ANALYSIS OF COMPOUNDING ORDERS ISSUED BY AUTHORITY YEAR 2020
1) Transfer or Issue of Security by a Person Resident Outside India (Inbound Investment) (FEMA 20/2000-RB), Taking on record transfer of shares from resident to non-resident.
| Applicant | M/s W. Hunger Hydraulics India Private Limited |
| Compounding Application Number | C.A. No. 126/2019 |
| Amount imposed under Compounding Order | Rs. 3,589/- |
| Date of orde | 31st January, 2020 |
| Compounding Authority Name | Foreign Exchange Department, Kolkat |
FACTS OF CASE: Certain equity shares of the applicant company were initially held by Mr. B. K. Mukherjee, Kolkata. Upon demise of Mr. Mukherjee, the heirs of him voluntarily transferred these shares to Ms. Daniela Regina Hepp, Germany (one of the directors of the Indian company) in the year 2012. The transfer of shares was in the nature of gift without any consideration of money. Later, Ms. Daniela Regina Hepp expressed her desire to return those shares without consideration and the buy-back of those shares has been completed by the company with all regulatory formalities during the year 2019.
CONTRAVENTION: Regulation 4 of FEM (Transfer or issue of security by a Person Resident Outside India) Regulations, 2000 notified vide Notification No. FEMA 20/2000-RB states as follows: “Save as otherwise provided in the Act, or rules or regulations made thereunder, an Indian entity shall not issue any security to a person resident outside India or shall not record in its book any transfer of security from or to such person:….” The applicant took on record transfer of shares from R to NR without consideration (in the nature of gift) and thus, the applicant contravened the provision of the notification ibid.
2) Transfer or Issue of any foreign Security (Outbound Investment) (FEMA 120/2004-RB) Repatriation of disinvestment proceeds beyond the stipulated time period
| Applicant | Gemini Power Hydraulics Private Limited |
| Compounding Application Number | C.A. No. 5013/2019 |
| Compounding Authority Name | Foreign Exchange Department, Mumbai |
| Amount imposed under Compounding Order | Rs. 1,42,571/- |
| Date of order | 16th January, 2020 |
FACTS: The applicant had set up a WOS namely Gemini Intertrade Pte. Ltd., in Singapore during the year 2008. It disinvested and closed down the WOS on 30th September 2017 while the disinvestment proceeds were repatriated only on 16th January 2018.
CONTRAVENTION: Repatriation of disinvestment proceeds beyond the stipulated time period: Regulation 16(2) of Notification No. FEMA 120/2004-RB dated 07th July 2004 states as ”Sale proceeds of shares/securities shall be repatriated to India immediately on receipt thereof and in any case not later than 90 days from the date of sale of the shares/securities and documentary evidence to this effect shall be submitted to the Regional office of the Reserve Bank through the designated authorized dealer.” In this case, applicant could not repatriate the disinvestment proceeds within the stipulated time period of 90 days and thus, contravened the provision of Regulation 16(2).
3) FEM (Remittance of Assets) Regulations, 2000 (FEMA 13/2000-RB) Remittance of Assets beyond the stipulated limit
| Applicant | William Scott Pinckney |
| Compounding Application Number | C.A. No. 4995/2019 |
| Compounding Authority Name | Foreign Exchange Department, Mumbai |
| Amount imposed under Compounding Order | Rs. 3,18,829/- |
| Date of order | 30th January, 2020 |
FACTS : The applicant, Mr. William Scott Pinckney is an Australian Citizen who stayed in India for employment during the period from 1998 to 2015. During Feb 2015 to April 2017, the applicant had made multiple remittances to his overseas bank account in Australia.
DoE initiated an investigation against the applicant in connection with the forex transactions undertaken by him and a SCN was issued to the applicant. DoE had stated that the applicant had remitted funds in excess of the prescribed limit viz. USD 1 mn., during the year 2015-16. The applicant had submitted a reply mentioning that he had worked in India for 17 years till year 2015 and had relocated to Australia after retirement. Also, remittances were made by him out of the assets earned over the period in which he was in India. And subsequently filed the compounding application with RBI. The concerned Division has taken the transactions on record.
CONTRAVENTION: Remittance of Assets beyond stipulated limit: Regulation 4(2) of FEM (Remittance of Assets) Regulations, 2000 permits a citizen of foreign state not being a citizen of Nepal or Bhutan who has retired from an employment in India to remit an amount not exceeding USD 1,000,000 per FY subject to payment of applicable taxes in India, if any. Applicant had remitted > USD 1,000,000 during FY 2015-16 and thus, contravened the provision of Regulation 4(2).
4) Transfer or Issue of any foreign Security (Outbound Investment) (FEMA 120/2004-RB)
| Applicant | Vahdam Teas Pvt. Ltd. |
| Compounding Application Number | C.A. No. 5056/2019 |
| Compounding Authority Name | Foreign Exchange Department, Mumbai |
| Amount imposed under Compounding Order | Rs. 1,072/- |
| Date of order | 27th February 2020 |
FACTS: The applicant had set-up a wholly owned subsidiary (WOS) viz. Vahdam Teas Global Inc. in USA on 08th January 2018. The applicant had made investment of USD 100 into the WOS. The investment was made by a CPA who had incurred the expenses on behalf of the applicant and the WOS issued 1000 shares to the applicant at USD 0.10 per share
CONTRAVENTION: Funding of overseas investment through a mode other than the permitted modes of funding: As per Regulation 6(3) of Notification No. FEMA 120/2004-RB, an Indian party is permitted to make Overseas Direct Investment in a JV/WOS outside India subject to the condition that investment under this regulation should be funded out of the prescribed sources mentioned in this regulation viz. from an EEFC account or Drawal of Forex from AD in India.
5) Receipt of shares without upfront payment as well as on deferred payment basis
| Applicant | Windlass Engineers and Services Pvt. Ltd. |
| Compounding Application Number | C.A. No. 5010/2019 |
| Compounding Authority Name | Foreign Exchange Department, Mumbai |
| Amount imposed under Compounding Orde | Rs. 4,13,738/- |
| Date of order | 24th February 2020 |
FACTS : The applicant had set up an overseas Joint Venture ( JV) viz. Windlass International Limited (WIL) in British Virgin Island in the year 2015. The overseas JV allotted equity shares to the applicant on 17th February 2016 for a total value of USD 23,76,146.40 against which the applicant made two remittances of USD 15,53,885.37 and USD 2,96,960 on 17th February 2016 and 07th June 2016, respectively.
CONTRAVENTION: Receipt of shares without upfront payment as well as on deferred payment basis: Regulation 5(1) of the Notification No. FEMA 120/2004-RB states that save as otherwise provided in the Act, rules or regulations made or directions issued there under, or with prior approval of the RBI, no PRI shall make any direct investment outside India…
Receiving share certificates without making remittance or on deferred payment basis is not permitted under the Notification No. FEMA 120/2004-RB. In the present case, the applicant had received share certificate for investment in overseas JV for which the applicant had not made any remittance from India. Also the applicant had received share certificates prior to the date of remittance. Thus, the applicant had contravened the provision of FEMA 120/2004-RB.
FAQ 63 as updated by RBI states no Indian party or Resident individual can make direct investment either on deferred payment basis or on without remittance.
6) Making a foreign direct investment (FDI) in India through overseas direct investment (ODI) route
| Applicant | R Systems International Limited |
| Compounding Number | C.A. No. 5041/2019 |
| Amount | Rs. 1,43,500/- |
| Authority | Foreign Exchange Department, Mumbai |
| Date of order | 03rd February 2020 |
FACTS: The applicant had set up an overseas wholly owned subsidiary (WOS) viz. R Systems (Singapore) Pte Ltd in September 2000. Subsequently, the WOS acquired another entity in Singapore namely IBIZ consultancy Pte Ltd during the year 2015. Later, during the year 2015 itself, IBIZ consultancy Pte Ltd acquired a stake in an Indian company viz. IBIZ consultancy Services Private Limited.
CONTRAVENTION: Making a foreign direct investment (FDI) in India through overseas direct investment (ODI) route: Regulation 5(1) of the Notification No. FEMA 120/2004-RB states that save as otherwise provided in the Act, rules or regulations made or directions issued there under, or with prior approval of the RBI, no PRI shall make any direct investment outside India. In the present case, acquisition of stake in IBIZ consultancy Services Private Limited by IBIZ consultancy Pte Ltd resulted in creation of an ODI-FDI structure. Thus, the applicant had contravened the provision of FEMA 120/2004-RB. The applicant subsequently acquired the shares of IBIZ Consultancy Services India Pvt. Ltd. thereby ending the ODI-FDI structure
7) Transfer of Shares of an Indian company from NRI to NR without prior RBI approval
| Applicant | Applicant |
| Compounding Number | C.A. No. 5047/2019 |
| Amount | ` 79,526/ |
| Authority | Foreign Exchange Department, Mumbai |
| Date of order | 12th February 2020 |
FACTS: The applicant a Non-Resident Indian was allotted 4,598 equity shares of an Indian company as part of subscription to the Memorandum. Further, 80 equity shares were allotted on 10th October 2001 as further issue of shares. However, the applicant transferred 4,598 and 80 equity shares to M/s Atrenta Inc. on 26th May 2011 and 17th October 2001 respectively.
CONTRAVENTION: Transfer of shares of an Indian company from NRI to NR without prior RBI approval: Regulation 9(2)(ii) of Notification No. FEMA 20/2000-RB stated as follows: a non-resident Indian may transfer by way of sale or gift, the shares or convertible debentures or warrants of an Indian company or units of an Investment Vehicle held by him or it to another non-resident Indian only. Therefore, as per the then applicable FEMA provision, non-resident Indian (NRI) was permitted to sale the shares of an Indian company to another non-resident Indian (NRI) only. In the present case, the applicant being a non-resident Indian (NRI) had transferred the shares of an Indian company to another non-resident (NR) entity. Thus, applicant had contravened the provision of Regulation 9(2)(ii) of Notification No. FEMA 20/2000-RB.
YEAR 2019
| Applicant | Gaurav Bamania |
| Compounding Number | C.A. No.4577/2017 & 4578/2017 |
| Amount | Rs. 26,530/ |
| Authority | Foreign Exchange Department, Mumbai |
| Date of order | 2-2/2019 & 30-1/2019 |
FACTS: Mr. Gaurav Bamania, an NRI, paid the consideration amount of ` 56,850 on August 3, 2015 for subscribing to 3,790 shares of an Indian company Edunetwork Pvt Ltd. Mr. Gaurav Bamania paid the consideration amount through his resident account and not by way of inward remittance through normal banking channel from abroad or out of funds held in NRE/FCNR/NRO account maintained with a bank in India. Edunetwork Pvt. Ltd. issued such shares to Mr. Gaurav Bamania upon receipt of aforesaid consideration
CONTRAVENTION: Payment of consideration towards investment in Indian company by an NRI through a resident account: Para 8(a) of Schedule 3 of erstwhile Foreign Exchange Management (Deposit) Regulations, 2000 notified vide Notification No. FEMA 5/2000-RB dated May 3, 2000 stated as follows – “When a person resident in India leaves India for a country (other than Nepal or Bhutan) for taking up employment, or for carrying on business or vocation outside India or for any other purpose indicating his intention to stay outside India for an uncertain period, his existing account should be designated as a Non-Resident (Ordinary) account.
Issue of shares to NRI upon receipt of consideration from a resident account without permission from RBI: Erstwhile Para 3 of Schedule 4 of erstwhile Foreign Exchange Management (Transfer or Issue of Security By a Person Resident Outside India) Regulations, 2000 notified vide Notification No. FEMA 20/2000- RB dated May 3, 2000 stated as follows: “The consideration for investment under this Schedule shall be paid by way of inward remittance through normal banking channel from abroad or out of funds held in NRE/FCNR/NRO account maintained with a bank in India.” Further, Regulation 4 of erstwhile FEMA 20 stated as follows: “Save as otherwise provided in the Act or Rules or Regulations made thereunder, an Indian entity shall not issue any security to a person resident outside India or shall not record in its books any transfer of security from or to such person: Provided that the Reserve Bank may, on an application made to it and for sufficient reasons, permit an entity to issue any security to a person resident outside India or to record in its books transfer of security from or to such person, subject to such conditions as may be considered necessary
10.Foreign Investment in India
| Applicant | M/s. Icube Analytics and Data Services Private Limited |
| Compounding Number | C.A. No. 713/2017 |
| Amount | Rs. 11,670/- |
| Authority | – |
| Date of order | 8-1-2019 |
FACTS: M/s. Icube Analytics and Data Services Private Limited has allotted 8,421 equity shares to M/s Think and Tell Enterprises, France and 10,526 equity shares to M/s Carcasses Alain, France on December 1, 2014 of ` 10/- each. The Reserve Bank of India has duly acknowledged the issue on April 6, 2016. Shri Tejpal Mehta purchased these equity shares from them on October 10, 2015. The company reported in the Form FC-TRS on July 25, 2017 with a corresponding delay of 1 year 7 months 16 days approximately whereas the transfer of shares was taken on record by the company on March 31, 2016 without obtaining duly acknowledged / certified Form FC-TRS by the AD bank.
CONTRAVENTION: The contravention sought to be compounded relates to the following: • Taking on record by the company, the transfer of shares by resident to non resident without obtaining certified Form FC-TRS: Regulation 4 of erstwhile Foreign Exchange Management (Transfer of issue of Security by a Person Resident outside India) Regulations, 2000 notified vide Notification No. FEMA 20/2000- RB dated May 3, 2000 stated as follows: “Save as otherwise provided in the Act or Rules or Regulations made thereunder, an Indian entity shall not issue any security to a person resident outside India or shall not record in its books any transfer of security from or to such person: Provided that the Reserve Bank may, on an application made to it and for sufficient reasons, permit an entity to issue any security to a person resident outside India or to record in its books transfer of security from or to such person, subject to such conditions as may be considered necessary.”
11. Foreign Investment in India
| Applicant | Diabu Diamond Tools (India) Pvt. Ltd. |
| Compounding Number | C.A. No. 4548/2017 |
| Amount | Rs. 1,11,610/- |
| Authority | |
| Date of order | 31-1-2019 |
FACTS: The Indian company had allotted 42,126 equity shares on 1-11-2013 to Diabu Germany (parent company) in lieu of supply of raw material for ` 89,21,042 and bank charges of ` 5,57,389, totalling ` 94,78,431. The allotment of 42,126 shares were entered into the books of the company without the approval of RBI.
CONTRAVENTION: The contravention sought to be compounded relates to the following: • Issuance of shares to the foreign entity without obtaining prior approval RBI: Regulation 4 of erstwhile Foreign Exchange Management (Transfer of issue of Security by a Person Resident outside India) Regulations, 2000 notified vide Notification No. FEMA 20/2000- RB dated May 3, 2000 stated as follows: “Save as otherwise provided in the Act or Rules or Regulations made thereunder, an Indian entity shall not issue any security to a person resident outside India or shall not record in its books any transfer of security from or to such person: Provided that the Reserve Bank may, on an application made to it and for sufficient reasons, permit an entity to issue any security to a person resident outside India or to record in its books transfer of security from or to such person, subject to such conditions as may be considered necessary.”
12. Foreign Investment in India
| Applicant | Shri Mahesh Ramakrishnan & Shri S. Ramakrishnan |
| Compounding Number | C.A. No. 4536/2017 & 4542/2017 |
| Amount | Rs. 83,300/- each |
| Authority | |
| Date of order | 31-1-2019 |
FACTS: In 2015-16, Shri Mahesh Ramakrishnan & Shri S. Ramakrishnan (being Indian residents and Directors of Indian Company M/s. M.S.R. Garments Private Limited) entered into an understanding with Mr. Ian Meirs and Mr James Sleater, acting collectively for M/s. Cad and Dandy Limited, a company incorporated in United Kingdom for sale of 66.66% in aggregate of the paid up equity capital of the Indian company to the UK company at an aggregate price of ` 1,18,72,800.
The sale consideration of ` 60,40,904/- was received by Shri Mahesh Ramakrishnan on December 16, 2015 in his bank account with HDFC Bank. Whereas the sale consideration of ` 60,39,563/- was received by Shri S. Ramakrishnan on December 16, 2015 in his bank account with ICICI Bank. However, the sale consideration was received by both individuals through a third party intermediary, vis. Transferwise and not through banking channel. The transaction was reversed and the refund took place on November 22, 2017, subject to compounding
CONTRAVENTION: The contravention sought to be compounded relates to the following: • Receipt of remittance through non-banking channel: Paragraph 10(iv) of Schedule I to erstwhile Notification No. FEMA 20/2000-RB stated as follows – “(iv) The sale consideration in respect of shares or convertible debentures remitted into India through normal banking channels, shall be subjected to a KYC check by the remittance receiving AD bank at the time of receipt of funds. In case, the remittance receiving AD bank is different from the AD bank handling the transfer transaction, the KYC check shall be carried out by the remittance receiving bank and the KYC report shall be submitted by the customer to the AD bank for carrying out the transaction along with the Form FC-TRS.’’
Though Foreign Exchange Management (Transfer or Issue of Security By a Person Resident Outside India) Regulations have been replaced by revised regulations Para 2(1) of Schedule 1 to extant FEMA 20(R)/2017-RB dated 07/11/2017 corresponds to Paragraph 10(iv) of Schedule I to erstwhile Notification No. FEMA 20/2000- RB dated May 3, 2000
One should bear in mind that only the following modes are permitted for receiving payment of consideration under Schedule 1: (a) inward remittance from abroad through banking channels; (b) debit to NRE/FCNR(B) / Escrow account. Accordingly, receiving payment through other modes such as deposit of foreign cheques transfer through online money transfer portals such as TransferWise, PayPal etc. are not permitted.)
13. Transfer or Issue of Security by a Person Resident Outside India (Inbound Investment) (FEMA 20/2000-RB)
| Applicant | M/s. Karadi Path Education Company Pvt. Ltd |
| Compounding Number | C.A. No. 741/2017 |
| Amount | Rs. 1,92,477/- |
| Authority | |
| Date of order | 10-1-2019 – |
FACTS: Amongst other facts, the company converted 5432 CCPS to 7730 equity shares on 10-9-2013 at ` 1543.08 per share. However, the fair value of equity shares as on the date of allotment of CCPS (25-2.2013) was ` 1990.42. The shortfall was brought in by way of inward remittance.
The shortfall was brought in with delay of three years eight months and 14 days approximately.
CONTRAVENTION: Conversion of compulsorily convertible preference shares to equity shares at a price less than the fair value: In terms of Paragraph 5 of Schedule I to erstwhile Notification No. FEMA 20/2000- RB dated May 3, 2000 the price of shares issued to persons resident outside India under this Schedule, shall not be less than the fair valuation of shares.
Though Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations have been replaced by revised regulations; Explanation to Regulation 11(1) to extant FEMA 20(R)/2017-RB dated 7-11-2017 corresponds to Paragraph 5 of Schedule I to erstwhile Notification No. FEMA 20/2000- RB dated May 3, 2000
We have dealt with only one of the several contraventions committed by the company in this case. It needs to be borne in mind that the price at the time of conversion should not in any case be lower than the fair value worked out at the time of issuance of such instruments. If shares are converted at a price which is lower than their fair value as worked out at the time of issuance of such convertible instruments, it may amount to affording concessions to the foreign investor either at the expense of the resident shareholders or otherwise.)
14. Transfer or Issue of Security by a Person Resident Outside India (Inbound Investment) (FEMA 20/2000-RB)
| Applicant | Tata Hitachi Construction Machinery Company Private Limited |
| Compounding Number | C.A. No. 4501/2017 |
| Amount | Rs. 1,14,12,800/- |
| Authority | |
| Date of order | 12-1-2019 |
FACTS OF CASE:
Tata Hitachi Construction Machinery Company Private Limited acquired 60% stake in M/s. Comoplesa Lebrero S.A., Spain, in 2008, for a consideration of Euro 3.60 million. The remaining 40% stake was acquired in 2011-12, making the overseas entity a Wholly Owned Subsidiary (WOS) of the applicant. The total investment of the applicant in the WOS was to the extent of equity of Euro 7 million and loan of Euro 17.84 million (a total of INR (` 181.89 crore). After exhausting all options of revival of the WOS, the applicant liquidated the WOS with effect from March 31, 2015, with a writeoff of the entire amount of investment, i.e., INR 181.89 crore. Amongst other facts, the interest due on the loan (INR 5.49 crore) was not repatriated but written off.
CONTRAVENTION: The contravention sought to be compounded relates to the following: • Non-repatriation of dues within 60 days and writing off the interest on loan upon liquidation: Regulation 15(ii) of Notification No.FEMA.120/2004-RB dated July 7, 2004 as amended from time to time states as follows – “An Indian Party, which has acquired foreign security in terms of the Regulations in Part I, shall – repatriate to India, all dues receivable from the foreign entity, like dividend, royalty, technical fees etc., within 60 days of its falling due, or such further period as the Reserve Bank may permit”.
(Comments: We have dealt with only one of the several contraventions committed by the company in this case. Although Regulation 15(ii) of Notification No.FEMA.120/2004- RB dated July 7, 2004 mentions dividend, royalty, technical fees, these receivables are only illustrative in nature. Accordingly, even export receivables may get covered under this regulation. Therefore, it needs to be borne in mind that the usual time period of 9 months as provided under FEMA 23(R)/2015-RB dated 12-1-2016 may not apply when receivable is due from the overseas JV/WOS and instead a shorter period of 60 days may be applicable.)
15. Transfer or Issue of Security by a Person Resident Outside India (Inbound Investment) (FEMA 20/2000-RB)
| Applicant | Halcyon Finance & Capital Advisors |
| Compounding Number | C.A. No. 4469/2017 |
| Amount | Rs. 2,31,58,756/- |
| Authority | |
| Date of order | 2-1-2019 |
FACTS OF CASE: Halcyon Finance & Capital Advisors Private Limited (HFC) is a private limited company incorporated on February. In April 2010, HFC set up a wholly-owned subsidiary (WOS) in Singapore namely, Infrahealth Pte. Ltd. (hereinafter referred as ‘WOS’) and remitted USD 200,000 and USD 3,614,676 on July 13, 2010 & July 16, 2012 respectively to the overseas WOS towards acquisition of its equity shares. The overseas WOS raised USD 60 million (USD 50 million as term loan and USD 10 million as credit line) from JP Morgan Chase Bank, Singapore through convertible credit facility. In July 2010 the overseas WOS acquired the entire stake in M/s Integrated Health & Healthcare Services Private Limited (IHHS India now called as M/s Radiant Life Care Private Limited) from another non-resident entity viz. M/s Integrated Hospital & Healthcare Services, Mauritius for an amount of USD 44,382,975 (` 209,21,57,752/-) and subsequently during the period 2010-2016 further invested USD 18,061,528 ((` 92,85,65,229/-) in the equity of IHHS, India by way of remittances into India (total investment in SDS was USD 62,444,503 i.e. (` 302,07,22,981/- approximately). Thus, IHHS, India became a subsidiary of the overseas WOS and a step down subsidiary (SDS) of HFC. RBI vide letter FE.CO.OID No.6789/19.58.025/2013-14 dated October 3, 2013 advised HFC to unwind either FDI or ODI leg of the structure. Accordingly, the FDI leg was unwound by transfer of the shares of IHHS, India held by the overseas WOS to HFC for a consideration of (` 426,00,36,447/- on November 16, 2016. The acquisition of IHHS, India by HFC was funded out of the funds raised through loans and non-convertible debentures from M/s. KKR India Financial Services Private Ltd. and its affiliates.
CONTRAVENTION: Undertaking foreign direct investment (FDI) through the overseas direct investment (ODI) route: Regulation 6(2) (ii) of Notification No. FEMA. 120/2004- RB dated July 7, 2004 states that an Indian party may make direct investment in a Joint Venture (JV) or Wholly Owned Subsidiary (WOS) outside India provided that direct investment is made in an overseas JV or WOS engaged in a bona fide business activity. Whereas the acquisition of the Indian entity by the overseas WOS in 2010 resulted in an ODI-FDI structure thereby leading to contravention of the said FEMA Regulation.
16.
| Applicant | Hurix Systems Private Limited |
| Compounding Number | C.A. No. 4473/2017 |
| Amount | Rs. 2,75,596/-) |
| Authority | |
| Date of order | 25-1-2019 – |
FACTS: The applicant company was incorporated as Hurix Systems Pvt. Ltd. on May 22, 2000. In October 2001, the applicant incorporated a wholly owned subsidiary (WOS) in the name Hurix Systems Inc in USA to engage in building, distributing and managing digital content across various IT platforms and to cater to the company’s US customers. Hurix USA did not gain much business and remained non-operational till many years till it was voluntarily liquidated in 2015. The Indian Party received a Dissolution Certificate stating the date of dissolution as 1-6-2015. Amongst other facts, no valuation certificate was produced to show the value of shares at the time of dissolution and the company wrote off its entire investment.
CONTRAVENTION: Disinvestment without submission of a valuation certificate: According to Regulation 16(1)(iii) of Notification No FEMA 120-RB 2004 as amended from time to time, an Indian Party may disinvest any share or security held by him in a Joint Venture or Wholly Owned Subsidiary outside India provided that the share price is not less than the value certified by a Chartered Accountant /Certified Public Accountant as the fair value of the shares based on the latest audited financial statements of the Joint Venture or Wholly Owned Subsidiary.
(Comments: We have dealt with only one of the several contraventions committed by the company in this case. It needs to be borne in mind that conduct of valuation is required also in the case of liquidation since it would confirm the veracity of the aggregate liquidation proceeds to be received by the Indian Party upon liquidation.)
17. Establishment in India of LO / BO / PO 0
| Applicant | Hirose Electric Singapore Pte. Ltd. |
| Compounding Number | C.A. No. 73/2017 |
| Amount | Rs. 106,793/- |
| Authority | |
| Date of order | 12/03/2019 – |
FACTS: Hirose Electric Singapore Pte. Ltd. was granted permission to establish a Liaison Office in India at Bangalore (Nodal Office) and New Delhi as an additional Liaison Office) vide Reserve Bank approval letter No. FE.CO. FID/14278/10.97.440/2010-11 dated December 15, 2010. In terms of RBI approval, the offices were opened in Bangalore and New Delhi. Permission for the first extension of Liaison Office (LO) valid up to December 14, 2016 was granted by Standard Chartered Bank vide their letter dated December 5, 2013 and further extension up to December 14, 2017 was given by Sumitomo Banking Corporation vide their letter dated January 2, 2017.
Subsequently, the company also opened a Liaison Office at Noida, Uttar Pradesh in May 2014 without obtaining prior approval from Reserve Bank. All the operations were routed through the Noida Office (which was in operation without RBI permission) instead of New Delhi office, which was also maintained in terms of RBI approval. The Liaison Office at Noida has not earned any income and incurred total expenditure of ` 1,70,65,259/- (` One crore seventy lakh sixty five thousand two hundred and fifty nine rupees only) for the period between May 1, 2014 and August 10, 2017. The Liaison Office noticed non-compliance and suo motu submitted application to Reserve Bank of India for post facto approval for regularisation of the contravention
CONTRAVENTION: Regulation 3 and 5(i) of Foreign Exchange Management (Establishment in India of Branch or Office or Other Place of Business) Regulations, 2000 notified vide Notification No. FEMA.22 /2000-RB dated May 03, 2000, as amended from time-to-time.
- Regulation 3 of FEMA 22 ibid., states that no person resident outside India shall, without prior approval of the Reserve Bank, establish in India a branch or a liaison office or a project office or any other place of business by whatever name called.
- Further, Regulation 5(i) of notification No. FEMA 22 ibid., states that a person resident outside India desiring to establish a branch or Liaison Office in India shall apply to the Reserve Bank, in form FNC 1. In the instant case, the company established its Liaison Office at Noida, Uttar Pradesh without prior approval of Reserve Bank. The aforementioned contravention has been regularised by RBI vide letter FE.CO. FID/151/10.97.440/2016-17 dated August 10, 2017, subject to compounding of contraventions
17. External Commercial Borrowings:
| Applicant | M/s. Surbana International Consultants (India) Private Limited (SICPL) |
| Compounding Number | C.A.No.4631/2018 |
| Amount | Rs. 24,55,213/- |
| Authority | |
| Date of order | 25-4-2019 – |
FACTS: The applicant was engaged in the business of providing architectural design, master planning and project consultancy services to various clients in India. It regularly sought expert assistance in the areas of business development and technical consultancy from its overseas group entities viz. Surbana Jurong Consultants Pte Ltd., Singapore (Surbana Singapore) and SIPM Consultants Pte Ltd., Singapore (SIPM Singapore). During the course of rendering the services, the overseas group entities incurred expenditure amounting to SGD 64,27,869 (` 31,96,08,020/-) primarily on account of travel expenses, hotel expenses, consultancy services, etc. on behalf of SICPL which were cross charged to SICPL on cost-to-cost basis. SICPL could not pay the above dues to the overseas group companies due to financial hardships and liquidity concerns and as a result, the dues remained outstanding for a period exceeding three years.
CONTRAVENTION: The contravention sought to be compounded related to the following: • Deemed ECB as result of the dues remaining outstanding for a period exceeding three years (Comments: • We have dealt with one of the several contraventions committed by the company in this case. It may be noted that although the guidelines governing ECB have been modified time and again, the FEMA Notification No. FEMA.3/2000-RB dated May 03, 2000 has not been amended simultaneously from time-to-time.
- It is important to bear in mind that any dues which remain outstanding for a period beyond 3 years may be treated as deemed ECB by RBI and may give rise to consequential contraventions as a result of the outstanding dues being treated as deemed ECB.)
18. Foreign Currency Account Outside India
| Applicant | Arvind Singh Mewar |
| Compounding Number | C.A. No.4624/2018& 4623/2018 |
| Amount | Rs. 1,54,289 |
| Authority | |
| Date of order | 25-4-2019 & 6-4-2019 |
FACTS: The applicant, Arvind Singh Mewar, is a resident individual. The applicant, during his visit to UK, opened accounts with HSBC, UK on July 09, 2008 (parent account) by depositing an amount of GBP 5000 (` 4,25,100/-) by cash and saving account by transfer of funds from the parent account. Another account was opened by the applicant with HSBC, UK on August 03, 2011 by transfer of funds from the parent account. The applicant remitted an amount of GBP 154,500 (` 1,33,91,218.85) to these foreign currency accounts held with HSBC, UK during the period from November 2008 to October 2014 under the Liberalised Remittance Scheme (LRS) from the bank accounts held in India.
The applicant continued to maintain the foreign currency account after his return to India. In addition to the above remittances, a total amount of USD 800,000 (` 4,62,75,732/-) was deposited in the applicant’s foreign currency accounts by the JCB group directly during the period 2010-2018 towards fee for appointment as a senior advisor on the JCB Indian Advisory Council. Out of this amount, USD 200,000 (` 1,31,48,730.40/-) was repatriated by the applicant in January 2018. This amounted to non-repatriation of the balance amount of USD 600,000 (` 3,31,27,001.60) to India.
Apart from the above, the applicant, as director of the company, extended loan amounting to GBP 156,563.80 (` 1,48,98,472,72/-) to a nonresident company registered in UK viz The Lake Palace Hotels & Motels UK Limited. A part of the loan was given by way of incurring expenditure on behalf of the company amounting to GBP 76,563.80 (` 72,49,355.72) during the period from May 29, 2013 to June 30, 2017 and the balance amount of GBP 80,000 (` 76,49,117) by transfer of funds from the parent account during the period from November 28, 2015 to February 09, 2017. A total amount of GBP 70,000 (` 63,53,324) was received towards part repayment of the loan by the applicant during the year 2016-17. The repayment towards balance amount of loan amounting to GBP 86,563.80 was received by the applicant on January 18, 2018.
CONTRAVENTION: Maintenance of foreign currency accounts with a bank outside India after return to India for purpose other than LRS: Regulation 7(6) of Notification No. FEMA10/2000-RB dated May 03, 2000, states that, ‘A person resident in India who has gone abroad for studies or who is on a visit to a foreign country may open, hold and maintain a Foreign Currency Account with a bank outside India during his stay outside India, provided that on his return to India, the balance in the account is repatriated to India.’
Non-repatriation to India of the balance amount of USD 600,000 (` 3,31,27,001.60/) out of a total amount of USD 800,000 (` 4,62,75,732/-) deposited in the applicant’s foreign currency accounts: Regulation 3 of Notification No. FEMA 9/2000-RB dated May 3, 2000 states that, ‘A person resident in India to whom any amount of foreign exchange is due or has accrued shall, save as otherwise provided under the provisions of the Act, or the rules and regulations made thereunder, or with the general or special permission of the Reserve Bank, take all reasonable steps to realise and repatriate to India such foreign exchange…’
Lending in foreign exchange by a resident individual to a non-resident entity from the bank accounts held outside India: Regulation 5(1) of Notification No.FEMA.3/2000-RB dated May 3, 2000 as amended from time-to-time states that ‘An Indian entity may lend in foreign exchange to its wholly owned subsidiary or joint venture abroad constituted in accordance with the provisions of Foreign Exchange Management (Transfer or issue of Foreign Security) Regulations, 2004. ’Whereas the applicant extended loan to the non-resident entity otherwise than in accordance.
19. Inability to issue equity shares or refund share application money to foreign investor.
| Applicant | M/s. Apollo Cosmetic Surgical Center Private Limited |
| Compounding Number | C.A. HYD 308 |
| Amount | ` 37,289/- |
| Authority | Foreign Exchange Department, Hyderabad |
| Date of order | 30th August, 2019 |
FACTS : The applicant had acquired M/s. Apollo Cosmetic Surgical Center Private Limited (ACSCPL), vide High Court of Telangana order dated August 18, 2016. ACSCPL was originally incorporated as M/s. Chicago Cosmetic Surgery Centers Private Limited under the Companies Act, 1956 on 17-7-2007 and later changed its name on 21-12-2009. ACSCPL had received inward remittance of INR 9,85,250/- from Mr. Sanjeev Kaila, non-resident Indian on 11-3-2009 towards advance for subscription to equity shares. However, the company (ACSCPL) could not allot shares or refund the share application money to the foreign investor since he was not traceable. The applicant, since took over ACSPL, transferred the unallotted share application money to Investor Education and Promotion Fund on August 8, 2018 in accordance with Section 125 of Companies Act, 2013
CONTRAVENTION: Neither the equity instruments were issued nor amount refunded within 180 days from the date of receipt of the inward remittance: Paragraph 8 of Schedule 1 of erstwhile Foreign Exchange Management (Transfer of issue of Security by a Person Resident outside India) Regulations, 2000 notified vide Notification No. 20/2000-RB stated as follows: “If the shares are not issued within 180 days from the date of receipt of the inward remittance, the amount of consideration so received shall be refunded to the person concerned, provided the Reserve Bank may on an application made to it and for sufficient reasons permit to refund the amount of consideration received towards issue of security, if such amount is outstanding beyond a period of 180 days from the date of receipt”.
Though Foreign Exchange Management (Transfer or Issue of Security By a Person Resident Outside India) Regulations, 2000 has been replaced by revised regulations; Para 2(2) of Schedule 1 of extant FEMA 20(R)/2017-RB dated 7-11-2017 corresponds to Para 8 of Schedule 1 of erstwhile FEMA 20/2000- RB dated May 3, 2000. • It may be noted that the applicant was indeed constrained from either refunding the share application money to the foreign investor or allotting shares to him since the foreign investor was not traceable implying impermissibility of performance. Further, the applicant has also complied with the provisions of Companies Act, 2013 by transferred the unallotted share application money to Investor Education and Promotion Fund. It is difficult to reconcile that RBI has proceeded with levy of penalty notwithstanding these facts.
Allotment of Shares to Non-Resident under Wrong Category
| Applicant | M/s. Rain Industries Limited |
| Compounding Number | C.A. HYD 304 |
| Amount | Rs. 52,708/- |
| Authority | Foreign Exchange Department, Hyderabad |
| Date of order | 4th July, 2019 |
FACTS : Applicant had taken over M/s. Rain Calcining Limited (RCL) with effect from 25-10-2007. RCL had received a foreign inward remittance of ` 3,61,000/- from Mr. Siddiqui Dawood on 20-2-1997 towards allotment of shares. At the time of subscription, Mr. Siddiqui Dawood had declared his nationality as British and was allotted 36,100 shares of ` 10/- each on 21-3-1997 under NRI category. Consequent upon amalgamation of RCL with the applicant, shares were allotted to the existing shareholders of RCL in the ratio of 2:7 with further division of one equity share of ` 10/- each into five equity shares of ` 2/- each. Accordingly, 51,570 equity shares were issued to Mr. Siddiqui Dawood
The applicant has received an application from Mr. Rafique Dawood, son and legal heir of late Mr. Siddiqui Dawood, for transmission of 51,570 shares held by his father. The applicant later approached FIPB on 15-6-2016 seeking approval for the transmission of above shares to Mr. Rafique Dawood who is a citizen of Pakistan. Ministry of Commerce and Industry, Department of Industrial Policy and promotion (FIF-Section), Govt. of India, vide their approval No. 02(2018)/SIACoC/4239/2016 dated April 13, 2018 conveyed its approval for the transfer of 51,570 shares held by Late Mr. Siddiqui Dawood to Mr. Rafique Dawood subject to Compounding of Contravention.
CONTRAVENTION : Allotment of shares to the non-resident investor under wrong category: SubRegulation (1) of Regulation 5 of erstwhile Foreign Exchange Management (Transfer of issue of Security by a Person Resident outside India) Regulations, 2000 notified vide Notification No.20/2000-RB stated as follows: “A person resident outside India (other than a citizen of Bangladesh or Pakistan or Sri Lanka) or an entity outside India, whether incorporated or not, (other than an entity in Bangladesh or Pakistan), may purchase shares or convertible debentures of an Indian company under Foreign Direct Investment Scheme, subject to the terms and conditions specified in Schedule 1.” Further, notwithstanding anything contained in clause above, “A person who is a citizen of Pakistan or an entity incorporated in Pakistan may, with the prior approval of the Foreign Investment Promotion Board of the Government of India, purchase shares or convertible debentures or warrants of an Indian company under Foreign Direct Investment scheme, subject to the terms and condition specified in schedule 1”
Though Foreign Exchange Management (Transfer or Issue of Security By a Person Resident Outside India) Regulations, 2000 has been replaced by revised regulations; sub-regulation (1) of Regulation 5 of extant FEMA 20(R)/2017-RB dated 07/11/2017 corresponds to sub-regulation (1) of Regulation 5 of erstwhile FEMA 20/2000- RB dated May 3, 2000.
- This order relates to incorrect declaration of nationality by the foreign investor. It becomes important for a company inviting FDI to conduct due diligence of the foreign investor before receiving the share application money. However, the company may come under precarious situation if the foreign investor does not disclose a change in status of his nationality, subsequent to receipt of investment, to that of a notified country which requires prior government approval.
Receipt of foreign investment under approval route without obtaining specific and prior approval from Government of India
| Applicant | M/s. Alphamed Formulations Private Limited |
| Compounding Number | C.A. HYD 307 |
| Amount | Rs. 24,91,973/- |
| Authority | Foreign Exchange Department, Hyderabad |
| Date of order | 24th July, 2018 |
FACTS OF CASE: The applicant is a resident company incorporated as a Private Limited Company under the Companies Act, 1956 on 20-11-2006. Applicant is engaged in the business of manufacturing and dealing with pharmaceuticals, formulations, medicines, chemical preparation and drug formulation and the company had been receiving inward remittances since December 2006, which are permitted up to 100% under automatic route. In terms of Department of Industrial Policy and Promotion’s Press Notification No. 1/16/2010-FC-I dated November 8, 2011, the FDI policy has been revised such that the foreign investment up to 100% would be permitted for brownfield investments in the pharmaceutical sector, under the Government approval route. The applicant did not obtain prior approval from Government of India for the remittances received after 8-11-2011 as per the extant rules. Later, Department of Pharmaceuticals, on an application being made to it by the company granted its post facto approval vide their approval No. 13012/13/2017-FDI-Policy dated February 23, 2018 subject to compounding of the said contravention by Reserve Bank of India.
CONTRAVENTION: Receipt of foreign investment under approval route without obtaining specific and prior approval from Government of India: Paragraph 3 of Schedule 1 to erstwhile Foreign Exchange Management (Transfer of issue of Security by a Person Resident outside India) Regulations, 2000 notified vide Notification No. 20/2000-RB stated as follows: “A company which is engaged or proposes to engage in any activity specified in Annexure ‘A’ or which proposes to issue shares to a person resident outside India beyond the sectoral limits stipulated in Annexure ‘B’ or which is otherwise not eligible to issue shares to a person resident outside India, may issue shares to a person resident outside India referred to in paragraph 1, provided it has secured prior approval of Secretariat for Industrial Assistance or, as the case maybe of the Foreign Investment Promotion Board of the Government of India and the terms and conditions of such an approval are complied with”
Though Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 has been replaced by revised regulations; Para 1(1) of Schedule 1 of extant FEMA 20(R)/2017-RB dated 7-11-2017 corresponds to para 3 of Schedule 1 of erstwhile FEMA 20/2000- RB dated May 3, 2000. Press Note No. 3/2011 for restricting brownfield investment under pharmaceutical sector was issued by DIPP on 8-11-2011 whereas corresponding Notification No. FEMA/296/2014-RB dated 3-3-2014 took effect from 8-1-2014. Though Notification was issued much later after the issuance of press note by DIPP, RBI has still considered the date of issuance of press note as the date of commencement of contravention. This is contrary to its stand as reported in FAQ No. 47 wherein RBI has clarified that foreign investment can be made based on notification issued under FEMA 1999 and cannot be based on press note / FDI Policy.
Delay in repatriation to India of excess refund of share application money
| Applicant | M/s. PAR Formulations Pvt. Ltd. |
| Compounding Number | C.A. 789/2018 |
| Amount | ` 2,40,846/- |
| Authority | Foreign Exchange Department, Chennai |
| Date of order | 6th July, 2019 |
FACTS : The applicant had received foreign inward remittances from i) Mr. Muthusamy Shanmugam, USA, ii) M/s. Kali Capital LLP, USA iii) M/s. Par Pharmaceuticals Inc., USA towards subscription to equity shares and reported the same to the Reserve Bank. Later, out of the total remittance received by the applicant, the applicant failed to allot the shares against the remittance of ` 68,76,036/- received on 16-11-2007 and refunded ` 84,43,800/- on 19-5-2009 with delay of one year three days approximately without prior approval of Reserve Bank. However, the company instead of refunding foreign currency equivalent to the rupee consideration received, had refunded on 19-5-2009 the INR equivalent of the USD received on 16-11-2007 resulting in excess refund. The company has brought in the excess amount of refund as advised by Reserve Bank by way of inward remittance on 22-12-2017 with delay of eight years seven months three days approximately.
CONTRAVENTION: Delay in bringing in excess refund: Para 8 of Schedule 1 to erstwhile Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 notified vide Notification No. 20/2000-RB read with AP (Dir Series) Circular No. 20 dated December 14, 2007, which states that: “If the shares are not issued within 180 days from the date of receipt of the inward remittance, the amount of consideration so received shall be refunded to the person concerned, provided the Reserve Bank may on an application made to it and for sufficient reasons permit to refund the amount of consideration received towards issue of security, if such amount is outstanding beyond a period of 180 days from the date of receipt”.
Though Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 has been replaced by revised regulations; Para 2(3) of Schedule 1 of extant FEMA 20(R)/2017-RB dated 7-11-2017 corresponds to Para 8 of Schedule 1 of erstwhile FEMA 20/2000- RB dated May 3, 2000.
- It is a common occurrence when excess remittance is wired to India due to absence of clarity in the amount of bank charges. It may be even borne in mind that any amount of excess share application money received, however minor, needs to be refunded.
- Further, the FDI recipient company needs to be careful to refund foreign currency equivalent of excess rupee consideration received originally and not rupee equivalent of excess foreign currency remitted by foreign investor
Outbound Transactions (FEMA 120)
Making outward remittances to the overseas entity when Indian party is under investigation
| Applicant | PC Jeweller Limited |
| Compounding Number | C.A 4619/2018 |
| Amount | Rs. 74,13,478/ |
| Authority | Foreign Exchange Department, Mumbai |
| Date of order | 12th July, 2019 |
FACTS : The applicant set up a wholly-owned subsidiary (WOS) namely, P. C. Jeweller Global DMCC in UAE on June 8, 2016 and made remittances amounting to USD 20,000,500 to the overseas WOS, under the automatic route. The remittances were reported in Form ODI-Part-I within the prescribed time except in one instance wherein the applicant had to remit USD 500 to compensate for the shortfall in the first remittance on account of deduction of the bank charges. Thus, applicant reported the said remittance with delay beyond the prescribed time on December 13, 2017. However, the applicant was under investigation by Directorate of Revenue Intelligence (DRI) which was concluded in July 2014 and a show cause notice (SCN) dated July 8, 2014 was issued to the applicant. The applicant filed an appeal against the SCN to Commissioner (customs) Imports in January 2015 which is pending till date RBI, vide letter No. FE.CO.CEFA/8434/15.20.67/2017-18 dated April 12, 2018 requested Directorate of Enforcement (DoE) to convey within 30 days as to whether the investigation pertained to the contraventions sought to be compounded and whether it had any objection to compounding by RBI under the specific provisions. After RBI’s reminder dated May 15, 2018, DoE vide letter F.No.RBI/SDE/WR/B-140/2018/886 dated June 7, 2018 expressed its inability to quote the applicability of the conditions specified in the proviso to rule 8(2) of the Foreign Exchange (Compounding Proceedings) Rules, 2000. Accordingly, this order is only in respect of the above contraventions and the contraventions are compounded without prejudice to any action initiated or proposed to be initiated by any Authority including the DoE/DRI under any Law including under the FEMA or PMLA against the Applicant or any other person involved in the contravention compounded by the Reserve Bank.
CONTRAVENTION: Making outward remittances to the overseas entity without submission of Form ODI: In terms of Regulation 6(2) (vi) of Notification No. FEMA 120/2004-RB, Dated 7-7- 2004, an Indian Party making direct investment in a joint-venture (JV)/WOS outside India has to submit Form ODI Part-I, duly completed, to the designated branch of an Authorized Dealer, the applicant did not report the investment made in the overseas entity (WOS) within the prescribed time period of 30 days in one instance. Making outward remittances to the overseas entity under the automatic route when the same was permitted only with prior approval: In terms of regulation 6(2) (iii) of Notification No. FEMA 120/2004-RB, dated 7-7-2004, an Indian Party may make direct investment in a JV/WOS outside India subject to the condition that the Indian Party is not on the Reserve Bank’s exporters’ caution list / list of defaulters to the banking system circulated by the Reserve Bank and/or is not under investigation by any investigation / enforcement agency or regulatory body. Whereas the applicant made ODI in the overseas WOS when the appeal filed by the applicant in connection with a DRI investigation was still pending and thus applicant had contravened the said provisions under FEMA.
One needs to bear in mind that remittance of shortfall due to bank charges without filing of Form ODI would also constitute a Contravention under FEMA.
- If a Company is under investigation by any investigation/enforcement agency or regulatory body, then the said company needs to take prior approval of Reserve Bank of India for making any outward remittance to overseas entity even though the same would be ordinarily permitted under automatic route
- In terms of the proviso to Rule 8 (2) of Foreign Exchange (Compounding Proceedings) Rules, 2000 inserted vide GOI notification dated February 20, 2017, if the Enforcement Directorate is of the view that the compounding proceeding relates to a serious contravention suspected of money laundering, terror financing or affecting sovereignty and integrity of the nation, then RBI is not supposed to proceed with the matter and has to remit the case to the appropriate Adjudicating Authority for adjudicating contravention under section 13. Under the present case, since Directorate of Enforcement (DoE) expressed its inability to convey whether the investigation pertained to the contraventions sought to be compounded and whether it had any objection to compounding by RBI under the specific provisions, RBI has proceeded with compounded the contraventions sought to be compounded.
Write-off the entire amount of ODI without filing APR and obtaining fair valuation certificate
| Applicant | Anand Rathi Wealth Services Limited |
| Compounding Number | C.A. 4627/2018 |
| Amount | Rs. 2,10,510/- |
| Authority | Foreign Exchange Department, Mumba |
| Date of order | 17th July, 2019. |
FACTS : The applicant invested USD 30,000 on October 19, 2005 in an overseas WOS viz., Anand Rathi India Realty Fund in Mauritius. The company was unable to commence operations and as a result the applicant decided to close the company vide Board Resolution dated May 17, 2008. The company was removed from the Registrar of Companies in Mauritius w.e.f. August 6, 2009. The applicant did not submit annual performance reports (APRs) for the period 2006 to 2009.Further, the applicant had written off the entire amount of ODI under automatic route without obtaining fair valuation certificate and without submitting APRs.
CONTRAVENTION: Written off the entire amount of ODI under automatic route without obtaining fair valuation certificate: Regulation 16(1) (iii) of the Notification No. FEMA 120/2004-RB, dated 7-7-2004, states that an Indian Party may transfer, by way of sale to another Indian Party any share or security held by it in a JV or WOS outside India subject to the condition that if the shares are not listed on the stock exchange 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 as the fair value of the shares based on the latest audited financial statements of the JV/WOS. Whereas Regulation 16(1)(v) of the notification ibid, states that an Indian party may transfer, by way of sale to another Indian Party any share or security held by it in a JV or WOS outside India subject to the condition that the overseas concern has been in operation for at least one full year and the Annual Performance Report together with the audited accounts for that year has been submitted to the Reserve Bank.
Delayed return of share application money under ODI
| Applicant | Pyramid Consulting Engineers Private Limited |
| Compounding Number | Application Number C.A. 4673/2018 |
| Amount | Rs. 1,10,000/- |
| Authority | Foreign Exchange Department, Mumbai |
| Date of order | 9th July, 2019 |
FACTS : The applicant remitted USD 275,000 on August 17, 2007 towards investment in overseas joint venture viz., Pyramid Engineering and Consulting LLC in Oman. Due to business disagreement between the promoters, the plan to open the JV could not materialise. The aforesaid amount of investment was returned to the applicant after deducting bank charges. The applicant received USD 224,956.74 on October 10, 2007 (within 6 months of initial investment) and USD 47,448.13 on September 22, 2008 (beyond 6 months of the initial investment).
CONTRAVENTION: Delayed return of share application money beyond 180 days from the date of remittance: Regulation 15(i) of FEMA 120/2004, states that an Indian party, shall receive share certificates or any other document as an evidence of investment in the foreign entity to the satisfaction of the Reserve Bank within six months, or such further period as Reserve Bank may permit, from the date of effecting remittance or the date on which the amount to be capitalised became due to the Indian party or the date on which the amount due was allowed to be capitalised
This kind of unfortunate circumstance usually occurs in the case of JV disputes. However, in cases where overseas direct investment is refunded amicably, compounding application is generally dealt with under Regulation 15(i) of FEMA 120 (viz., non receipt of share certificate within six months from the date of effecting remittance, or such further period as RBI may permit.) RBI has considered the period of contravention as 10 years and 10 days, being date of remittance to the date of submission of compounding application
Borrowing or Lending in Foreign Exchange (FEMA 3/2000-RB)
| Applicant | Aircom International India Private Limited |
| Compounding Number | CA No. 4720 / 2018 |
| Amount | Rs. 5,05,935/- |
| Authority | Foreign Exchange Department, Mumbai |
| Date of order | 23rd August, 2018 |
FACTS : The applicant company raised foreign currency loan on February 7, 2001 from its parent company for general corporate expenses without obtaining LRN and adhering to reporting requirements. The lender was not a recognised lender at the time and became eligible only from June 2001. Further, the applicant company also raised foreign currency loans in 7 tranches from July 15, 2004 to May 15, 2006 from the parent company, for working capital purposes without obtaining LRN and adhering to reporting requirements. Working capital was permitted as end-use only with effect from September 4, 2013.
CONTRAVENTION : In terms of Regulation 6 of Notification No. FEMA 3/2000-RB, “a person resident in India may raise in accordance with the provisions of the Automatic Route Scheme specified in Schedule I, foreign currency loans of the nature and for the purposes as specified in that Schedule’’. Paragraph 1(iii) of Schedule I to FEMA Notification No. FEMA.3/2000-RB, provides that “The borrowings in foreign currency by way of issue of bonds, floating rate notes or other debt instruments by whatever name called may be made from – (a) International bank or export credit agency or international capital market, or (b) Multilateral financial institutions, namely, IFC, ADB, CDC etc., or (c) Foreign collaborator or foreign equity holder as specified by the Reserve Bank, or (d) Supplier of equipment provided the amount of loan raised does not exceed the total cost of the equipment being supplied by the lender, or (e) Any other eligible entity as prescribed by the Reserve bank in consultation with the Government of India.” Paragraph 1(iv) of Schedule I to FEMA Notification No. FEMA.3/2000-RB provides the end-uses for which ECB is permitted. However, loan towards ‘lease deposit for office premises’ is not a permitted end-use.
Entering into partnership with a person resident outside India without obtaining prior approval
| Applicant | Expedition Voyages |
| Compounding Number | CA No. 4661 / 2018 |
| Amount | Rs. 73,108 |
| Authority | Foreign Exchange Department, Mumba |
| Date of order | 3rd September, 2018. |
FACTS OF CASE: Expedition Voyages, a Partnership Firm was formed vide a Deed of Partnership made on March 23, 2015 between Mr. Karl Espen Fjermeros a resident of New York and Mr. John Jayanta Ambat a resident of India. As per Deed of Partnership, the profit and loss of the business of the firm shall be shared between the partners in the ratio of 70% (Mr. Karl Espen Fjermeros) and 30% (Mr. John Jayanta Ambat). Mr. Karl Espen Fjermeros remitted total amount of ` 38,51,373.22 in five tranches between 15-07-2015 to 28-12-2015. The applicant subsequently reversed the transaction and remitted back the total amount of ` 38,51,373.22 on May 28, 2018 to Mr. Karl Espen Fjermeros.
CONTARVENTION: V Entry into partnership with a person resident outside India without obtaining prior approval: Regulation 3 of the Notification no. FEMA 24/2004-RB, dated 3-5-2000, states that “Save as otherwise provided in the Act or rules or regulations made or directions or orders issued thereunder, no person resident outside India shall make any investment by way of contribution to the capital of a firm or a proprietary concern or any association of persons in India. Provided that the Reserve Bank may, on an application made to it, permit a person resident outside India subject to such terms and conditions as may be considered necessary to make an investment by way of contribution to the capital of a firm or a proprietary concern or any association of persons in India.”
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