bank as well as the AD Bank
• Both KYC needs to be attached here
• Foreign Inward Remittance Certificate (FIRC): This is a certificate that will be issued by the AD Bank and needs to be attached
• Authorised Signature of the Investee Company
• Details of AD Bank to whom the form is submitted — The form will be sent to the bank to confirm all the details and once the bank and RBI checks it, then the acknowledgment will be generated for your reference

Upon issue of shares to non-resident investors:

a) Pricing guidelines

· Fresh issue of shares:

Price of fresh shares issued to persons resident outside India under the FDI be:

i. On the basis of SEBI guidelines in case of listed companies.

ii. Not less than fair value of shares determined by a SEBI registered Merchant Banker or a Chartered Accountant as per the Discounted Free Cash Flow Method (DCF) in case of unlisted companies.

The above pricing guidelines are also applicable for issue of shares against payment of lump sum technical know-how fee / royalty or conversion of ECB into equity or capitalization of pre incorporation expenses/import payables (with prior approval of Government).

· Preferential allotment:

In case of issue of shares on preferential allotment, the issue price shall not be less that the price as applicable to transfer of shares from resident to non-resident.

· Issue of shares by SEZs against import of capital goods: In this case, the share valuation has to be done by a Committee consisting of Development Commissioner and the appropriate Customs officials.

· Right Shares: The price of shares offered on rights basis by the Indian company to non-resident shareholders shall be;

i. In the case of shares of a company listed on a recognised stock exchange in India, at a price as determined by the company.

ii. In the case of shares of a company not listed on a recognised stock exchange in India, at a price which is not less than the price at which the offer on right basis is made to the resident shareholders.

Within 30 days from the date of issue of shares, a report in Form FC-GPR, PART A together with the following documents should be filed with the concerned regional office of the Reserve Bank of India.

• PAN of the Investee Company
• Date of issue of shares
• Basic details of the Investee Company
• Description of the main business activity: This basically covers the description and the activities of txhe business that is given at the time of obtaining the registration from the RBI
• Location of the project for which the investment has been made
• Percentage(%) of FDI allowed as per FDI Policy
• State whether it is allowed under Automatic or Approval Route
• Details of Foreign Investor
• Type of Security Issues:
• Whether the nature of the security is Equity, Debentures, Others (Specify)
• Number
• Face Value
• Premium
• Issue Price/Share
• Amount of Inflow
• Nature and date of Issue
• This is further divided into Cash and Non-Cash Transaction
• The nature of the issue i.e IPO/FPO, preferential allotment/private placement, Rights, ESOP, other(specify)
• Break up of premium
• Total Inflow in rupees on account of shares/convertible debentures/others to non-residents
• It asks for further 3 options — Remittance through AD, debit to NRE/FCNR/Escrow A/c with bank, Others (Specify)
• Date of Advance Reporting to the RBI regarding the above-mentioned transaction
• Disclosure of the Fair Value of the shares issues
• Post issue pattern of shareholding
• Declaration by the Investee Company (Select tick whichever applicable)
• Certificate from the company secretary of the company accepting investment from persons resident outside India certifying that;

The company has complied with the procedure for issue of shares 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

The proposal is within the sectoral policy / cap permissible under the automatic route of RBI and it fulfills all the conditions laid down for investments under the Automatic approval route namely

a) Non-resident entity/ies (other than individuals) to whom it has issued shares does / do not have any existing joint venture or technology transfer or trade mark agreement in India in the same field.

b) The company is not investing in an SSI unit & the investment limit of 24 % has been observed/ requisite approvals have been obtained.

c) Shares have been issued on rights basis and the shares are issued to non-residents at a price that is not lower than that at which shares are/were issued to residents.

OR

d) Shares issued are bonus shares.

OR

e) Shares have been issued under a scheme of merger and amalgamation of two or more Indian companies or reconstruction by way of demerger or otherwise of an Indian company, duly approved by a court in India.

· Shares in the company have been issued to the Foreign Investor in terms of SIA/FIPB approval number and date. A copy of the Foreign Investment Promotion Board (FIPB) must be attached.

· MOA

· Board Resolution approving the FDI in India

• 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.
• The report of receipt of consideration as well as Form FC-GPR have to be submitted by the AD Category-I bank to the Regional Office concerned of the Reserve Bank under whose jurisdiction the registered office of the company is situated.

Annual Return on Foreign Liabilities and Assets (FLA): An Indian Company which has received FDI or an LLP which has received investment by way of capital contribution in the previous year including the current year, should submit form FLA to the Reserve Bank on or before the 15th day of July of each year. Explanation: Year for this purpose shall be reckoned as April to March.

Reporting on FIRMS Application

RBI has introduced FIRMS, an online application which provides the interface for filing of EMF and SMF. Online reporting on FIRMS has to be made in two phases:

1. In the first phase, the first module viz. the interface for filing EMF has been made available online.

2. In the second phase, the second module containing the SMF would be made available online with effect from August 1st, 2018.

The Reserve Bank, in the First Bi-monthly Monetary Policy Review dated April 5, 2018 announced that, with the objective of integrating the extant reporting structures of various types of foreign investment in India, it will introduce a Single Master Form (SMF) subsuming all the existing reports.

1.2 In order to implement this announcement, the Reserve Bank is introducing an online application, FIRMS (Foreign Investment Reporting and Management System), which would provide for the SMF. FIRMS would be made online in two phases. In the first phase, the first module viz., the Entity Master, would be made available online. Instructions in this regard were already issued through A. P. Dir. Series Circular №30 dated June 07, 2018.

1.3 In the second phase, the second module containing 9 reports would be made available with effect from August 01, 2018. With the implementation of SMF, the reporting of FDI, which is presently a two-step procedure viz., ARF and FC-GPR would be merged into a single revised FC-GPR. The SMF also introduces reporting of indirect foreign investment through form DI and reporting of inflows in investment vehicles through Form InVi. Further, the reporting in FC-TRS, LLP-I, LLP-II, ESOP, DRR and CN would also be made in SMF only. The finalized structure of SMF and operational instructions thereof would be made available in the Master Direction on Reporting under FEMA, 1999.

1.4 The first module will be available to the public for data entry between June 28 (at 1:00 pm) and July 12, 2018. It would provide an interface for Indian entities [as defined in Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2017 dated November 07, 2017 and as amended from time to time] to input their existing foreign investment (including indirect foreign investment) data. Entities shall provide data with respect to all foreign investments received, irrespective of the fact that the regulatory reporting to the Reserve Bank for the same has been made or not and whether the same has been acknowledged or not.

1.5 Indian entities not complying with these instructions will not be able to receive foreign investment (including indirect foreign investment) and will be treated as non-compliant with Foreign Exchange Management Act, 1999 (FEMA) and regulations made thereunder and liable for action as laid in FEMA or the regulations made thereunder

Registration for an Entity User 4.1

Pre-requisites

• Authority letter: The entity may issue an authority letter, in the format as given at Annex to the identified personnel authorizing him/her for registering as an Entity user for the entity.

• The Entity user may keep ready all details of foreign investment in the entity. 4.2 Registration Process

• Uniform Resource Locators (URL) of the application is https://firms.rbi.org.in

• The person, for registering as Entity User, may access the login page of the FIRMS application using the above URL on the internet.

Authority Letter submitted by the entity user will be verified by RBI and after RBI’s approval, the user will receive the password on their registered email ID from RBI email ID autoreply-fid@rbi.org.in. (Note: If the user does not receive the mail notification for approval/rejection of the registration within the next 48 hrs, he/she may contact by email).

COMPLIANCES UNDER COMPANIES ACT

a) As per the provisions of the Companies Act, 2013, the company has to keep the share application money in a separate bank account and cannot utilize the money before the allotment of the shares to the investors. If the Company contravenes the provisions of the Companies Act, 2013 the its promoters and directors will be liable for a penalty which may extend to the amount involved or 2 crores rupees, whichever is higher and the company shall also refund all monies to the subscribers within a period of 30 days from the date of penalty along with the interest of 12% p.a.

b) The Company has to allot/issue the shares within the time frame given by RBI and MCA accordingly. The time limits are:

• RBI — The shares must be allotted within 180 days from the date of receipt of funds
• MCA — The shares must be allotted within 60 days from the date of receipt of funds

So, in a nutshell, the time limit to issue/allot the shares comes down to 60 days as per the MCA.

c) Issue of preference shares may be made either through:

· Rights Issue under Section 62(1)(a) only to the existing Equity Shareholders; or

· ESOP Under Section 62(1)(b) specifically provides for the issue to the employees or

· Preferential Allotment under Section 62(1)© of the Companies Act, 2013 to any person including above can participate in this type of further issue subject to the adherence to Rule 13 of Companies (Share Capital and Debenture) Rule, 2014;

· Private Placement of Shares under section Section-42 read with the rule;

Conditions for issue of preference shares

Section 55 of the Act read with Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014 (‘Rules’) framed there under, inter alia, requires a company to obtain the prior approval of the Shareholders, by way of a Special Resolution for the issuance of preference shares;

· As per section 55 of the Act, a company can issue only redeemable preference shares i.e. a company is not allowed to issue irredeemable preference shares.

· Further, it is mandatory for every company issuing preference shares to redeem it within a period of 20 years from the date of issue.

· However, a company may issue preference shares with a redemption period of more than 20 years’ time provided that a certain percentage of such shares are redeemed annually at the option of the shareholders

· In order to issue securities by way of preference shares by private placement, the private company (‘the Company’) is required to circulate an offer letter to the selected group of people to whom the Company proposes to issue its shares,

· Conditions to be complied with before issuing preference shares:

i. Whether nominal capital of company divides into Equity Share Capital and Preference Share Capital;

ii. whether there is Provision in Article of Association of the company regarding the issue of Preference shares;

iii. At the time of issue of Preference shares no subsisting default in the redemption of preference shares issued. (Rule-9(1)(b) of The Companies (Share Capital & Debentures) Rules, 2014;

iv. At the time of issue of Preference shares no subsisting default in the payment of dividend due on any preference share. (Rule-9(1)(b) of The Companies (Share Capital & Debentures) Rules, 2014;

The regulations in respect of the following matters relating to preference shares are to be included in the Articles of Association of a company:-

· The voting rights;

· The redemption of preference shares.

· The priority with respect to the payment of dividend or repayment of capital vis-à-vis equity shares.

· The payment of dividend on the cumulative or non-cumulative basis.

· The conversion of preference shares into equity shares. The participation in the surplus fund.

· The participation in surplus assets and profit, on winding-up.

The “Explanatory Statement” to be annexed to the notice of the general meeting pursuant to section 102 shall, inter-alia, provide the complete material facts concerned with and relevant to the issue of such shares, including —

i. size of the issue and number of preference shares to be issued and the nominal value of each share;

ii. the nature of such shares i.e. cumulative or non-cumulative, participating or non-participating, convertible or non-convertible

iii. the objectives of the issue

iv. the manner of the issue of shares;

v. the price at which such shares are proposed to be issued;

vi. the basis on which the price has been arrived at;

vii. the terms of issue, including terms and rate of dividend on each share, etc.;

viii. the terms of redemption, including the tenure of redemption, redemption of shares at the premium and if the preference shares are convertible, the terms of conversion;

ix. the manner and modes of redemption;

x. the current shareholding pattern of the company;

xi. The expected dilution in equity share capital upon conversion of preference shares.

d) Conduct a Board Meeting with the Board of Directors to allot the shares.

e) File Form MGT-14 with following attachments:

(i) Certified true copy of resolution passed at general meeting

(ii) Notice of general meeting and explanatory statement

Note: Ensure that filing of e-Form MGT-14 precedes filing of Form PAS-3

f) File Form GNL-2 with following attachments:

(i) Certified true copy of resolution passed at general meeting

(ii) Notice of general meeting and explanatory statement

(iii) Form PAS-4

(iv) Form PAS-5

(v) Ensure that filing of e-Form GNL-2 precedes filing of Form PAS-3 but not Form MGT-14

g) Filing of Form PAS-3 with MCA: This form needs to be filed with the MCA within 30 days from the date of allotment of shares. The Form needs to be downloaded from the MCA website and needs to be filled manually and then upload the form. The Form can be available at MCA

http://www.mca.gov.in/MinistryV2/companyformsdownload.html

The details covered in the form are:

1. CIN of the Company — Once you fill this, click on Pre Fill and the basic details of the company will be automatically filled in the form
2. Number of Allotment
3. Date of Allotment
4. Details of Shares issued
5. Details of the Consideration Received
6. Whether an agreement or contract is executed in writing for allotting securities for consideration other than cash
7. Whether Valuation report of the evaluated person has been obtained

• Bonus Shares issued
• Capital structure of the Company after taking into consideration the above allotment shares
• Debt structure of the Company after taking into consideration the above allotment shares

1. Attachments:

• List of Allottees of shares
• Board Resolution

1. This form also needs to be signed by a practicing CA/CS Chartered Accountant/ Company Secretary
2. Form PAS- 5.

h) The Company has to issue the Share Certificate within 60 days from the allotment of shares. Issue Share Certificate in Form- SH-1 (As per Section-56 within 2 (two) months from the date of allotment of shares.

i) Payment of Stamp Duty: The Company will also have to pay the stamp duty on the shares allotted as per the State in which the Company is registered.

1. This form also needs to be signed by a practicing CA/CS Chartered Accountant/ Company Secretary
2. Form PAS- 5.

h) The Company has to issue the Share Certificate within 60 days from the allotment of shares. Issue Share Certificate in Form- SH-1 (As per Section-56 within 2 (two) months from the date of allotment of shares.

i) Payment of Stamp Duty: The Company will also have to pay the stamp duty on the shares allotted as per the State in which the Company is registered.

Information in this blog is intended to provide only a general outline of the subjects covered It should not be regarded as comprehensive or sufficient for making decisions, nor should it be used in place of professional advice.

Nitin Jogad & Associates| Chartered Accountants accept no responsibility for loss arising from any action taken or not taken by anyone using this blog.