FEMA Regulations with respect to Pharmaceutical Sector

The article highlights the provisions of Foreign Exchange Management Act, 1999 (FEMA) pertaining to Pharma sector.

The world did not need a pandemic to know the importance of the pharma industry globally. Covid-19 has placed it right at the top of the list.  The Indian Pharmaceutical industry is respectably positioned in the world -it is the largest supplier of generic drugs globally, it caters to over 50% of global demand for various vaccines and is third largest in the world w.r.t production by volume and continues to grow.

Some statistics: Indian Pharmaceutical Industry consists of more than 10,000 companies and has annual export turnover of about USD 20 billion with equivalent amount of domestic annual turnover. Pharmaceutical sector in India is expected to grow to US$ 100 billion by 2025. Recently, Indian government has announced a package of Rs 14,000 cr for setting up bulk drugs and medical devices park. Government of India is also working toward Production linked Incentive scheme for this sector. In the short term too, Indian Pharmaceutical industry is bound to benefit by the global demand for vaccines and India’s production capacities will be fully utilized.

Given the backdrop and the potential of the industry, Pharma sector has attracted significant Foreign Direct Investment (FDI). This sector has also done significant Overseas Direct Investment (ODI) as well. Let’s understand the relevant FEMA provisions on FDI & ODI pertaining to Pharmaceuticals sector.

Pursuant to amendment made through Finance Act 2015, Central Government is empowered to legislate for Capital Account Transactions. Department of Economic Affairs under Ministry of Finance has issued Foreign Exchange Management (Non-debt Instrument) Rules, 2019 (herein after referred as NDI Rules) for acceptance of Foreign Investment/Foreign Direct Investment in India. NDI Rules supersedes Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017, called as TISPRO. Foreign Investment in India is subject to entry route, sectoral cap, pricing guidelines and attendant conditionalities as specified in Schedule 1 of NDI Rules.

FDI in Manufacturing of Medical Devices:

100% FDI under automatic route is permissible for manufacturing of Medical Devices

Medical device means

A. Any instrument, apparatus, appliance, implant, material or other article (whether used alone or in combination) including the software, to be used for human/animals for below purposes, but does not achieve its primary intended action in or on human body or animals by any pharmacological or immunological or metabolic means, but which may be assisted in its intended function by such means

• Diagnosis, prevention, monitoring, treatment or alleviation of any disease or disorder;
• Diagnosis, monitoring, treatment, alleviation of, or assistance for, any injury or disability;
• Investigation, replacement or modification or support of the anatomy or of a physiological process;
• Supporting or sustaining life;
• Disinfection of medical devices;
• Control of conception;

B. An accessory to such an instrument, apparatus, appliance, material or other article;

C. In-vitro diagnostic device which is a reagent, reagent product, calibrator, control material, kit, instrument, apparatus, equipment or system, whether used alone or in combination thereof intended to be used for examination and providing information for medical or diagnostic purposes by means of examination of specimens derived from human bodies/ animals.

FDI in Pharmaceuticals:

As per Schedule 1 of NDI Rules, 100% FDI is permissible for Pharmaceutical sector in Greenfield and Brownfield.  Entry route for Greenfield is 100% under automatic route, but for Brownfield up-to 74% FDI is under automatic route and beyond that under government route subject to applicable laws, regulations, security and other conditionalities.

Greenfield means construction of new production and operational facilities from the ground up, including industrial licenses. Brownfield means existing plants. Though definition of Brownfield and Greenfield is clear but practical problems are visible, requiring Government to come out with further clarifications. Let’s consider a case where significant expansion is required in existing JV and Indian Partners have limited ability to fund the expansion, but Foreign Partners are willing to extend their contribution. Technically, it would fall in Brownfield, but one can work around the model of SPV for expansion to avoid government route.

Conditions applicable to both Brownfield and Greenfield:

• Non-compete clause would be allowed only under exceptional/special circumstances with government approval.
• Certificate, in specified format, to be furnished by prospective investor & investee providing complete list of agreements entered into and attaching the copies thereof.

Conditions applicable to Brownfield:

• Government may, at the time of granting approval for Brownfield, incorporate/impose appropriate conditions for FDI in Brownfield cases.
• Maintenance of Production and Supply of National List of Essential Medicines (NLEM) Drugs: Production level of NLEM drugs and their supply to domestic market should be maintained over the next five years at an absolute quantitative level. Benchmark for this level would be highest level of yearly production of NLEM drugs in last three financial years, preceding the induction of Foreign Investment.
• Maintenance of Research and Development Expenses: In value terms, it should be maintained for 5 years at an absolute quantitative level. The benchmark for this would be highest level of R&D expenses incurred in any of last three financial years immediately preceding the year of Foreign Investment.
• In case of transfer of technology, complete information along with induction of Foreign Investment to be provided to Administrative Ministry.
• Administrative Ministry (s) i.e. Ministry of Health and Family Welfare, Department of Pharmaceuticals or any other regulatory Agency/Development as notified by Central Government from time to time, shall monitor the compliance of conditionalities.

FDI from below, irrespective of sector, would be subject to government approval:

• Any entity of a country which shares land border with India, or
• Beneficial owner who is either situated in that country or is a Citizen of that country which shares land border with India

Thus, FDI from the companies incorporated/persons living in/citizens of Afghanistan, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar, and China, would be subject to government approval (NDI amendment rules 2020).

NDI Rules consist of 10 schedules for Foreign Investment. Schedule 1 consist of FDI. Each schedule is different, and Foreign Investment would be subject to the limits, conditions/restrictions mentioned in respective schedules. Investment from NRI, on non-repatriation basis under schedule 4, is treated at par with Domestic Investment and hence not considered as Foreign Investment. 

Equity Instruments to Person Resident Outside India (PROI): should be issued within 60 days from the date of receipt of consideration, failing which consideration should be remitted back, to PROI within 15 days from the date of completion of 60 days, through banking channels or by credit to his NRE/ FCNR (B) account.

Pricing Guidelines

• Listed Company: Price worked out in accordance with SEBI guidelines.
• Un-listed Company: As per any Internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a Chartered Accountant or a Merchant Banker registered with SEBI or a practicing Cost Accountant.

Mode of payment for equity instrument and the reporting compliances are governed by Foreign Exchange Management (Mode of Payment and Reporting of Non-debt Instruments) Regulations 2019, issued by RBI.

Reporting

Form Foreign Currency – Gross Provisional Return (FC-GPR): An Indian company issuing equity instruments to PROI, under FDI should report such issue in Form FC-GPR, within 30 days from the date of issue of equity instruments.

Annual Return on Foreign Liabilities and Assets (FLA): An Indian Company, which has received FDI or an LLP which has received Foreign Investment, shall submit form FLA to RBI by 15^th July of each year.

Foreign Currency – Transfer of Shares (FC-TRS): To be filed for transfer of equity instruments in accordance with NDI rules, between:

• PROI holding equity instruments in an Indian company on a repatriable basis and PROI holding equity instruments on a non-repatriable basis; and
• PROI holding equity instruments in an Indian company on a repatriable basis and PRI

Onus of reporting is on resident transferor / transferee or PROI holding equity instruments on a non-repatriable basis. Transfer of Equity Instrument of an Indian Company by/to PROI are governed by Rule 9 &13 of NDI Rules.

Form LLP (I): LLP receiving amount towards capital contribution/acquisition of profit shares from PROI, should file Form LLP (I), within 30 days from the receipt of consideration.

Form LLP (II): On disinvestment / transfer of capital contribution/profit share between PRI and PROI (or vice versa) Form LLP(II) should be filed within 60 days from the receipt of funds. Onus of reporting is on the resident transferor / transferee.

Common Contraventions on FI/FDI by this sector, as observed from the compounding orders, are accepting FDI in Brownfield under automatic route beyond permissible limit,  allotment of shares prior to receipt of inward remittance, delay in refund of share application money, allotment of shares after permissible period, delay in submission of Annual Return FLA, delay in submission of FC-GPR/FC-TRS, non-adherence to pricing guidelines etc.

Amneal Pharmaceuticals Private Limited accepted FDI in Brownfield pharmaceutical sector without government approval as per extant regulations. This led to contravention of FDI Regulations. The company opted for compounding to regularize the contravention. The compounding was done at Rs. 3.1 cr but the company failed to make the payment of compounding within prescribed timelines of 15 days, resulting compounding order as null and void (CA 4915/2019).

Raks Pharma Private Limited accepted investment under FDI in brownfield from Amneal Pharma Investment Holding, Mauritius under automatic route during 2011 to 2013. Foreign Investment, in Brownfield pharmaceutical, was brought under government route with effect from Nov 2011. Hence acceptance of FDI under automatic route in Brownfield, after November 2011, was contravention which was regularized through compounding (CA 4656/2018).

Alcon Laboratories (India) Private Limited, having 100% FDI from Novartis AG, Switzerland, was engaged in wholesale trading in India and providing maintenance services in relation to eye care products. The company was carrying out financial leasing of ophthalmic surgical equipment. A company having Foreign Investment and engaged in financial leasing is required to meet the minimum capitalization norms. The company failed to do so, thus contravening Regulation 5(1) read with Annexure B of Schedule I of Notification No. FEMA 20/2000- RB. The contravention was regularized through compounding on payment of Rs. 69 lacs (CA 4737/2018).

Relisys Medical Devices Limited, engaged in manufacture of rubber surgical and medical equipment, had converted CCDs into equity shares of Rs. 10 each at a premium of Rs. 21.37 each which was lower than the fair value of Rs. 64.22 per share as certified by Chartered Accountant, resulting in contravention of pricing guidelines. This contravention, along-with other contraventions, were regularized through compounding (CA HYD 429).

Celon Laboratories Private Limited allotted the shares to NRI on non-repatriation basis on receipt of consideration from third party. As per regulation, the consideration should be received either by way of foreign inward remittance through banking channel or out of NRE/FCNR(B)/NRO account of investor and not from the third party. The contravention along with another contravention, were regularized through compounding (CA HYD 390).

Zhaveri Pharmakem Private Limited parked FDI proceeds in EEFC account and utilized the proceeds for import payment and foreign expenditure. Parking of FDI proceeds in the EEFC account is a contravention of FEMA regulation, which was regularized through compounding on payment of Rs 3.5 lac (CA 4613/2018).

It’s also important to understand the concept of “Indirect Foreign Investment” (IFI) as many companies contravene on provision of IFI.: Investment made by an Indian Entity into equity instrument of another Indian Entity is called as Down Stream Investment (DSI). A DSI would be categorised as Indirect Foreign Investment if:

1^st Part

a. Investor Indian Entity has Foreign Investment in it, AND

2^nd Part

b. Investor Indian Entity is owned or controlled by PROI;

OR

c. Investor Indian Entity is not owned & not controlled by Resident Indian Citizens

Indian Entity means Indian Company or a LLP

DSI would be categorized as IFI only if it satisfies both 1^st and 2^nd part of above. For example, if Investor Indian Entity does not have any foreign investment in its equity instrument, then DSI by such entity would not be categorized as IFI. Similarly, if Investor Indian Entity has foreign investment in its equity instrument but it is owned and controlled by Resident Indian Citizen, then also DSI made by such company would not be categorized as IFI.

Further, Investment made by Investment Vehicle would also be called as IFI if sponsor, manager or investment manager is either not Owned & not Controlled by Resident Indian Citizen or is Owned or Controlled by PROI. It may be noted that Foreign Investment is not criterion for deciding IFI in case of investment by Investment Vehicle.

Though the definition of ownership is clear but when it comes to control, there is ambiguity with reference to veto rights, which is commonly placed in JV agreements. How to factor the controls being exercised through veto rights? NDI rules are silent on this.

Entire amount of DSI is being categorized as IFI and not the proportionate amount. For instance if ‘’X Co’’ of USA has made an investment of 80% in the equity shares of  an Indian  company “A Co” and ‘’A Co’’ has further made 60% investment in Indian company “B Co”, then entire Investment by ‘’A Co’’ into ‘’B Co’’ i.e. 60% would be categorized as IFI and not the proportionate (80%*60%= 48%).

There is an exception to the above rule. IFI received by a wholly owned subsidiary company shall be limited to the total Foreign Investment of the investor company, i.e. the company making DSI. In above instance, if ‘’A Co’’ invests 100% in ‘’B Co’’ then IFI for ‘’B Co’’ would be 80% and not 100%.

Many companies/ LLP, contravene on the provisions of Indirect Foreign Investment as the investment is being done by Indian Company into Indian Company/LLP.

Indus Towers Limited (JV of Bharti and erstwhile Vodafone & Idea) engaged in the business of building, owning, operating and maintaining passive infrastructure in different telecommunication circles across India. Under FDI Policy of August 2017, 49% of Foreign Investment was permissible under automatic route. Indus Tower had Foreign Investment of 47% approx till 2017, but in February 2018, Idea group allotted equity shares to its promoters (including non-resident entities) and consequently Idea became a foreign owned company. This led to increase in IFI in Indus Tower by 11.15%, and, therefore, the aggregate Foreign Investment (direct and indirect) in Indus Tower increased to 58% (beyond 49%). The company missed on prior approval of Foreign Investment and has regularized this contravention by way of compounding (CA NDL 299/2018).

Biomerieux India Private Limited, an Indian WOS of Biomerieux France, engaged in diagnostic products. The company acquired 60% stake in RAS Lifesciences Private Limited, an Indian company, engaged in manufacture and marketing of molecular diagnostic kits, for a consideration of Rs. 7.5 crore. Thus, Biomerieux India Private Limited, being WOS of Foreign Company, made Down Stream Investment of in another Indian Company (RAS Lifesciences), this would be categorized as Indirect Foreign Investment in investee company as Biomerieux is not owned by Resident Indian Citizen. The company contravened on DSI compliances. The contravention was regularized through compounding (CA 4693/2018).

Compliances by Indian Entity Making DSI:

• Notify the Secretariat for Industrial Assistance (SIA), DPIIT within 30 days of such investment along-with the modality of investment in new / existing ventures.
• Submission of Form DI to RBI within 30 days from the allotment of equity instrument.
• Obtain a certificate of compliance of DSI provisions annually from its statutory auditor. Intimation to RBI in case of qualified report.
• Compliance of DSI provisions should also be mentioned in the Director’s report of the company.
• Should not use domestically borrowed funds for DSI.

Compliance by Indian Entity Receiving IFI: Entry route, sectoral caps, pricing guidelines and other attendant conditions as applicable for Foreign Investment.

Overseas Direct Investment Regulations under FEMA

Investment in Overseas Joint Venture (JV) / Wholly Owned Subsidiary (WOS), by Indian Pharma Companies is a common occurrence and quite pervasive. Here are some important provisions of ODI regulated under Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2017.

Financial commitment/investment by an Indian Party (Indian Company/Registered partnership firm/LLP), up-to 400% of its Net Worth (based upon last audited Balance Sheet) is permissible under automatic route, provided:

• Overseas JV or WOS should be engaged in a bonafide business activity
• Indian Party is not on RBI’s exporters caution list /list of defaulters/ under investigation by any investigation/ enforcement agency or regulatory body
• Indian Party has submitted Annual Performance Report (APR) for its existing overseas JV/WOS
• Transactions relating to investment in JV/WOS should be routed through one branch of AD Bank, designated by it and investment in Overseas JV/WOS should be subject to adherence of valuation norms prescribed under the regulations

400% limit is on the total financial commitment by an Indian party in all of its overseas JV/WOS. However, this limit is relevant at time of making remittance only. Subsequently, if due to erosion of net worth, existing ODI crosses the prescribed limit of 400%, then it would not have any repercussion on existing ODI but subsequent investment may not be possible under automatic route.

It should, however, be noted that any financial commitment exceeding USD 1 billion/ its equivalent, in a financial year would require prior approval of RBI even when total financial commitment of Indian party is within the eligible limit under automatic route.

What if Eligible Limit is Fully Utilized

Remittance, for investment in overseas JV/WOS, out of EEFC or proceeds of ADR/GDR are not being considered in prescribed limit of 400% of net worth. Thus, remittance from EEFC or out of proceeds of ADR/GDR, may be used for making investment in overseas JV/WOS under automatic route, even if the limit of 400% of net worth is fully utilized. This is important for Pharmaceutical sector as they get substantial revenue from export.

Financial commitment means

• 100% investment by Indian Party in overseas JV/WOS in
  • Equity shares/ Compulsorily Convertible Preference shares,
  • Other preference shares,
  • Loan
• 100% of guarantees (other than performance guarantee) issued by Indian Party to/on behalf of Overseas JV/WOS
• 100% of bank guarantee issued by a resident bank on behalf of overseas JV/WOS provided bank guarantee is backed by a counter guarantee / collateral by Indian Party
• 50% of amount of performance guarantee issued by Indian Party

Swap of Shares have been prominent way of acquiring stakes in foreign companies. This transaction involves acquisition of shares of an overseas company by swap of shares of an Indian company. On acquisition of shares of overseas company, the shares are issued by acquirer Indian company rather than paying cash. FDI would be applicable with respect to the shares that are being issued by Indian Company. In cases of swap of equity instrument, irrespective of the amount, valuation involved in swap arrangement should be made by a Merchant Banker registered with SEBI or an Investment Banker outside India registered with the appropriate regulatory authority in the host country. Such issue is also subject to entry route, sectoral cap, pricing guidelines etc.

An Indian Company may also acquire the shares of a foreign company by way of exchange of ADR/GDR issued to the foreign company provided

• Foreign company to be engaged in bona fide business activity
• ADR/GDR to be listed on recognized stock exchange outside India
• Such ADR/GDR issue is backed by underlying fresh equity shares issued by the Indian Company
• Issue of fresh shares should be in compliance with sectoral cap
• Valuation of shares of the foreign company shall be
  • As per recommendations of Investment Banker if shares are not listed on any recognized stock exchange; or
  • Based on the current market capitalization of the foreign company arrived on monthly average price on stock exchange abroad for preceding 3 months and the premium, if any, as recommended by the Investment Banker in its due diligence report.

Loan or Guarantee to Overseas JV/WOS

Indian Party may extend loan/guarantee only to an overseas JV/WOS in which it has equity participation. Undertaking financial commitment without equity contribution in overseas JV/WOS requires prior approval of RBI. Many countries like UAE, Middle East, European Countries have provisions permitting issue of shares under MOA pending receipt of funds, but Indian regulation considers equity participation post remittance of funds only. Enforcement Directorate had imposed penalty of Rs. 55 cr on Krishiraj Trading Co for extending corporate guarantee to its overseas JV in which it was holding the shares but the remittance towards issue of shares was pending.

Indian Party is also permitted to issue corporate guarantees on behalf of their first level step down operating JV/WOS, set up by their overseas JV/WOS operating as either an operating unit or as Special Purpose Vehicle, under automatic route, provided financial commitment is within the prescribed limit.

Issuance of corporate guarantee on behalf of second or subsequent level step down operating subsidiaries is subject to RBI approval, provided Indian Party indirectly holds 51% or more stake in the overseas subsidiary for which such guarantee is intended to be issued.  

Biocon Limited, an Indian Company, made an investment, without approval of RBI, in preferred stock of overseas company in which Biocon had no Equity Participation. This was contravention of Regulations 6(4) of Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 as amended time to time. The contravention was regularized through compounding (CA 3869/2015).

Alkem Laboratories Private Limited, an Indian Company, engaged in manufacturing and distribution of pharmaceuticals, had an Overseas WOS named S&B Holdings B.V., Netherlands. SBLCs were issued on behalf of first level step-down subsidiary (SDS) of the company, without approval of RBI. This was contraventions of Regulation 6(2)(i)(g) which permits issuance of SBLCs under automatic route only on behalf of JV/WOS and not SDS. The contravention, along-with other contravention of receipt of share certificate after prescribed period of 6 months and delay in submission of APR, was regularized through compounding on payment of Rs. 2.6 crore (CA 4263/2017). Similarly, Alembic Pharmaceuticals Limited, issued SBLC on behalf of first level operating subsidiary. The contravention was regularized through compounding (CA 4235/2016). It may be noted that though corporate guarantee may be issued in on behalf of first level step down operating subsidiary under automatic route but SBLC can be issued on behalf of JV/WOS only.

All guarantees (including performance guarantees and Bank Guarantees/SBLC) should be reported to RBI through their designated AD, at the time of issuance of such guarantees.

Obligations of Indian Party making ODI:

• Receive share certificates or any other document evidencing investment in foreign entity within 6 months, or such further period as permitted by RBI, from the date of effecting remittance
• Repatriate to India, all dues receivable from overseas JV/WOS, like dividend, royalty, technical fees etc., within 60 days of its falling due, or such period as may be extended by RBI
• Reporting:
  • Form ODI within 30 days from the date of effecting remittance. Diversification of Activities of overseas JV or WOS/ setting up of step-down subsidiary (SDS) by Overseas JV or WOS/ alteration in shareholding pattern of overseas JV or WOS should be reported to RBI in Form ODI within 30 days from date of approval of such decision by appropriate authority of host country
  • Annual Performance Report (APR) by 30th June every year
  • Annual Return on Foreign Liabilities & Assets (FLA) by 15th July every year

Contraventions on ODI, as observed from compounding opted by the companies in this sector, are delays in submission of APR, delays in submission of Form ODI, making remittance before allotment of Unique Identification Number (UIN), delay in receipt of share certificate, non-reporting of SDS by oversea JV/WOS, issuance of Corporate Guarantee on behalf of second or subsequent level operating subsidiary without RBI approval,  FDI under ODI structure or ODI under FDI structure, divestment of Overseas JV/WOS without approval of RBI etc. ODI, without RBI approval, is not permissible if the overseas entity has made FDI in an Indian Entity.

Narayana Hrudayalaya Limited, engaged in providing healthcare facilities, opted compounding to regularize the contravention of delay in submission of Form ODI for issuance of SBLC and outward remittances, and delay in submission of Form APR. The compounding was done on the payment of Rs. 18 lacs (CA 4967/2019).

Aricent Technologies (Holding) Limited (Aricent Holding), an Indian Entity, acquired a stake in Aricent Mauritius Engineering Services PCC (Aricent Mauritius). Aricent Mauritius was already holding investment in Aricent Technologies Private Limited, India when ODI was made by Aricent Holding. The resultant structure amounted to making ODI in an entity with pre-existing FDI, which is not permitted without prior approval of RBI. Aricent Holding had not sought RBI approval. The entire structure (FDI and ODI) was unwound and Aricent Holding had regularized the contravention through compounding on the payment of Rs. 3.7 Cr (CA 4803/2018).

Divestment/Sale of shares of overseas JV/WOS is permissible without RBI approval subject to specified conditions in regulation. Take Business Cloud Private Limited (TBCPL), an Indian Entity, had divested its stake in overseas JV without approval of RBI.  Divestment, involving write off, by unlisted company where ODI investment in JV/WOS exceeds USD 10 million, requires prior approval of RBI. TBCPL divested its stake in Overseas JV without seeking approval of RBI leading to contravention. This contravention, along-with other contraventions, were regularized at the compounding of Rs. 1.5 Cr (CA 4686/2018).

As a part of the business restructuring, Take Solutions Limited, engaged in the business of supply chain solutions providing niche services to pharma companies, disinvested its stake in the overseas JV. This divestment was made without submission of APR and divestment proceeds were repatriated beyond permissible time of 90 days. Both the contraventions were regularized through compounding (CA 4675/2018).

Sahyadri Hospitals Limited had divested its stake in Sahyadri Speciality Pacific Hospital Ltd Fiji. Divestment, without approval of RBI, was done with outstanding due from overseas JV, which was in contravention and the same was regularized through compounding (CA 4284-2017).

Indus Biotech Private Limited contravened on making remittance to overseas entity without allotment of UIN, divesting overseas entity without submission of APR, disinvestment under automatic route with outstanding dues from the overseas entity. All the contraventions were regularized through compounding (CA 4286/2017).

Torrent Pharmaceuticals Limited had liquidated its overseas JV/divested its overseas JV without submitting APR for 10 years, leading to contravention of Regulations 15(iii) and 16(1)(v) of Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, as amended time to time (CA 4827/2018).

Sahajanand Medical Technologies Private Limited, divested its entire stake, with write-off, in overseas entity without fair valuation, without submission of APR, leading to contravention of regulation (CA 4443/2017).

 Ayursundra Healthcare Private Limited availed of interest free unsecured from its NRI Director, without issuance of non-convertible debentures (NCDs), in contravention of Regulation 5(1)(i) read with 5(1)(v)(B) of Notification No. FEMA 4/2000-RB. The company also granted an interest free loan of Rs. 1.3 cr to NRI Director without prior RBI approval, in contravention of Regulation 3. The Contravention was compounded on payment of Rs.16.5 lacs (CA 4791-2018).

Healthcare Global Enterprises Limited, engaged in the business of providing specialty healthcare services in India, entered into certain agreements with offshore suppliers of medical equipment for import of capital goods on deferred payment basis, thus qualifying as suppliers’ credit in terms of extant ECB guidelines. As per extant ECB guidelines, the company was not eligible to raise ECB under automatic route, all in cost ceiling was breached and LRN number was not obtained. The contravention was regularized through compounding on payment of Rs. 17.7 lacs (CA 3893-2016).

The importance of compliance of FEMA rules cannot be overemphasized. Non-compliance leads of Penalty u/s 13 of FEMA 1999, up-to 300% of the sum involved in the contravention, if the amount is quantifiable or upto Rs. 2 lacs if the amount is not quantifiable. In case of continuing contravention, further penalty up-to Rs. 5000 per day can be imposed.

 In case of contravention by a company, the person, responsible for the business of the company, would be deemed guilty and liable to be proceeded against and penalized under section 42 of FEMA, 1999. Further, if proven that contravention had taken place with consent of or due to negligence on the part of director, manager, secretary or any authorized officer of the company, then they would also be deemed guilty and liable to be proceeded against and penalized accordingly.  

Regulators are prompt in taking immediate action on contraventions against the company, directors, concerned officers. It is prudent to have periodical reviews of transactions under FEMA and seek timely advice on transactions involving foreign exchange.

Note: Extension of dates for current year, for reporting compliances, due to COVID-19 pandemic have not been considered here.

About Author:

Vikas Maheshwari, FCA, Founder of VM Consulting & Advisory, engaged in interpreting FEMA, PMLA and laws relating to Black Money and Benami Properties. He has more than 3 decades of professional experience and has served at various senior position including CFO, Global Treasury Head etc. in MNCs. He can be reached at the following coordinates:

Email: [email protected]

Mobile: +91 98811 36320