Vignesh Iyer

Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Eleventh Amendment) Regulations, 2016

Master Direction[1] on Other Remittance Facilities dated January 01, 2016, as amended from time to time, provides for the instructions issued on remittance facilities for residents.

Para 4.4 of the aforesaid Master Direction mandated obtaining prior approval of RBI for remittances made by persons other than individuals exceeding five per cent of investment brought into Indiaor USD 100,000 whichever is higher, by an entity in India by way of reimbursement of pre-incorporation expenses.

Para 4.4 of the Master Direction reads as below:

4.4. Remittances towards re-imbursement of pre-incorporation expenses

Remittances by persons other than individuals shall require prior approval of the Reserve Bank of India for remittances exceeding five per cent of investment brought into India or USD 100,000 whichever is higher, by an entity in India by way of reimbursement of pre-incorporation expenses.”

The corporates faced compliance of the above provision to be time consuming and restrictive and hence, had to make delayed remittance of pre-incorporation expenses to their overseas holding entities in cases where the amount of remittances exceeded the limits specified. Consequently, the corporates and other stakeholders were expecting RBI to bring in some relaxations in these restrictive provisions.

In the light of the same, RBI vide Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Eleventh Amendment) Regulations, 2016 (Amendment Regulations, 2016) dated October 24, 2016 has provided for an alternative to the corporates to settle the pre-incorporation expenses with the non-resident entity setting up a wholly owned subsidiary in India.

The Amendment Regulations, 2016 permits wholly owned subsidiary set up in India by a non-resident entity, operating in a sector where 100 per cent foreign investment is allowed in the automatic route and there are no FDI linked conditionalities to issue equity shares or preference shares or convertible debentures or warrants to the said non-resident entity against pre-incorporation/ preoperative expenses incurred by the said non-resident entity up to a limit of five per cent of its capital or USD 500,000 whichever is less, subject to the specified conditions as prescribed below:

a. Within thirty days from the date of issue of equity shares or preference shares or convertible debentures or warrants but not later than one year from the date of incorporation or such time as Reserve Bank of India or Government of India permits, the Indian company shall report the transaction in the Form FC-GPR to RBI.

b. The valuation of the equity shares or preference shares or convertible debentures or warrants shall be subject to the provisions of Paragraph 5 of Schedule 1 of the Foreign Exchange Management (Transfer or issue of Security by a Person Resident outside India) Regulations, 2000.

c. A certificate issued by the statutory auditor of the Indian company that the amount of pre-incorporation/preoperative expenses against which equity shares or preference shares or convertible debentures or warrants have been issued has been utilized for the purpose for which it was received should be submitted with the FC-GPR form.

Additionally, the Amendment Regulations, 2016 has also provided the following inclusive definition for the term ‘Pre-incorporation/Pre-operative expenses’:

“Pre-incorporation/pre-operative expenses shall include amounts remitted to Investee Company’s account, to the investor’s account in India if it exists, to any consultant, attorney or to any other material/service provider for expenditure relating to incorporation or necessary for commencement of operations”.

Conclusion

The alternative option of issuing shares instead of remittance by the wholly owned subsidiary for the pre-incorporation/pre-operative expenses incurred by overseas holding entities may also be a favorable move for the corporate sector. However, in case of other than wholly owned subsidiaries, option for issuance of shares has not been expressly permitted. Therefore, the same may be paid by way of remittance subject to the restriction specified under Para 4.4 of Master Direction on Other Remittance Facilities.

[1] https://taxguru.in/rbi/rbi-master-direction-remittance-facilities.html

(Author can be reached at vignesh@vinodkothari.com)

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