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Doing Business in India 2020

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India is a vast, populous, and diverse nation encompassing many different identities, languages, cultures, and religions. India is the seventh largest country by area and the second most populous country in the world.
In terms of its economic growth, India is one of the fastest growing economies of the world. However, these are intriguing times for the Indian economy. Rated as one of the most stable economies, India continues to shine amidst global gloom. Led by the Modi government, several economic, financial, and institutional reforms including the reforms leading to ease of doing business across states, have been implemented. India claiming the 63rd spot in World Bank’s recently released Ease of Doing Business rankings is a testimony to this fact. Moreover India has marked the biggest improvement recorded among 190 countries in the World Bank’s ‘Doing Business 2020-Reforming to create jobs’ report. Furthermore, India jumped 22 ranks in last four years in the United Nation’s E-Governance Index.

Increase in the economic growth in India is majorly attributed to the sweep of changes that have been ushered by the governments both at the central and state level with some of the biggest changes being:

• Introduction of a unified indirect tax law system,
• Introduction of insolvency and bankruptcy code to turn around stressed assets and improve the flow of money in the economy [primarily through banking and financial institutions],
• Stabilization of government’s outlook towards imposing taxes on foreign investors, liberalization of the framework for foreign investment,
• Regulation of real estate market, which was largely considered fragmented and unorganised by enactment of the Real Estate Regulation Act [RERA],
• The state and central governments have also made changes to the various laws which deal more so with the compliances whereby they have streamlined the laws and brought them in line with the socio economic changes that have happened since the introduction of several of such laws and thus, have moved away from the age-old bureaucracy and red-tapism by removing physical interaction and interface vis-à-vis the government and progressing towards digital interfaces.

This document endeavours to lay down the fundamental legal regime regarding the conduct of business in India and resolves queries and issues normally raised by overseas investors. It is intended to act as a broad legal guide to aid your decision making process when deciding to invest, establish business entity and carry on operations in India.

Today, when the world is looking at India as an ideal business destination, we hope that this comprehensive document will prove to be very handy and useful to all the aspirants from global business fraternity and our professional associates throughout the world in their analysis and evaluation of business ventures and in strengthening decision making process

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Doing Business In India

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India has emerged as the fastest growing major economy in the world and is expected to be one of the top three economic powers in the world over the next 10-15 years, backed by its robust democracy and strong partnerships.

The service sector has been driving economic growth in India, accounting for 55% of Gross Value Added (GVA) growth (at constant prices), followed by the industry sector with a 28% share, and agriculture accounting for 17%. However, agriculture still has the largest share in employment (over 40% of the total workforce), followed by services (approximately 30%). Within the service sector, India is the leading sourcing destination across the world. As per industry estimates, India accounts for approximately 55% market share of the US$ 200-250 billion global services sourcing business in 2019-20. Further, the IT industry accounts for approximately 8% of India’s GDP.

India’s Economy Rebounded Strongly Despite Facing 3 Major COVID-19 Waves as India’s GDP forecast for FY 2022-23 is poised at 7.5%.

India’s nominal GDP at current prices was estimated at Rs.232.15 trillion (US$ 3.12 trillion) in FY22. With more than 100 unicorns valued at US$ 332.7 billion, India has the third-largest unicorn base in the world. The government is also focusing on renewable sources to generate energy and is planning to achieve 40% of its energy from non-fossil sources by 2030.

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Provisions of Section 194S in brief:

To remove difficulties in implementing the provisions of section 194S, the Central Board of Direct Taxes (CBDT) has issued Circular No.13/2022 on 22nd June 2022 containing the guidelines in the form of questions/ answers. The Guidelines clear air on numerous vexed issues. We have summarized the incidence of TDS under various situations as provided in these guidelines.

Other clarifications:

• Whether provisions of section 194Q would also apply on transfer of VDA?

  No, section 194Q would not be applicable once TDS is deducted U/s 194S.

• Whether consideration for transfer of VDA shall be inclusive of GST and commission or it shall be net of GST & commission?

  It shall be net consideration exclusive of GST & commission.

• Where the transaction is carried out through payment gateways, whether such payment gateways are also required to deduct TDS?

  The Payment gateway would not be required to deduct TDS if it has already been deducted U/s 194S by the person responsible for deduction of tax.

• Whether Consideration for transfer of VDA before 01-07-2022 shall also be considered for calculation of threshold limit of Rs.50,000/- or Rs.10,000/- per financial year for specified person/ others respectively?

  As such, for FY 2022-23, the consideration for transfer of VDA from 01-04-2022 to 30-06-2022 shall also be considered for calculating the value of Rs. 50,000/- or Rs.10,000/-, as the case may be.

  Here are some illustrations for obtaining better understanding of the threshold limits:

  Case: A (non-specified person) purchases some VDAs from B in the following manner:

Illustrations 1:

In this case, TDS u/s 194S shall be deducted by A on an amount of Rs. 45,000 i.e. the VDAs purchased up to 30-06-2022 shall also be considered for determining the threshold limit for deduction of Rs. 50,000. However, since, 194S shall be effective from 01-07-2022, no TDS shall be deducted on VDAs purchased up to 30-06-2022.

Illustrations 2:

In this case, TDS u/s 194S shall be deducted on an amount of Rs. 45,000 only. Again, TDS on an amount of Rs. 55,000 representing VDAs purchased up to 30-06-2022 shall not be deducted as Section 194S is applicable only from 01-07-2022.

Illustrations 3:

In this case, no TDS u/s 194S shall be deducted as no VDAs have been purchased on or after section 194S becomes effective. It does not matter if the threshold of Rs. 50,000 has been breached because of purchases up to 30-06-2022.

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Section 194R: Deduction of tax on benefit or perquisite in respect of business or profession:

• Any person responsible for providing to a resident, any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession, by such resident, shall, before providing such benefit or perquisite, as the case may be, to such resident, ensure that tax has been deducted in respect of such benefit or perquisite at the rate of ten per cent of the value or aggregate of value of such benefit or perquisite:

  Provided that in a case where the benefit or perquisite, as the case may be, is wholly in kind or partly in cash and partly in kind but such part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of such benefit or perquisite, the person responsible for providing such benefit or perquisite shall, before releasing the benefit or perquisite, ensure that tax required to be deducted has been paid in respect of the benefit or perquisite:

  Provided further that the provisions of this section shall not apply in case of a resident where the value or aggregate of value of the benefit or perquisite provided or likely to be provided to such resident during the financial year does not exceed twenty thousand rupees:

  Provided also that the provisions of this section shall not apply to a person being an individual or a Hindu undivided family, whose total sales, gross receipts or turnover does not exceed one crore rupees in case of business or fifty lakh rupees in case of profession, during the financial year immediately preceding the financial year in which such benefit or perquisite, as the case may be, is provided by such person.

• If any difficulty arises in giving effect to the provisions of this section, the Board may, with the previous approval of the Central Government, issue guidelines for the purpose of removing the difficulty.
• Every guideline issued by the Board under sub-section (2) shall, as soon as may be after it is issued, be laid before each House of Parliament, and shall be binding on the income-tax authorities and on the person providing any such benefit or perquisite.

Explanation – For the purposes of this section, the expression “person responsible for providing” means the person providing such benefit or perquisite, or in case of a company, the company itself including the principal officer thereof.]

Brief Background

As per clause (iv) of section 28 of the Act, the value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of profession is to be charged as business income in the hands of the recipient of such benefit or perquisite. However, in many cases, such recipient does not report the receipt of benefits in their return of income, leading to furnishing of incorrect particulars of income.

Accordingly, in order to widen and deepen the tax base, the Finance Act 2022 inserted Section 194R to the Act to provide that the person responsible for providing to a resident, any benefit or perquisite, whether convertible into money or not, arising from carrying out of a business or exercising of a profession by such resident, shall, before providing such benefit or perquisite, as the case may be, to such resident, ensure that tax has been deducted in respect of such benefit or perquisite.

Provisions of Section 194R in brief:

To remove difficulties in implementing the provisions of section 194R, the Central Board of Direct Taxes (CBDT) has issued Circular No.12/2022 on 16th June 2022 containing the guidelines in the form of questions/ answers. The Guidelines clear air on numerous vexed issues like taxability in recipient’s hands, nature of asset given, TDS compliance where cash component falls short, valuation, free medicines samples, sales discount and rebates, other incentives, out-of-pocket expenses, among others.

We have critically analyzed the provisions in depth and have prepared detailed FAQs covering possible practical scenarios and seek to address all the ambiguities that have creeped in the minds of the taxpayers.

Practical Frequently Asked Questions [FAQs] on applicability of Section 194R:

For deducting TDS, whether test of taxability u/s 28(iv) is required to be performed?

Applicability of section 194R is not directly linked to section 28(iv). Therefore, it is not necessary for the payer/ deductor to check the taxability of the sum in the hands of the payee u/s 28(iv). In this regard, CBDT has also clarified that the sum could also be taxable under any other sections like Section 41(1) without affecting the applicability of section 194R. CBDT has distinguished the principles governing TDS u/s 194R from the underlying principles operating for TDS u/s 195 where the payer is required to determine whether the sum being paid to the non-resident is indeed his income and hence taxable.

Thus, the payer has to deduct TDS u/s 194R if the benefits being paid fulfills the conditions specified under this section only, without considering its taxability in the hands of the recipient.

How to deduct tax where benefit is only in kind or benefit in cash is not sufficient to discharge TDS liability?

Proviso to sub-section (1) of Section 194R states that in a case where the benefit or perquisite, as the case may be, is wholly in kind or partly in cash and partly in kind but such part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of such benefit or perquisite, the person responsible for providing such benefit or perquisite shall, before releasing the benefit or perquisite, ensure that tax required to be deducted has been paid in respect of the benefit or perquisite.

In point no.2 above, how the ‘provider of benefit or perquisite’ shall ensure that appropriate tax has been paid by the recipient in respect of the benefit or perquisite?

In such a case, the recipient would pay tax in the form of advance tax. The tax deductor may rely on a declaration along with a copy of the advance tax payment challan provided by the recipient confirming that the tax required to be deducted on the benefit or perquisite has been deposited. However, it is the responsibility of the deductor to report this in the TDS return along with challan number.

CBDT has also provided an alternative in which the benefit provider may deduct the tax u/s 194R and pay to the Government out of his own pocket. However, such tax paid out of own pocket would also be considered as benefit or perquisite and calculation of tax payable shall be done after grossing up of taxable value.

Whether benefits or perquisites provided before 01-07-2022 shall also be considered for calculation of threshold limit of Rs. 20,000/- per financial year?

For deduction of tax, Section 194R provides for threshold limit of Rs. 20,000/- for each financial year. As such, for FY 2022-23, the benefit or perquisites provided from 01-04-2022 to 30-06-2022 shall also be considered for calculating the value of Rs. 20,000/-.

Here are some illustrations for obtaining better understanding of the threshold limits:

Illustrations 1: Benefits provided to a resident up to 30-06-2022 is Rs. 5,000:

In this case, TDS u/s 194R shall be deducted on an amount of Rs. 18,000 i.e. the benefits provided up to 30-06-2022 shall also be considered for determining the threshold limit for deduction of Rs. 20,000. However, TDS shall not be applicable on benefits provided up to 30-06-2022 as section 194R becomes effective only from 01-07-2022.

Illustrations 2: Benefits provided to a resident is more than ₹ 20,000 up to 30-06-2022:

In this case, TDS u/s 194R shall be deducted on an amount of Rs. 60,000. Again, TDS on an amount of Rs. 25,000 representing benefits provided up to 30-06-2022 shall not be deducted as Section 194R is applicable only from 01-07-2022.

Illustrations 3: Benefits provided to a resident is more than ₹ 20,000 up to 30-06-2022 but no benefit provided on or after 01-07-2022:

In this case, no TDS u/s 194R shall be deducted as no benefit has been provided on or after section 194R becomes effective. It does not matter if the threshold of Rs. 20,000 has been breached because of benefits provided up to 30-06-2022.

on an amount of Rs. 60,000. Again, TDS on an amount of Rs. 25,000 representing benefits provided up to 30-06-2022 shall not be deducted as Section 194R is applicable only from 01-07-2022.

Whether TDS is required to be deducted where benefit is in the form of a capital asset?

Section 194R does not discriminate on the basis of nature of benefit or perquisite being provided. Therefore, the nature of asset given as benefit or perquisite is not relevant and even capital assets given as benefit or perquisite are covered within the scope of Section 194R. In the guidelines provided by CBDT, it has categorically used the phrase ‘of whatever nature’ to define the nature of benefit or perquisite for fastening TDS liability on the payer.

Whether TDS is required to be deducted on Sales Discount, Cash Discount & Rebates given to customers?

Sales discounts, cash discount or rebates (collectively called as discount) allowed to customers from the listed retail sale price represents reduction in purchase price for the customers. Although, the discounts given may fall within the definition of benefit or perquisite given to the customers, the CBDT vide its guidelines has clarified that no tax is required to be deducted u/s 194R on discount allowed to customers. This relaxation has also been extended to ‘Buy 1 Get 1 Free’ schemes.

Having said this, the CBDT has also clarified that such a relaxation shall not be construed to be applicable on all forms of discounts or benefits given to customers. For illustration purposes, CBDT has listed down the following cases where TDS u/s 194R shall be deducted:

• Where free samples are given by sellers.
• When a person gives incentives (other than discount, rebate) in the form of cash or kind such as car, TV, computers, gold coin, mobile phone etc.
• When a person sponsors a trip for the recipient and his/her relatives upon achieving certain targets.
• When a person provides free ticket for an event
• When a person gives medicine samples free to medical practitioners.

Where benefits are provided to employees of the recipient entity, in whose name TDS should be deducted?

The benefits or perquisites may be used by owner / director/ employee of the recipient entity or their relatives who in their individual capacity may not be carrying on business or exercising a profession. In such a scenario, the tax is required to be deducted by the person in the name of recipient entity since the usage by owner/director/employee/relative is by virtue of their relationship with the recipient entity and in substance the benefit/perquisite has been provided by the person to the recipient entity.

For example, the free medicine sample may be provided by a company to a doctor who is an employee of a hospital. Therefore, the TDS u/s 194R of the Act is required to be deducted by the company in the hands of hospital as the benefit/perquisite is provided to the doctor on account of him being the employee of the hospital.

Where TDS on benefits provided to employees is deducted in the hands of employer, what shall be treatment of the same to be done by the employer?

In such a scenario, the employer shall treat this benefit/perquisite as the perquisite given to its employees (if the person who used is an employee) u/s 17 of the Act and deduct tax u/s 192 of the Act. In such a case, it’d be first taxable in the hands of the hospital and then allowed as deduction as salary expenditure. Thus, ultimately the amount would get taxed in the hands of the employee and not in the hands of the employer. The employer can get credit of tax deducted u/s 194R of the Act by furnishing its tax return.

In a situation described in Point No. 6, whether threshold for deduction of TDS shall be considered in respect of benefits provided to each employee or for the employer as a whole?

Where benefits/ perquisites are provided to employees due to them being in a particular employment and thus, TDS being deducted in the hands of the employer, the threshold of Rs. 20,000 provided in the section shall be considered in respect of a particular employer and not for each employee to whom benefits is being provided.

Whether treatment shall be same where benefit is provided to a particular person by virtue of his association with a particular organization as a consultant but not as an employee?

The tax is required to be deducted u/s 194R of the Act if the benefit or perquisite is to a person who is working as a consultant of the employer. In this case also, the provider of benefit or perquisite may deduct tax u/s 194R of the Act treating the organization as a recipient and then such deemed recipient organization may again deduct tax u/s 194R of the Act for providing the same benefit or perquisite to the concerned person. However, the provider of benefit at its option may also directly deduct the TDS of that consultant.

How the valuation of benefit or perquisite required to carried out?

The valuation of the benefit or perquisite would be based on fair market value of the benefit or perquisite except in following cases:

• The benefit/perquisite provider has purchased the benefit/perquisite before providing it to the recipient. In that case the purchase price shall be the value for such benefit/perquisite.
• The benefit/perquisite provider manufactures such items given as benefit/perquisite, then the price that it charges to its customers for such items shall be the value for such benefit/perquisite.

Whether GST is to be included in the value of benefit or perquisite for deduction of TDS?

GST will not be included for the purposes of valuation of benefit/perquisite for TDS under section 194R of the Act. Thus, the TDS need to be deducted on value exclusive of GST.

Whether TDS is required to be deducted on the value of products given for promotion to social media influencers?

Where products forwarded to such social media influencers are returned the manufacturing companies upon promoting them, then no TDS is required to be deducted. However, where such products are retained by them, then it will be in the nature of benefit/perquisite and the manufacturing company is required to deduct TDS u/s 194R.

Whether TDS is required to be deducted u/s 194R on out of pocket expenses incurred by service provider in the course of rendering services?

It is a matter of fact that any expenditure, which is the liability of a person carrying out business or profession, if met by the other person is a benefit/perquisite provided by the second person to the first person in the course of business/profession.

However, if the expenditure is incurred by the first person but the invoice for that is issued in the name of second person, thus demonstrating the fact that the liability to incur such expense was on the shoulders of the second person carrying on business or profession, then in such case, amount reimbursed subsequently to the first person shall not become his benefit or perquisite and no TDS u/s 194R shall be deducted.

Whether expenses incurred on arrangement of a conference or event to educate or inform dealers, shall be construed as benefit or perquisite for such dealers?

In this particular subjective matter, CBDT has clarified that such an expense shall not be construed as benefit or perquisite if such a conference has been organized for the following illustrative reasons:

• New product being launched.
• Discussion as to how the product is better than others.
• Obtaining orders from dealers/customers
• teaching sales techniques to dealers/customers
• addressing queries of the dealers/customers
• Reconciliation of accounts with dealers/customers

Further, CBDT has clarified that such a conference must not be in the nature of incentives or benefits to select dealers or customers who have achieved particular targets.

Also, for removing any grey areas in applicability of TDS in such cases, CBDT has clarified that TDS u/s 194R would be attracted in following cases:

• Expense attributable to leisure trip or leisure component, even if it is incidental to the dealer/business conference.
• Expenditure incurred for family members accompanying the person attending dealer/business conference.
• Expenditure on participants of dealer/business conference for days which are on account of prior stay or overstay beyond the dates of such conference.

Thus, it appears from CBDT’s clarification that expenditure would not fall in the category of benefit or perquisite only if is directly connected to and absolutely necessary for the business or profession of the organizer. Any undue advantage not absolutely necessary for the business or profession shall fall within the definition of benefit or perquisite and TDS u/s 194R is applicable on the same.

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In other words, Overseas Direct Investment in Joint Venture (JV) or Wholly Owned Subsidiary (WOS) is a way of promoting business globally by Indian entrepreneurs. It is a medium of connecting two countries through business co-operation. Overseas Direct Investment is a business strategy in which a domestic firm expands operations toa foreign country.

Employing ODI is a natural progression for firms if their domestic markets become saturated and better business opportunities are available abroad. There are numerous benefits of overseas investments.

Overseas investment involves the transfer of major benefits such as:

• Technology & Skill
• Market Access
• Sharing R&D
• Brand Image
• Employment Generation
• Utilization of Raw Material

It does not only provide benefits to its businesses but also benefits the country as it promotes economic co-operation with the host countries with many other significant benefits. In simplified words, Overseas Direct Investment is an investment made by Indians outside India.

Overseas Direct Investment refers to the investments made in the Joint Ventures (JV) and Wholly
Owned Subsidiaries (WOS) by way of:

-Subscription to the Memorandum of a foreign entity; or

-Purchase of existing shares of foreign entity either by market purchase or private placement or
through stock exchange

OVERSEAS DIRECT INVESTMENT (ODI) LEGAL FRAMEWORK IN INDIA

ODI is governed by the following in India:

• Section 6(3)(a) of Foreign Exchange Management Act (FEMA) 1999 read with FEM (Permissible
  Capital Account Transactions) Regulations, 2000
• FEMA (Transfer or Issue of any Foreign Security) Regulations, 2000
• AP (DIR Series) Circulars issued by RBI
• FAQ on Overseas Direct Investment released by RBI (as updated from time to time)
• Liberalized Remittance Scheme of February 4, 2004 amended from time to time
• FAQ on Liberalized Remittance Scheme – Applicable for resident Individuals

ELIGIBLE INDIAN PARTY

An Indian Party is eligible to make Overseas Direct Investment into a Joint Venture (JV) or Wholly Owned
Subsidiary (WOS). An Indian Party is:

– a Company

– a body created under an Act of Parliament

– Registered Partnership Firm*

– Limited Liability Partnership (LLP)

– Any other entity in India as notified by RBI

– A combination of the above entities can also form an “Indian Party”.

*Only those Partnership firms which are registered under Partnership act can make outside investment
through automatic route. Unregistered Partnership firms require approval of RBI before making any
outside investment.

Joint Venture: A foreign entity is termed as JV of the Indian Party when there are other foreign promoters holding the stake along with the Indian Party.

Wholly Owned Subsidiary: In case of WOS entire capital is held by the one or more Indian Parties

Note: ODI in Pakistan is allowed under the approval route. ODI in Nepal can be made in Indian Rupees only.

Prohibited activities

Indian Parties are prohibited from making investment or financial commitment in foreign entity engaged
in:

– real estate ie meaning buying and selling of real estate or trading in Transferable Development
Rights (TDRs) but does not include development of townships, construction of residential/commercial premises, roads or bridges; or

– banking business; or

– offer financial products linked to Indian Rupee e.g. non-deliverable trades involving foreign
currency, rupee exchange rates, stock indices linked to Indian market, etc.

CRITERIA FOR ODI UNDER AUTOMATIC ROUTE

An Indian Party can make outside investment through automatic route subject to the compliance of
following conditions:

– The total financial commitment (“FC”) of Indian Party in overseas JV/ WOS shall not exceed 400%
of its net worth* (as per the last audited Balance Sheet).

– FC made out of balances held in the EEFC account of the Indian party or out of funds raised
through ADRs/GDRs will not be taken into consideration for the purpose of the aforesaid
calculation.

– Prior approval of RBI is required if the FC exceeds USD 1 Billion in a Financial Year.

– Overseas JV/ WOS shall carry out bonafide activity permitted as per the law of the host country.

– Indian Party shall not be on the RBI’s exporters’ caution list / list of defaulters/ under
investigation by enforcement agency.

– All transactions relating to a JV / WOS routed through one branch of an AD bank. For switching
over to another AD, an application shall be made to RBI after obtaining an NOC from the existing
AD.

In case of acquisition of an existing foreign company and the investment is more than USD 5
million:

• valuation of the shares of the company shall be made by a Category I Merchant Banker
  registered with SEBI or an Investment Banker / Merchant Banker outside India registered
  with the appropriate regulatory authority in the host country.
• In all other cases by a Chartered Accountant or a Certified Public Accountant.

*Net Worth means paid up capital and free reserves however free reserves not defined in ODI Regulation. Companies Act 2013 -Section 2(43) –Free reserves does not include Securities premium which is included in Net Worth definition under section 2(57).

SOURCE OF FUNDING

Funding for overseas direct investment can be made by one or more of the following sources:

– Drawl of Foreign Exchange/p>

– Capitalization of exports and other dues and entitlements

– In exchange of ADRs (American Depository Receipt) / GDRs (Global Depository Receipt) issued*

– Market Purchase

– Swap of Shares **

– Proceeds of External Commercial Borrowings (ECBs) / Foreign Currency Convertible Bonds
(FCCBs)

– Proceeds of foreign currency funds raised through ADR / GDR issue

– Balances held in EEFC Account

Capitalization of export proceeds remaining unrealized beyond the prescribed period of realization will
require the prior approval of RBI.

For any capitalization of exports, alongwith Form ODI, a custom certified copy of the invoice raised
towards the export must be submitted to RBI.

Indian software exporters are permitted to receive 25% of the value of their exports to an overseas
software start-up company in the form of shares without entering into Joint venture Agreements, with
the prior approval of the Reserve Bank.

*American Depository Receipt (ADR) means a security issued by a bank or a depository in United States of America (USA) against underlying rupee shares of a company incorporated in India.

Global Depository Receipt (GDR) means a security issued by a bank or a depository outside India against underlying rupee shares of a company incorporated in India;

** In cases of swap of shares, valuation of the shares shall be made by a Category I Merchant Banker registered with SEBI or an Investment Banker outside India registered with the appropriate regulatory authority in the host country. Approval of FIPB is also required.

FINANCIAL COMMITMENT

Financial Commitment means the amount of direct investment by way of contribution to equity, loan,
guarantees, performance guarantees issued by an Indian Party to or on behalf of its overseas JV or WOS.
the financial Commitment comprises of:

• 100% of the amount of equity shares and/ or Compulsorily Convertible Preference Shares (CCPS);
• 100% of the amount of other preference shares;
• 100% o f the amount of corporate guarantee;
• 100% of the amount of bank guarantee issued by a resident bank, provided that the bank
  guarantee is backed by a counter guarantee / collateral by the Indian Party.
• 50% of the amount of performance guarantee.

provided that if the outflow on account of invocation of performance guarantee results in
the breach of the limit of the financial commitment in force, prior permission of the
Reserve Bank is to be obtained before executing remittance beyond the limit prescribed
for the financial commitment.

Conditions

– Indian Party can extend Loan and guarantee to an overseas entity only if there is already an
existing equity/CCPS participation by way of direct investment.

– However, with the RBI’s approval the Indian Party may undertake such financial commitment
without equity contribution in JV/WOS based on the business and legal requirements of the host
country.

– All the FCs, including all forms of guarantees and creation of charge are within the overall ceiling
prescribed for the Indian Party.

– The amount and period of the guarantee should be specified upfront. In the case of performance
guarantee, time specified for the completion of the contract shall be the validity period of the
related performance guarantee.

In cases where invocation of the performance guarantee breaches the ceiling for the financial
commitment, the Indian Party shall seek the prior approval of the Reserve Bank before remitting
funds from India, on account of such invocation.

REPORTING REQUIREMENTS

In respect of Initial Investment:

An Indian Party shall submit Part I of the Form ODI within 30 days of Investment with designated
Branch of Authorized Dealer Bank along with the following annexures:

• Certified Copy of Board Resolution approving the Investment Outside India
• Remittances Proofs i.e. Bank Documents of payments
• Statutory Auditor’s Certificate
• Form A2 (Form A2 is submitted to Banks at the time of remittance Outside India)
• Valuation report for the value of shares

After receiving the aforesaid documents, AD Bank shall verify all the Documents and if found in
order, forwards the same to RBI.

RBI then allots a Unique Identification Number (UIN) for that particular JV/WOS.

UIN No. is allotted by RBI to Indian Party in respect of each JV/WOS outside India.

In respect of Subsequent Investment:

An Indian Party shall quote the UIN No. as allotted by RBI in Part I of form ODI.

Contents of Part I of the form ODI:- All ODI forms are submitted to the AD Bank in physical. Part I
of form is divided in sections which includes the following:

• Section A – Details of the Indian Party (IP)/Resident Individual (RI)
• Section B – Capital Structure and other details of JV/WOS/Step Down Subsidiary
• Section C – Details of Transaction/Remittance/Financial Commitment of IP/RI
• Section D – Declaration by the IP/RI
• Section E – Certificate by the statutory auditors of the IP/self certification by RI

POST INVESTMENT OBLIGATIONS OF INDIAN PARTY

Event Wise

• Receive Share Certificates/Other Documentary Evidence: An Indian Party shall receive share
  certificates/ any other documentary evidence of investment in the overseas JV / WOS and
  submit the same to the designated AD within 6 months.
• Repatriation of Dues: Repatriate to India all dues receivable from the overseas JV / WOS, like
  dividend, royalty, technical fees etc within 60 days of its falling due, or such further period as
  the Reserve Bank may permit.
• Repatriation of Sale Proceeds in case of Disinvestment: On disinvestment, repatriate the sale
  proceeds immediately or not later than 90 days from the date of sale of the shares
  /securities.

Recurring

• Submission of Annual Performance Report (APR): Submission of APR in Part II of Form ODI in
  respect of each JV/WOS outside India set up or acquired by the Indian party by 31 December
  every year.
• Submission of Return on Foreign Liabilities and Assets: File Foreign Liabilities and Assets (FLA)
  return every year by 15 July.

Transfer/Sale of shares without write off of the investment

An Indian Party, under the automatic route, may transfer by way of sale to another Indian Party or to a
person resident outside India, any share or security held by it in a JV or WOS outside India subject to the
following conditions:

– the sale does not result in any write off of the investment or financial commitment made;

– the sale is effected through a stock exchange where the shares of the overseas JV/ WOS are
listed;

– if the shares are not listed and the shares are disinvested by a private arrangement, the share
price is not less than the value certified by a Chartered Accountant / Certified Public Accountant
on the latest audited financial statements of the JV / WOS;

– the Indian Party does not have any outstanding dues from the JV or WOS;

– the overseas concern has been in operation for at least one full year and the reporting in APR has
been submitted alongwith audited accounts for that year with RB;

– the Indian Party is not under investigation by CBI / DoE/ SEBI / IRDA or any other regulatory
authority in India;

– The Indian Party shall intimate to RBI through AD Bank of such disinvestment within 30 days
from the date of disinvestment.

Transfer/sale of shares involving write off of the investment

Indian Party may disinvest with write off under the automatic route where the amount repatriated after
disinvestment is less than the original amount invested subject to the following:

• where the JV / WOS is listed in the overseas stock exchange;
• where the Indian Party is listed on a stock exchange in India and has a net worth of not less than
  Rs.100 crore;
• where the Indian Party is an unlisted company and the investment in the overseas JV / WOS does
  not exceed USD 10 million; and
• where the Indian Party is a listed company with net worth of less than 100 crore but investment
  in an overseas JV/WOS does not exceed USD 10 million.

All other conditions as applicable in disinvestment without write off shall mutatis mutandis apply for
Disinvestment with write off.

Prior approval is required from RBI, if does not satisfy the conditions laid down above for undertaking
any disinvestment in its JV/WOS abroad.

Restructuring of the balance sheet of the overseas entity Writing off Capital or Other Receivables:

• Listed Indian companies are permitted to write off capital and other receivables up to 25% of the
  equity investment in the JV /WOS under the Automatic Route; and
• Unlisted companies are permitted to write off capital and other receivables up to 25% of the
  equity investment in the JV /WOS with prior approval of the Reserve Bank.

Compliances followed by the Indian Party:

• Reporting of Part III of Form ODI to AD Bank within 30 days of divestment;
• On disinvestment, repatriate the sale proceeds immediately or not later than 90 days from the
  date of sale of the shares /securities;
• A certified copy of the balance sheet showing the loss in the overseas WOS/JV set up by the
  Indian Party; and
• Projections for the next five years indicating benefit accruing to the Indian company consequent
  to such write off / restructuring.

OVERSEAS DIRECT INVESTMENTS BY RESIDENT INDIVIDUALS

A resident individual (single or in association with another resident individual or with an Indian Party),
may make overseas direct investment in the equity shares and compulsorily convertible preference
shares of a Joint Venture (JV) or Wholly Owned Subsidiary (WOS) outside India.

• Investment in overseas JV / WOS only by way of equity / compulsorily convertible preference
  shares.
• JV / WOS to be engaged in bonafide business activities except real estate / banking / financial
  services.
• Resident individual not to be on RBI caution / defaulters list.
• Limit of investment in JV / WOS as per LRS limit (currently USD 250,000 per person per annum).
• Investment made from EEFC / RFC account also included in prescribed LRS limit.
• Undertaking financial commitment on behalf of the JV or WOS other than ODI (subscription to
  equity/ CCPS) is prohibited.
• JV / WOS to be operating entity only – No step down subsidiary to be acquired or set up by JV /
  WOS.
• Write off not permitted in cases of disinvestments.

Valuation /Reporting and Post investment obligations same as applicable to ODI by Indian Party.

PURCHASE/ ACQUISITION OF FOREIGN SECURITIES IN CERTAIN CASES

– General permission has been granted to a person resident in India who is an individual

– to acquire foreign securities as a gift from any person resident outside India;

– to acquire shares under cashless Employees Stock Option Programme (ESOP) issued by a
company outside India, provided it does not involve any remittance from India;

– to acquire shares by way of inheritance from a person whether resident in or outside India;

– to purchase equity shares offered by a foreign company under its ESOP Schemes. AD banks are
permitted to allow remittances for purchase of shares by eligible persons under this provision
irrespective of the method of operationalisation of the scheme.

Resident Indian may transfer by way of sale the shares acquired as stated above provided that the
proceeds thereof are repatriated immediately on receipt thereof and in any case not later than 90 days
from the date of sale of such securities.

In all other cases, approval of the Reserve Bank is required to be obtained before acquisition of a foreign
security.

OVERSEAS DIRECT INVESTMENT BY REGISTERED TRUST AND SOCIETIES

Registered Trusts and Societies engaged in manufacturing/educational/hospital sector are allowed to
make investment in the same sector(s) in a JV/WOS outside India, with the prior approval of the Reserve
Bank.

Eligibility Criteria for Trust

• The Trust should be registered under the Indian Trust Act, 1882;
• The Trust deed permits the proposed investment overseas;
• The proposed investment should be approved by the trustees;
• The AD Category – I bank is satisfied that the Trust is KYC (Know Your Customer) compliant
  and is engaged in a bonafide activity;
• The Trust has been in existence at least for a period of three years;
• The Trust has not come under the adverse notice of any Regulatory/Enforcement agency like
  the Directorate of Enforcement, Central Bureau of Investigation (CBI), etc.

Eligibility Criteria for Society

• The Society should be registered under the Societies Registration Act, 1860.
• The Memorandum of Association and rules and regulations permit the Society to make the
  proposed investment which should also be approved by the governing body/council or a
  managing/ executive committee.
• The AD Category – I bank is satisfied that the Society is KYC (Know Your Customer) compliant
  and is engaged in a bonafide activity;
• The Society has been in existence at least for a period of three years;
• The Society has not come under the adverse notice of any Regulatory /Enforcement agency
  like the Directorate of Enforcement, CBI etc.

Valuation /Reporting and Post investment obligations are same as applicable to ODI by Indian Party.

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• Any entity which has received Foreign Direct Investment (FDI) whether in terms of shares and/or External Commercial Borrowing (ECB); and/ or
• Any entity which has invested in any foreign company either through a Joint Venture (JV) or Wholly Owned Subsidiary (WOS) i.e. known as Overseas Direct Investment (ODI).

In other words, if any entity holds foreign assets or/and liabilities in its balance sheet, it shall file Foreign Liabilities and Asset (FLA) Return with Reserve Bank of India (RBI).

Further even if an eligible entity has not received any fresh FDI and/or made ODI in the latest year but the company has outstanding FDI and/or ODI, then that entity would be still required to file FLA.

ELIGIBLE ENTITIES

• A Company within the meaning of section 1(4) of the Companies Act, 2013.
• A Limited Liability Partnership (LLP) registered under the Limited Liability Partnership Act, 2008
• Others include SEBI registered Alternative Investment Funds (AIFs), Partnership Firms, Public Private Partnerships (PPP) etc.

Entities those are not required to file FLA annual return

• An Indian company without having any outstanding investment in respect of inward and outward FDI.
• If an Indian company has received only share application money and does not have any FDI or ODI outstanding as on end March of the reporting year i.e. allotment has not been made till the end of financial year.
• Companies which have issued the shares to non-resident only on non-repatriable basis
• In case non-resident shareholders of an eligible entity has transferred their shares to the residents during the reporting period and the eligible entity does not have any outstanding investment in respect of inward and outward FDI as on end-March of reporting year, then the company need not submit the FLA Return.

REPORTING – DUE DATE AND REQUIREMENTS

• An eligible company shall file its FLA return on or before 15th July of every year in respect of previous financial year.
• If the company does not have audited account before 15th July, they need to file FLA annual return based on unaudited accounts.
• Once the accounts get audited and there are revisions from the provisional information submitted by the company, they are supposed to submit the revised FLA return based on audited accounts by end of September.
• The reporting company need to take approval from RBI in case of revision of submitted FLA form.
• If account closing period of the company is different from the reference period, then information should be reported for all the reference period, i.e. Previous (April-March period) and Latest (April-March period).
• Partnership firms, Branches or Trustees have any outward FDI outstanding as on end-March of the reporting year, then they are required to send a request mail to get a dummy CIN number which will enable them to file the Excel based FLA Return. If any entity has already got the dummy CIN number from the previous survey, they should use the same CIN number in the current survey also.

DEFAULT IN FILING OF FLA RETURN

Non-filing of the return before due date will be treated as a violation of FEMA and penalty will be levied on defaulters which shall be three (3) times the sum involved in contravention or Rs. 2,00,000 and if the contravention is continuing every day, Rs. 5,000 for every day for defaulting period.

COMPOUNDING FOR DELAY IN FILING

The powers to compound the contraventions have been delegated to all Regional Offices of RBI (except Kochi and Panaji) without any limit on the amount of contravention.

PROCEDURE FOR SUBMISSION OF THE FLA RETURN AND ACKNOWLEDGEMENT THEREFORE

The format and email-based reporting system has been replaced by the web-based formats for submission of annual FLA return from June 2019. In this web-based reporting system of FLA, companies first need to create business-user through “Entity-User Registration form”. The format is available on https://flair.rbi.org.in.

Creation of Business user: Every company first must create a business user on the FLAIR portal https://flair.rbi.org.in. and submit the necessary information/documents for creating the business user.

Acknowledgment: after submission of online return on FLAIR portal, an acknowledgement will be generated in the name of the entity “The annual return on Foreign Liabilities and Assets submitted by your company for the year ……. has been processed successfully”

CREATION OF BUSINESS USER

Go to Uniform Resource Locator (URL) of the application, i.e. https://flair.rbi.org.in. Then click on “Registration Form for New Entity User” and fill details in USER Registration Form. Keep ready with the following information/documents before creating FLA User registration Form:

Entity Details:

• CIN/Registration Number of the Company.
• Company Name.
• PAN Number of the Company
• Complete registered address alongwith PIN number.
• Mobile Number and Email ID.
• Confirm whether CIN/registration number of the company has changed during the latest financial year ending March.
• Confirm whether name of the company has changed the latest financial year ending March, if yes, details of pervious name and date of change to be filled.

Authorized Persons Details

• Name of the authorized person.
• PAN number of the authorized person.
• Mobile number and email id of the authorized person.

Verification letter and authority letter alongwith the PAN card of the entity and authorized person.

Note:

• The password and OTP (every time, whenever the entity logs-in) will be sent to this email id, therefore it should be correct.
• If case there is any change in email id and name of the entity during in the reporting period, the entity first need to deactivate the current account by sending the request to RBI on email id surveyfla@rbi.org.in and then create a new account by following the above said steps for filing of FLA return for the current year. The RBI cannot make any changes from their end.
• If the CIN/registration number is same as that used in the old account, then previously filled data will be updated on the new account.

PREPARE FLA RETURN ONLINE, RE-CHECK AND SUBMIT WITH RBI

For preparing FLA return, the RBI has divided the FLA return into 5 Sections:

SECTION I – IDENTIFICATION PARTICULARS

• Prefilled details: The name of the Company, PAN Number, CIN Number and Email (Head of institution) get automatically filled, once entity user created successfully.
• Contact Details: fill the Name of the Contact Person, Telephone no. (with extension), mobile number, email ID of the contact person, designation, web site, account closing date etc.
• NIC Code: In the FLA Return, industry codes are given as per the National Industrial Classification (NIC) -2008 codes. The details on NIC-2008 codes can be accessed through the following link, https://udyogaadhaar.gov.in/UA/Document/nic_2008_17apr09.pdf. If a company has more than one activity during the year, then company can select that activity, from which, they have earned major revenue.
• Confirm whether company is Listed and Assets Management Company, is there any Technical Foreign Collaboration, has any business activity etc during the latest financial year.
• Identification of the reporting Company (in terms of inward FDI): If an entity has only Outward Investment and no inward FDI, then Option ‘Others’ can be selected.

SECTION II – FINANCIAL DETAILS

Total Paid-Up Capital of Indian Reporting Company: In these fields, required to provide the total paid up capital of the company.

• Non-Participating share capital is treated as debt investment therefore the Non-Resident Equity and Participating Preference Shares Capital holding (%) is being calculated on the basis of Non-Resident Equity and participating Preference Shares Capital holding.
• Convertible Preference Share should be taken on Fully diluted preference share.
• Premium on issue of Equity Share Capital is a part of Reserve, which should be reported under the head of Reserves and Surplus.

Total Paid-Up Capital of Indian Reporting Company: in these fields, required to provide the details of Profit / Loss before tax, Profit / Loss after tax, Dividend both Interim and Final Dividend, Tax on Dividend if any relating from the statement of accounts made during the period of April – March.

Reserves & Surplus (from Balance Sheet): In these fields, required to provide the information relating to all reserves in the sub head of Reserves and Surplus and accumulated profit/loss separately to be mentioned in sub head of Profit/ Loss account balance.

Sales and Purchase made during the financial year: In these fields, required to provide the information relating to all purchases including capital (from balance sheet) and revenue of goods and services/sales made domestically as well as foreign during the period of April – March. The detailed information to be furnished in Sales and Purchase are as follows:

• All expenses (excluding depreciation) / sales shown in profit and loss account to be taken as total purchases / total sale.
• Both goods and services are to be included.
• All foreign purchases/ sales i.e. imports and exports, should be captured from P& L Account.

Employee Information: Number of employees to be mentioned in these filed on payroll only of the Indian reporting company (in actual).

SECTION III – FOREIGN LIABILITIES (INVESTMENTS MADE IN INDIA)

Investment in India under Foreign Direct Investment (FDI) scheme (10% or more equity participation): In these fields, required to provide the following information:

• number of foreign direct investors as on end-march of reporting year;
• Month and Year of receiving FDI (Settlement date/allotment date) first time irrespective of number of investors reported;
• Name of the Non-Resident Company/Individual;
• Country of Investor;
• % Percentage of Equity and Participating Preference share capital holding
• Liabilities to Direct Investor: auto calculated ie
• Networth X % of Equity and Participating Preference share capital holding of Foreign Investor
• Other Capital (Liabilities to Direct Investor): In these filed details to be given of:
• Non-participating preference shares;
• Fully/Partially/Non-convertible debentures and
• share application money is received from the existing non-resident shareholder.
• in the % of equity & participating preference share held by foreign investor at nominal value.
• Non-participating preference shares and Fully/Partially/Non-convertible debentures are treated as debt securities.
• Disinvestments in India during the year
• Separate detailed to be filed for each investor having more than 10% equity participation in the Indian Company by click in add button.

Investment in India under Foreign Direct Investment (FDI) scheme (less than 10% equity holding): In these fields, required to provide the following information:

• No. of Countries (for each country having aggregate foreign Equity Holding less than 10%) during the year;
• Country Non-Resident Investor;
• Percentage of Equity and Participating Preference share capital holding
• Liabilities to Direct Investor: auto calculated ie
• Networth X % of Equity and Participating Preference share capital holding of Foreign Investor.
• Other Capital (Liabilities to Direct Investor): In these filed details to be given of:
• Non-participating preference shares;
• Fully/Partially/Non-convertible debentures and
• share application money is received from the existing non-resident shareholder.
• in the % of equity & participating preference share held by foreign investor at nominal value.
• Disinvestments in India during the year

Portfolio investment in India:

• % of Equity and Participating Preference share capital holding to be given if any.
• Equity Securities (at market values): the outstanding equity investments (secondary / stock market investment) by non-resident investors, other than those made under Foreign Direct Investment Scheme in India.
• Debt Securities: Following items are included in Debt Securities:
• Money Market Instruments and Bonds & Other instruments are invested by non-resident investors
• Non-participating preference shares and debentures are held by foreign investor who is not holding equity share, then the same should be reported at Bonds & other instruments at nominal value.
• Disinvestments in India during the year: any disinvestments made by non-resident direct investor of the reporting Indian company during the year should be reported in this filed.

Other investment (outstanding liabilities with foreign unrelated parties):

• All financial outstanding liabilities (Trade Credit, Loans, Currency & Deposits, and other payable accounts) with foreign unrelated Parties should be reported here.
• Any domestic liabilities (even if it is in foreign currency) should not be reported in the FLA return.
• Further, if the share application money is received from foreign investor who does not hold equity shares, then outstanding share application money should be disclosed under the Other Investment in Other receivable and payable accounts.
• EEFC account with Bank is not creating any external Assets and Liabilities. Therefore, it will not come under this field.
• Any domestic liabilities or assets (even if it is in foreign currency) should not be reported.

SECTION IV – FOREIGN ASSETS

Companies are required to furnish the information on outstanding external liabilities and assets as on end-March of previous and latest year.

In case if the accounting period of overseas subsidiaries/ joint venture of Indian reporting company is different from the reference period, then the information for end-March should be given on internal assessment basis.

Overseas Direct Investment (ODI) 10% of more equity holding: In these fields, required to provide the following information:

• Number of Direct Investment Enterprises (DIE) abroad as on end-march of reporting year.
• Month and Year of ODI made first time by the Indian reporting company.
• Name and Country of the Investor.
• % of Equity and Participating Preference share capital holding.
• Select the Reported Foreign Currency.
• Total equity of DIE (paid up capital) and Equity of DIE held by Indian Reporting Company at face value.
• Reserve and surplus and separately mention the profit and loss account balance.
• Exchange rate in Indian Rupees.
• Totals Sales (Exports) and Total Purchase (Imports): The detail information to be furnished:
• All expenses/sales of DIE abroad shown in profit and loss account to be taken as total purchases/total sale.
• Both goods and services of DIE abroad are to be included.
• All foreign purchases/ sales of DIE abroad i.e. imports and exports, should be captured from P& L Account
• Number of employees on payroll (actual)
• Claim on Direct Investment Enterprises: auto calculated i.e.
• Networth X % of Equity and Participating Preference share capital holding by Indian reporting company.
• Other Capital (Claim on Direct Investment Enterprises): includes all other liabilities and claims at nominal value ie trade credit, loan, debenture, non participating capital, other accounts receivables and payables etc.
• Disinvestments in abroad during the year.

Direct investment abroad (less than 10% equity holding): In these fields, required to provide the following information:

• No. of Countries where the reporting Indian Company holds less than 10% equity shares in each under the ODI.
• Country of Investor.
• % of Equity and Participating Preference share capital holding
• Liabilities to Direct Investor: auto calculated ie
• Networth X % of Equity and Participating Preference share capital holding of Foreign Investor.
• Claim on Direct Investment Enterprises: auto calculated i.e.
• Networth X % of Equity and Participating Preference share capital holding by Indian reporting company.
• Other Capital (Claim on Direct Investment Enterprises): includes all other liabilities and claims at nominal value ie trade credit, loan, debenture, non participating capital, other accounts receivables and payables etc.
• Disinvestments in abroad during the year.

Debt securities and Portfolio Investment Abroad: Money Market Instruments and Bonds & Other instruments are invested by reporting company are included in the Debt Securities under Portfolio Investment Abroad.

Other investment (outstanding claims on foreign unrelated parties): All financial outstanding assets ie Trade Credit, Loans, Currency & Deposits, and other receivable accounts) with foreign unrelated Parties should be reported here. Any domestic assets should not be reported here.

SECTION V – VARIATION REPORT: It is auto generated variation report, the company cannot amend/edit any information in this report. Basically, it is a variation report of the information submitted in previous year with current year by an Indian Reporting Company.

RE-CHECK AND SUBMIT THE RETURN WITH RBI The Company can download the draft return and re-check the return before submitting with RBI.

ACKNOWLEDGEMENT:

The reporting Indian Company will receive the system-generated acknowledgement of FLA data submitted by company at the time of final submission itself. No separate mail will be sent by RBI in this regard.

DISCLAIMER: The views expressed are strictly of the author. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of author. Neither the author and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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