May 11, 2022

To,

Chief General Manager-in-Charge,

Foreign Exchange Department

Reserve Bank of India

11th Floor, Central Office Building,

Shahid Bhagat Singh Road,

Mumbai-400 001.

 

Dear Sir,

Sub:-    Suggestions Re. Provisions of FEMA 1999

We ,a group of Chartered Accountants, advisors to overseas Indians are running a consultancy firm in name of 'Keynote Consultancy'.

Our area of proficiency are : Foreign Exchange Laws, Tax Laws , Double Tax Treaties , USA Tax Compliance and Mutual Funds Advisors.

Our popular and beneficial websites for NRI's (Founder Late Mr. Rajesh Dhruva)

01.  www.femaonline.com  - a comprehensive , presenting edited and updated version of FEMA Act 1999, Rules and Regulation there under as also Tax Laws and Banking Regulations pertaining to NRI's.

02.  www.nribanks.com - the only website showing interest rates updated monthly of majority banks in India in Foreign Currency and INR for NRI's.

With our brief introduction, we would like to draw attention to few practical issues and suggestions regarding provisions of FEMA 1999.

SUGGESTIONS :-

I.      Definition - Person Resident in India:   

1.   The definition in Section 2(v) r.t.w. Section 2(w) defines an NRI returning to India for permanent settlement as person resident in India provided his stay in preceding year i.e. Financial Year (F.Y.) before the year of return exceeds 181 days.

.02   Thus, a returning NRI will not become a resident in the year of return but in the succeeding year following the year of return and that also only if his stay exceeds 181 days in the year of return.

.03   Now, various regulations and in particular F.E.M. (Deposit) Regulations, 2016 require a returning NRI to immediately re-designate Non-Resident External (NRE) and Non-Resident Ordinary (NRO) accounts as Resident accounts.  Similarly, not being an NRI, his demat accounts, life policies and other investments can also be made as Resident.

2.   Even if the definition theoretically followed and if such returning NRI considers himself as an NRI in the year of return, he cannot make new investments and settle down as non resident more in particular when his bank accounts are Resident Rupee accounts and practically he has ceased to be a non resident having returned to India for settlement.

3.   As the definition is contradictory, appropriate change is to be made and ideally all conditions regarding number of days should be deleted.

II.     Definition - Hindu Undivided Family (HUF) :

1.   Section 2(u)(ii) of Foreign Exchange Management Act, 1999  defines the term “person” and this includes  a Hindu Undivided Family.

2.   Whereas  Section 2(v) defines “person resident in India”  and Section 2(w) defines “person resident outside India”

3.   Now said definitions cover an individual as also a person or body corporate registered or incorporated in India or office branch or agency controlled by a person resident in India or otherwise.

.02 But none of the definitions cover / lay down guidelines for determining residential status of a Hindu Undivided Family.

4.   Appropriate guidelines as also investment facilities should be laid down for HUF.

III.   Filing Date of Annual Return By Companies Be Extended :

1.   Indian companies which have issued shares or accepted loans / deposits from Non-Resident Indians (NRIs); Persons of Indian Origin (PIOs) ; foreigners or overseas entities are required to file Annual Return  showing the position as on 31st March on or before 15th July under the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019.

2.   Now under the Companies Act, 2013, an Indian company is required to present audited accounts  and Annual Return in Annual General meeting on or before 30th September.

3.   Also under the Income Tax Act, 1961 [I.T. Act], an Indian company is required to file income tax return along with audited accounts on or before 30th September.

4.  As many Indian companies do not have their accounts audited on or before 15th July, such companies are required to submit Annual Return under FEMA based on unaudited provisional accounts and if there are major changes,  file revised Annual Return based on audited account.

5.  To mitigate this difficulty, the due date for filing Annual Return under FEMA be aligned with the date under the Companies Act ,2013 and be specified as 30th September.

IV.    Raising loans through ECB from Individual :

1.  As per Master Direction - External Commercial Borrowings, Trade Credits and Structured Obligations dated March 26, 2019 eligible borrower can avail ECB from individual provided such individual is foreign equity holders.

2.  Para 1.11 of the master direction define foreign equity holders as "direct foreign equity holder with minimum 25% direct equity holding in the borrowing entity".

3.  But nowhere it is mentioned that such direct holding is required to be on repatriation basis or non-repatriation basis.

4.    Appropriate clarification is required to be laid down.

V.     Disinvestment by way of write off of investment with JV/WOS :

1.  As per clause B.15 r.t.w. B.16 of Master Direction – Direct Investment by Residents in Joint Venture (JV) / Wholly Owned Subsidiary (WOS) Abroad dated January 1, 2016, Indian party may transfer by way of sale of share of a JV/WOS involving write off of the investment.

2.  Valuation certificate is required if share are not listed on stock exchange and share are disinvested by a private arrangement.

3.   Also valuation is required to be given on latest audited financial statement

But:

i)  It has not been clarified that in case of disinvestment on account of liquidation of the JV/WOS whether valuation certificate is required or not as there is no transfer by way of private arrangement.

ii)  Also in so many countries audit of JV/WOS is not required but it is mentioned in clause (iii) of B.15 of the master direction that it should be based on latest audited financial statement

4.   Appropriate clarification is required to be laid down.

VI.   Disinvestment by way of closure of JV/WOS and not Write-off :

1. the word "write-off" is not defined under Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004. However, in general write-off mean the underlying asset is still in existence however, it is practically nearly impossible to liquidate said asset.

2. Now under Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004, if Indian entity / Resident Individual has made Overseas Direct Investment in JV/WOS, which fails to grow business successfully and ultimately wind-up the company then in such instance it is not write-off and it is closure of company.

3. Practically in absence of detailed provisions for closure of overseas JV/WOS, Bankers ask to submit documentation applicable in case of write-off which becomes practically difficult.

4. More specifically when the Resident Individual has made investment in overseas JV/WOS and said JV/WOS are winding-up then RBI approval is mandatory.

5. Accordingly more clarification is sought on subject matter.

VII.  Loans to Non-Residents by Residents :

1. Para (i) of schedule I of Foreign Exchange Management (Permissible capital account transactions) Regulations, 2000, grant general approval for Loans and overdrafts by a person resident in India to a person resident outside India. [Regulation 3 (1)(A)]

2. However, as per para A.6(v) of Master Direction - Liberalised Remittance Scheme (LRS) dated January 1, 2016, loan can be given by individual only to his close relative as defined under section 2(77) of the Companies Act, 2013.

3. Such restriction is not found in relevant regulations of Foreign Exchange Management (Permissible capital account transactions) Regulations, 2000.

4. Thus appropriate changes should be made by removing restriction of close relative as defined in companies act 2013. As in any case close relative can give Gift to non-resident close relative.

5.   Appropriate changes is required to be made.

VIII. Investment in LLP from land border sharing countries :

1. Restriction for availing Foreign Direct Investment from  entity  or beneficial owner of  a  country,  which  shares  land  border  with  India  shall invest only with the Government approval was incorporated only in rule  6,  in  clause  (a) of Foreign  Exchange  Management  (Non debt Instruments) Rules 2019, vide notification No. S.O. 1278(E) dated April 22, 2020.

2. However, no such restriction incorporated in clause (b) of rule 6 for foreign investment in LLP.

3. As intention of such modification in rules meant for any and every kind of restriction for investment from countries sharing land border, such restriction should also be inserted under Rule 6 clause (b).

If any clarifications are required , we will be happy to provide the same and look forward to your response at earliest convenience.

With regards.
Sincerely
 

CA Nita Rajesh Dhruva          CA Bharat Khandhediya                CS Rima Joshi
(Chief Executive)    

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