FOREIGN DIRECT INVESTMENT-REGULATION & POLICY

CHAPTER – 4

FOREIGN DIRECT INVESTMENT-REGULATION & POLICY

CONCEPTS PARTICULARS NO. OF Q

CONCEPT-1 BASIC CONCEPTS OF FDI 3

CONCEPT-2 ELIGIBLE INVESTORS 1

CONCEPT-3 ELIGIBLE INVESTEE ENTITIES 1

CONCEPT-4 FDI IN E COMMERCE 1

CONCEPT-5 RBI PERMISSION IN CASE OF TRANSFER 1

CONCEPT-6 MODES OF PAYMENT 1

CONCEPT-7 ROUTES FOR FUNDING 1

CONCEPT-8 ISSUE OF RIGHT SHARES 1

CONCEPT-9 BRANCH OFFICE/LIAISON OFFICE/PROJECT 1

OFFICE
CONCEPT-10 PENALTIES, APPEALS, COMPOUNDING 1
PROCEEDINGS
CONCEPT-11 REPORTING OF FDI 3

TOTAL 15

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VFOREIGN DIRECT INVESTMENT-REGULATION & POLICY

Introduction to FDI

Eligible investee under

FDI

Prohibited Permitted 1. FDI in Indian Company

sectors sectors 2. FDI in partnership/proprietorship
3. FDI in trust
4. FDI in LLP
5. FDI in Investment Vehicle
6. FDI in Start up

Automatic
Route Routes for
funding FDI in E COMMERCE
Activity
Government
Route

Payment modes
under FDI Transfer of Capital
Instruments

Liaison Penalties, Appeals

& Compounding RBI Approval No RBI
Office
Proceedings required Approval
(discussed in (discussed in
chapter) chapter)
Project Branch
office office

Reporting of FDI

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BIRD’S EYE VIEW

1) Foreign direct investment (FDI) is an investment made by a firm or individual in one country into
business interests located in another country. It is lead to the globalization of an economy.

2) Foreign direct investment (FDI) in India is a major monetary source for economic development in
India. Foreign companies invest directly in fast growing private Indian businesses to take benefits
of cheaper wages and changing business environment of India.

3) There are two routes by which India gets FDI.

Automatic route: By this route FDI is allowed without prior approval by Government or Reserve
Bank of India.
Government route: Prior approval by government is needed via this route.

4) FDI is a capital account transaction. Thus, violation of RDI regulation may attract penal provisions
being covered under the FEMA. RBI administer the FEMA and Directorate of Enforcement under
the Ministry of Finance. The Directorate takes up the investigation in any contravention of FEMA.

5) The Government of India has amended FDI policy to increase FDI inflow. In 2014, the government
increased foreign investment upper limit from 26% to 49% in insurance sector. It also launched
Make in India initiative in September 2014 under which FDI policy for 25 sectors was
liberalized further.

6) The Indian government’s favorable policy regime and robust business environment have ensured
that foreign capital keeps flowing into the country.

The government has taken many initiatives in recent years such as relaxing FDI norms across
sectors such as defense, PSU oil refineries, telecom, power exchanges, and stock exchanges,
among others.

7) According to Department of Industrial Policy and Promotion (DIPP), the total FDI investments
in India April-June 2018 stood at US$ 12.75 billion, indicating that government's effort to
improve ease of doing business and relaxation in FDI norms is yielding results.

8) Associations which were granted certificates of registration, such registration shall be valid for a
period of five years.

9) Any offence punishable under this act, not being an offence punishable with imprisonment only,
may, before the institution of any prosecution, be compounded by such officers or authorities and
for such sums as the central government may specify in this behalf.

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CHAPTER – 4

FOREIGN DIRECT INVESTMENT-REGULATION & POLICY

CONCEPT 1
BASIC CONCEPTS OF FDI
Q1: What is Foreign Direct Investment? (NICE Q)
OR
Define Foreign Direct Investment.
(CS EXECUTIVE NEW SYLLABUS STUDY SELF TEST PAPER Q1)
Ans: Foreign direct investment (FDI) is an investment made by a firm or individual in one country into
business interests located in another country.

 Generally, FDI takes place when an investor establishes foreign business operations or
acquires foreign business assets, including establishing ownership or controlling interest in a
foreign company. Foreign direct investments are distinguished from portfolio investments in
which an investor merely purchases equities of foreign-based companies.

 Broadly, foreign direct investment includes "mergers and acquisitions, building new facilities,
reinvesting profits earned from overseas operations, and intra company loans".

 In a narrow sense, foreign direct investment refers just to building new facility, and a lasting

management interest (10 percent or more of voting stock) in an enterprise operating in an

economy other than that of the investor.

 FDI is the sum of equity capital, long-term capital, and short-term capital as shown in the

balance of payments. FDI usually involves participation in management, joint-venture, transfer

of technology and expertise. Stock of FDI is the net (i.e., outward FDI minus inward FDI)

cumulative FDI for any given period. Direct investment excludes investment through purchase

of shares.

 One great example of a successful foreign direct investment is Suzuki Motor Company's joint

venture in India through Maruti Suzuki India Limited. Since the joint venture was created,

the company has become a market leader in India's automobile industry. And Suzuki's

majority ownership stake has since provided it with billions in profits over the years.

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Q2: Mention the activities/sectors in which Foreign Direct Investment (FDI) is prohibited.
(CS EXECUTIVE OLD SYLLABUS DEC 2015)
OR
List out the sectors/activities where Foreign Direct Investment is prohibited.
(CS EXECUTIVE NEW SYLLABUS STUDY SELF TEST PAPER Q3)
Ans: FDI is prohibited under the Government Route as well as the Automatic Route in the following
sectors:

 Atomic Energy
 Lottery Business
 Gambling and Betting
 Business of Chit Fund
 Nidhi Company
 Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry,
Pisciculture and cultivation of vegetables, mushrooms etc) under controlled situations and
Plantations activities (other than Tea plantations)
 Housing and real estate business (except development of townships, constructions of
residential houses)
 Trading in Transferable Development Rights (TDRs)
 Manufacture of cigars, cheroots, cigarettes, or tobacco substitutes.

Q3: What are the sectors/activities where FDI is permitted? (INTERESTING Q)

OR
List out the sectors/activities where Foreign Direct Investment is prohibited.
(CS EXECUTIVE NEW SYLLABUS STUDY SELF TEST PAPER Q1)
Ans: FDI is permitted in following sectors:

FDI Entry Route &

Sector Limit Remarks

Agriculture & Animal Husbandry

• Floriculture, Horticulture, Apiculture and Cultivation of
Vegetables & Mushrooms under controlled conditions
• Development and Production of seeds and planting material
• Animal Husbandry(including breeding of dogs), Pisciculture,
Aquaculture
• Services related to agro and allied sectors 100% Automatic

Plantation Sector
• Tea sector including tea plantations 100% Automatic

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FDI Entry Route &

Sector Limit Remarks

• Coffee plantations
• Rubber plantations
• Cardamom plantations
• Palm oil tree plantations
• Olive oil tree plantations

Mining
Mining and Exploration of metal and non-metal ores including
diamond, gold, silver and precious ores but excluding titanium
bearing minerals and its ores 100% Automatic

Mining (Coal & Lignite) 100% Automatic

Mining
Mining and mineral separation of titanium bearing minerals and
ores, its value addition and integrated activities 100% Government

Petroleum & Natural Gas

Exploration activities of oil and natural gas fields,
infrastructure related to marketing of petroleum products and
natural gas, marketing of natural gas and petroleum products
etc 100% Automatic

Petroleum & Natural Gas

Petroleum refining by the Public Sector Undertakings (PSU),
without any disinvestment or dilution of domestic equity in the
existing PSUs. 49% Automatic

Automatic up to 49%
Above 49% under
Government routein
cases resulting in
access to modern
technology in the
Defence Manufacturing 100% country

Broadcasting
• Teleports(setting up of up-linking HUBs/Teleports)
• Direct to Home (DTH)
• Cable Networks (Multi System operators (MSOs) operating at
National or State or District level and undertaking upgradation
of networks towards digitalization and addressability
• Mobile TV
• Head end-in-the Sky Broadcasting Service(HITS) 100% Automatic

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FDI Entry Route &

Sector Limit Remarks

Broadcasting
Cable Networks (Other MSOs not undertaking up gradation of
networks towards digitalization and addressability and Local
Cable Operators (LCOs)) 100% Automatic

Broadcasting Content Services

• Terrestrial Broadcasting FM(FM Radio)
• Up-linking of ‘News & Current Affairs’ TV Channels 49% Government

Up-linking of Non-‘News & Current Affairs’ TV Channels/

Down-linking of TV Channels 100% Automatic

Print Media
• Publishing of newspaper and periodicals dealing with news and
current affairs
• Publication of Indian editions of foreign magazines dealing
with news and current affairs 26% Government

Publishing/printing of scientific and technical

magazines/specialty journals/ periodicals, subject to compliance
with the legal framework as applicable and guidelines issued in
this regard from time to time by Ministry of Information and
Broadcasting. 100% Government

Publication of facsimile edition of foreign newspapers 100% Government

Civil Aviation – Airports

Green Field Projects & Existing Projects 100% Automatic

Civil Aviation – Air Transport Services Automatic up to 49%

• Scheduled Air Transport Service/ Domestic Scheduled Above 49% under
Passenger Airline Government route
• Regional Air Transport Service 100% Automatic for
(Foreign Airlines are barred from Investing in Air India) 100% NRIs

Civil Aviation
• Non-Scheduled Air Transport Service
• Helicopter services/seaplane services requiring DGCA approval
• Ground Handling Services subject to sectoral regulations and
security clearance
• Maintenance and Repair organizations; flying training
institutes; and technical training institutions 100% Automatic

Construction Development: Townships, Housing, Built-up

Infrastructure 100% Automatic

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FDI Entry Route &

Sector Limit Remarks

Industrial Parks (new & existing) 100% Automatic

Satellites- establishment and operation, subject to the

sectoral guidelines of Department of Space/ISRO 100% Government

Automatic up to 49%
Above 49% & up to
74% under
Private Security Agencies 74% Government route

Automatic up to 49%
Above 49% under
Telecom Services 100% Government route

Cash & Carry Wholesale Trading 100% Automatic

E-commerce activities (e-commerce entities would engage only

in Business to Business (B2B) e-commerce and not in Business to
Consumer (B2C) e-commerce.) 100% Automatic

Single Brand retail trading

Local sourcing norms will be relaxed up to three years and a
relaxed sourcing regime for another five years for entities Automatic up to 49%
undertaking Single Brand Retail Trading of products having Above 49% under
‘state-of-art’ and ‘cutting edge’ technology. 100% Government route

Multi Brand Retail Trading 51% Government

Duty Free Shops 100% Automatic

Railway Infrastructure
Construction, operation and maintenance of the following
• Suburban corridor projects through PPP
• High speed train projects
• Dedicated freight lines
• Rolling stock including train sets, and locomotives/coaches
manufacturing and maintenance facilities
• Railway Electrification
• Signalling systems
• Freight terminals
• Passenger terminals
• Infrastructure in industrial park pertaining to railway
line/sidings including electrified railway lines and connectivities 100% Automatic

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FDI Entry Route &

Sector Limit Remarks

to main railway line

• Mass Rapid Transport Systems.

Asset Reconstruction Companies 100% Automatic

Automatic up to 49%
Above 49% & up to
74% under
Banking- Private Sector 74% Government route

Banking- Public Sector 20% Government

Credit Information Companies (CIC) 100% Automatic

Infrastructure Company in the Securities Market 49% Automatic

Insurance
• Insurance Company
• Insurance Brokers
• Third Party Administrators
• Surveyors and Loss Assessors
• Other Insurance Intermediaries 49% Automatic

Pension Sector 49% Automatic

Power Exchanges 49% Automatic

White Label ATM Operations 100% Automatic

Financial services activities regulated by RBI, SEBI, IRDA

or any other regulator 100% Automatic

Pharmaceuticals(Green Field) 100% Automatic

Automatic up to 74%
Above 74% under
Pharmaceuticals(Brown Field) 100% Government route

Food products manufactured or produced in India

Trading, including through e-commerce, in respect of food
products manufactured or produced in India. 100% Government

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CONCEPT 2
ELIGIBLE INVESTORS
Q4: Who are the eligible investors under Foreign Direct Investment? (ULTIMATE Q)
Ans ELIGIBLE INVESTORS
1. A non-resident entity.
2. A company, trust and partnership firm incorporated outside India and owned and controlled
by NRIs.
3. A SEBI registered, Foreign Venture Capital Investor (FVCI).
4. Erstwhile OCBs that are incorporated outside India
5. Foreign Institutional Investor(FII) and Foreign Portfolio Investors(FPIs)

NRIs resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan.

CONCEPT 3
ELIGIBLE INVESTEE ENTITIES
Q5: How can eligible investee entities can invest FDI in their respective concerns? (IMP Q)
OR
Under what conditions ‘Foreign Direct Investment’ in limited liability partnership is permitted.
(CS EXECUTIVE NEW SYLLABUS JUNE 2019)
Ans: ELIGIBLE INVESTEE ENTITIES

1) FDI in an Indian Company - Indian companies can issue capital against FDI.

2) FDI in Partnership Firm/Proprietary Concern

A Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) can invest in the capital
of a firm or a proprietary concern in India.
 That the remittance is received from abroad or out of an account maintained with
Authorized Dealers and
 The firm or proprietary concern is not engaged in any agricultural activity/plantation
activity or plantation activity or real estate business or print media sector.
 Amount invested shall not be eligible for repatriation outside India. However, interest is
repatriable.

3) FDI in Trusts

FDI is not permitted in Trusts other than in Venture Capital Fund (VCF) registered and
regulated by SEBI and ‘Investment vehicle’.

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4) FDI in Limited Liability Partnerships (LLPs) - FDI in LLPs is permitted subject to the
following conditions:

 FDI is permitted under the automatic route in Limited Liability Partnership (LLPs)
operating in sectors/activities where 100% FDI is allowed through the automatic route.
 An Indian company or an LLP having foreign investment, is also permitted to make down
stream investment in another company or LLP in sectors in which 100% FDI is allowed
under the automatic route and there are no FDI-linked performance conditions.

5) FDI in Investment Vehicle

 An entity being ‘investment vehicle’ registered and regulated under relevant regulations framed by
SEBI or any other authority designated for the purpose including Real Estate Investment Trusts,
Infrastructure Investment Trusts, Alternative Investment Funds and notified under Schedule 11
of Foreign Exchange Management (Transfer or Issue of Security by a PersonResident outside
India) Regulations, 2000 is permitted to receive foreign investment from a person resident
outside India (other than an individual who is citizen of or any other entity which is registered /
incorporated in Pakistan or Bangladesh), including a Registered Foreign Portfolio Investor (RFPI)
or a non-resident Indian (NRI).

CONCEPT 4
FDI IN E-COMMERCE ACTIVITIES
Q6: Discuss the conditions of FDI in E-Commerce activities.
(CS EXECUTIVE NEW SYLLABUS STUDY SELF TEST Q4)
Ans: Under the FDI Policy, e-commerce activities were defined as “the activity of buying and selling by
a company through the e-commerce platform, and 100% FDI was allowed subject to specified
conditions in Business to Business (“B2B”) e-commerce. As regard se-commerce in the retail
trading, i.e., Business to Customer (“B2C”) trading, the Press Note also reiterates and clarifies the
following specific exceptions/conditions of FDI in the B2C trading:

i. FDI is not permitted in inventory based

model of e-commerce
ii. Marketplace e-commerce entity will be
permitted to enter into transactions
with sellers registered on its platform on
B2B basis.
iii. E-commerce entity providing a
marketplace will not exercise ownership
over the inventory i.e. goods purported
to be sold. Such an ownership over the

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inventory will render the business into

inventory based model.

iv. An e-commerce entity will not permit more than 25% of the sales value on financial year
basis affected through its marketplace from one vendor or their group companies.

v. In marketplace model goods/services made available for sale electronically on website

should clearly provide name, address and other contact details of the seller. Post sales,
delivery of goods to the customers and customer satisfaction will be responsibility of the
seller.

vi. In marketplace model, payments for sale may be facilitated by the e-commerce entity in
conformity with the guidelines of the Reserve Bank of India.

vii. In marketplace model, any warrantee/ guarantee of goods and services sold will be
responsibility of the seller.

viii. Guidelines on cash and carry wholesale trading of FDI Policy will apply on B2B e-commerce.

Subject to the conditions of FDI policy on services sector and applicable laws/regulations, security
and other conditionalities, sale of services through e-commerce will be under automatic route

CONCEPT 5
PRIOR PERMISSION OF RBI IN CERTAIN CASES

Q7: Mention the cases in which prior approval of RBI is required for FDI in respect of transfer of
Capital Instruments. (LOVELY Q)
OR
Prior approval of RBI is not mandatory for transfer of Capital instruments from resident to
non-residents by way of sale. Comment. (CS EXECUTIVE NEW SYLLABUS DEC 2018)
Ans: In the following cases, prior approval of RBI is required:

 Transfer of capital instruments from resident to non-residents by way of sale.

 Transfer of any capital instrument by way of gift by a person resident in India to a person
resident outside India.
 Transfer of shares from NRI to Non-resident.

In the Following Cases, Approval of RBI Is Not Required

A. Transfer of shares from a Non-Resident to Resident under the FDI scheme where the pricing
guidelines under FEMA, 1999 are not met.
B. Transfer of shares from Resident to Non-Resident.

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CONCEPT 6
MODES OF PAYMENT ALLOWED FOR RECEIVING FDI IN AN INDIAN COMPANY

Q8: Mention the ways by which an Indian Company can receive consideration from a person resident
outside India. (OUTSTANDING Q)
Ans: An Indian company issuing shares/ convertible debentures to a person resident outside India shall
receive the amount of consideration by:

a) inward remittance through normal banking channels;

b) debit to NRE/ FCNR (B) account of a person concerned maintained with an AD Category I bank;
c) debit to non-interest bearing escrow account in Indian Rupees in India which is opened with the
approval from AD Category – I bank and is maintained with the AD Category I bank on behalf of
residents and non-residents towards payment of share purchase consideration;
d) conversion of royalty/ lump sum/ technical know-how fee due for payment or conversion of ECB;
e) conversion of pre-incorporation/ pre-operative expenses incurred by the non-resident entity up
to a limit of five percent of its capital or USD 500,000 whichever is less;
f) conversion of import payables/ pre-incorporation expenses/ can be treated as consideration for
issue of shares with the approval of FIPB;
g) Swap of capital instruments, provided where the Indian investee company is engaged in a
h) Government route sector, prior Government approval shall be required.

CONCEPT 7
ROUTES FOR FUNDING

Q9: Discuss the method of funding of foreign direct investment under the FEMA Act,1999
(CS EXECUTIVE OLD SYLLABUS DEC 2014)
OR
Write short notes on: (i) Automatic Route (ii) Government Route under FDI Policy.
(CS EXECUTIVE TEST PAPER Q2(c)), (CS EXECUTIVE NEW SYLLABUS SELF TEST Q5)

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Ans: There are two methods of funding foreign direct investment (FDI) which are discussed below:

AUTOMATIC ROUTE

 FDI in sectors/activities permitted under automatic route does not require any prior
approval either by the Government or RBI.
 The investors are only required to notify the Regional office concerned of RBI within 30 days
of receipt of inward remittances and file the required documents with that office within 30
days of issue of shares to foreign investors.

GOVERNMENT ROUTE

FDI in activities not covered under the automatic route require prior Government approval. Such
proposals are considered by the Foreign Investment Promotion Board (FIPB), a Government body
that offers single window clearance for proposals on foreign investment in the country that are not
allowed access through the automatic route.

Government approval is required in the following cases:

 Where a foreign investor has an existing joint venture/technology transfer / trademark

agreement in the same field, prior to January 12, 2005, the proposal for fresh investment /
technology transfer / collaboration / trademark agreement in a new joint venture would have
to be under the Government approval route through FIPB.

 In sectors with caps, including inter-alia defence production, air transport services, ground
handling services, asset reconstruction companies, private sector banking, broadcasting,
commodity exchanges, credit information companies, insurance, print media,
telecommunications and satellites, Government approval / FIPB approval would be required in
all cases where:

 An Indian company is being established with foreign investment and is owned or controlled
by a non-resident entity or

 The control or ownership of an existing Indian company, currently owned or controlled by

resident Indian citizens and Indian companies, which are owned or controlled by resident
Indian citizens, is being transferred to a non-resident entity as a consequence of transfer
of shares and/or fresh issue of shares.

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CONCEPT 8
ISSUE OF RIGHT SHARES
Q10: Write short note on the Issue of right shares
Ans ISSUE OF RIGHT SHARESI

FEMA provisions allow Indian companies to freely issue Rights/Bonus

shares to existing non-resident shareholders, subject to adherence to
sectoral cap, if any.
Additional allocation of rights shares by residents to non-residents

i. Existing non-resident shareholders are allowed to apply for issue of additional shares/fully,
compulsorily and mandatorily convertible debentures/fully, compulsorily and mandatorily
convertible preference shares over and above their rights share entitlements.
ii. The investee company can allot the additional rights share out of unsubscribed portion,
subject to the condition that the overall issue of shares to non-residents in the total paid-
up capital of the company does not exceed the sectoral cap.

Q11: What are the conditions for the Indian Company to allot sweat equity shares of its holding
company to its employees, who are resident outside India?
(CS EXECUTIVE NEW SYLLABUS JUNE 2019)
Ans ISSUE OF EMPLOYEES STOCK OPTION SCHEME (ESOPS) / SWEAT EQUITY

An Indian company may issue “employees’ stock option” and/or

“sweat equity shares” to its employees/ directors or
employees/directors of its holding company or joint venture or
wholly owned overseas subsidiary/subsidiaries who are resident
outside India, provided that :

a) The scheme has been drawn either in terms of regulations issued under the Securities Exchange
Board of India Act, 1992 or the Companies (Share Capital and Debentures) Rules, 2014 notified by
the Central Government under the Companies Act 2013, as the case may be.
b) The “employee’s stock option”/ “sweat equity shares” issued to non-resident employees/directors
under the applicable rules/regulations are in compliance with the sectoral cap applicable to the
said company.
c) Issue of “employee’s stock option”/ “sweat equity shares” by a company where foreign investment
is under the approval route shall require prior approval of Government of India.
d) Issue of “employee’s stock option”/ “sweat equity shares” under the applicable rules/regulations
to an employee/director who is a citizen of Bangladesh/Pakistan shall require prior approval of the
Government of India.

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e) The issuing company shall furnish to the Regional Office concerned of the Reserve Bank of India
under whose jurisdiction the registered office of the company operates, within 30 days from the
date of issue of employees’ stock option or sweat equity shares, a return as per the Form-ESOP.

CONCEPT 9
BRANCH OFFICE/PROJECT OFFICE/LIASION OFFICEIONBRANCH OFFICE/PROJECT
Q12: Write short note on the following:
(a) Branch Office
(b) Liaison Office
(c) Project office (STREE TYPE Q)
Ans: Branch Office

Branch office in relation to a company, means any establishment described as such by the company.
Normally, the branch office should be engaged in the activity in which the parent company is
engaged.

Such Branch Offices are permitted to represent the parent / group companies and undertake
the following activities in India:

i. Export / Import of goods

ii. Rendering professional or consultancy services.
iii. Carrying out research work, in areas in which the parent company is engaged.
iv. Promoting technical or financial collaborations between Indian companies and parent or
overseas group company.
v. Representing the parent company in India and acting as buying / selling agent in India.
vi. Rendering services in information technology and development of software in India.
vii. Rendering technical support to the products supplied by parent/group companies.
viii. Representing a Foreign airline / shipping company.

Liaison Office

Liaison Office means a place of business to act as a channel of communication between the principal
place of business or Head Office or by whatever name called and entities in India but which does
not undertake any commercial /trading/ industrial activity, directly or indirectly, and maintains
itself out of inward remittances received from abroad through normal banking channel.

A Liaison Office can undertake the following activities in India:

i. Representing in India the parent company / group companies.

ii. Promoting export / import from / to India.

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iii. Promoting technical/financial collaborations between parent/group companies and companies in

India.
iv. Acting as a communication channel between the parent company and Indian companies.

Project Office

Project office means a place of business in India to represent the interests of the foreign company
executing a project in India but excludes a Liaison Office.

Parameters of project office

A foreign company may open project office/s in India provided it has secured from an Indian
company, a contract to execute a project in India, and

 the project is funded directly by inward remittance from abroad; or

 the project is funded by a bilateral or multilateral International Financing Agency; or
 the project has been cleared by an appropriate authority; or
 a company or entity in India awarding the contract has been granted term loan by a Public
Financial Institution or a bank in India for the Project.

The Hon’ble Supreme Court vide its interim orders dated July 4, 2012 and September
14, 2015, passed in the case of the Bar Council of India vs A.K. Balaji & Ors., has
directed RBI not to grant any permission to any foreign law firm, on or after the date of
the said interim order, for opening of LO in India. Hence, no foreign law firm shall be
permitted to open any LO in India till further orders/notification in this regard.

However, foreign law firms which have been granted permission prior to the date of
interim order for opening LOs in India may be allowed to continue provided such
permission is still in force. No fresh permissions/ renewal of permission shall be granted
by the Reserve Bank/AD Category-I banks respectively till the policy is reviewed based
on, among others, final disposal of the matter by the Hon’ble Supreme Court.

CONCEPT 10
PENALTIES, ADJUDICATION AND COMPOUNDING PROCEEDINGS
Q13: Write short note on the following.

(a) Penalties
(b) Compounding Proceedings
(c) Adjudication and Appeals (FINE Q)

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Ans :
A. PENALTIES
On violation or contravention of any of the FDI regulations,
 then by way of non-adherence or breach or contravention of any rule or regulation or;
 any notification/circular or press release; even if it’s an order which has been issued via
exercising of the powers which has been given by the virtue of the FEMA provisions; or
 if there is a contravention of any conditions which have been authorized by the Government of
India/ Foreign Investment Promotion Board (FIPB) or by the Reserve Bank of India for that
matter,

then he shall be liable, upon adjudication, to a penalty up to

thrice the sum involved in the act of non-adherence where the
sum can be quantified or determined. In cases where the sum isn’t
quantifiable or can’t be determined then a sum of up to Two Lakh
Rupees.
 In cases where the non-adherence is of a continuing nature then, a further penalty is inflicted
which may extend to rupees five thousand per day, the contravention or non-adherence continues
to the initial day of non-adherence.

B. COMPOUNDING PROCEEDINGS

 Under the Foreign Exchange (Compounding Proceedings) Rules 2000, the

Central Government may designate a ‘compounding Authority’ an officer
either from Enforcement Directorate or Reserve Bank of India for any
individual repudiating or non-adhering any provisions of the FEMA.

 The Compounding Authorities are approved and authorized to compound the

sum or amount that is involved or is central to the negation or non-adherence
to the Act made by the individual.

 No non-adherence shall be compounded unless the sum required in such

contradiction or contravention is quantifiable. Any second or resulting non-
adherence committed after the expiry of a time of three years from the
date on which the non-adherence was already compounded might be deemed
to be a first non-adherence.

 The Compounding Authority should pass an order of compounding after

managing and affording a chance of being heard to all the worries and
concerns as speedily and not later than 180 days from the date of an
application made to the Compounding Authority.

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C. ADJUDICATION AND APPEALS

For the purpose of adjudication of any contravention of FEMA, the

Ministry of Finance as per the provisions contained in the Foreign
Exchange Management (Adjudication Proceedings and Appeal) Rules,
2000

 Appoints officers of the Central Government as the Adjudicating Authorities for holding an
enquiry in the manner prescribed. A reasonable opportunity has to be given to the person alleged
to have committed contraventions against whom a complaint has been made for being heard
before imposing any penalty.

 The Central Government may appoint as per the provisions contained in the Foreign Exchange
Management(Adjudication Proceedings and Appeal) Rules, 2000, an Appellate Authority/
Appellate Tribunal to hear appeals against the orders of the adjudicating authority

CONCEPT 11
REPORTING OF FDI

Q14: Explain the reporting details of FDI?

Ans: Reporting of Inflow
a) An Indian company receiving investment from outside India for issuing shares/convertible
debentures/preference shares under the FDI Scheme, should report the details of the
amount of consideration to the Regional Office concerned of the Reserve Bank not later than
30 days from the date of receipt in the Advance Reporting Form.
b) Indian companies are required to report, through an AD Category-I bank, together with a
copy/ies of the FIRC/s evidencing the receipt of the remittance along with the KYC report on
the non-resident investor from the overseas bank remitting the amount. The report would be
acknowledged by the Regional Officer concerned, which will allot a Unique Identification
Number for the amount reported.
c) An Indian company issuing partly paid equity shares, shall furnish a report not later than 30
days from the date of receipt of each call payment.

Reporting of Inflow

Reporting of issue of shares

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Reporting of transfer of shares

Reporting of Non cash

Reporting of FCCB/DR Issues

Reporting of issue of shares

a) After issue of shares the Indian company has to file Form FCGPR, not later than 30 days from
the date of issue of shares.
b) Form FC-GPR has to be duly filled up and signed by Managing Director/Director/Secretary of
the Company and submitted to the Authorized Dealer of the company, who will forward it to
the Reserve Bank.

c) The following documents have to be submitted along with the form:

i. A certificate from the Company Secretary of the company certifying that:
ii. A certificate from SEBI registered Merchant Banker or Chartered Accountant indicating
the manner of arriving at the price of the shares issued to the persons resident outside
India.
iii. The report of receipt of consideration as well as Form FC-GPR have to be submitted by
the AD Category-I bank to the Regional Office concerned of the Reserve Bank under
whose jurisdiction the registered office of the company is situated.

iv. Annual return on Foreign Liabilities and Assets should be filed on an annual basis by the
Indian company, directly with the Reserve Bank. This is an annual return to be submitted
by 15th of July every year, pertaining to all investments by way of direct/portfolio
investments/reinvested earnings/other capital in the Indian company made during the
previous years (i.e. the information submitted by 15th July will pertain to all the
investments made in the previous years up to March 31).

v. Issue of bonus/rights shares or stock options to persons resident outside India directly
or on amalgamation/merger/demerger with an existing Indian company, as well as issue of
shares on conversion of ECB/royalty/lumpsum technical know-how fee/import of capital
goods by units in SEZs, has to be reported in Form FC-GPR.

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Reporting of transfer of shares

a) Reporting of transfer of shares between residents and non-residents and vice- versa is
to be done in Form FC-TRS.
b) The Form FC-TRS should be submitted to the AD Category-I bank, within 60 days from
the date of receipt of the amount of consideration.
c) In cases where the NR investor, including an NRI, acquires shares on the stock exchanges
under the FDI scheme, the investee company would have to file form FC-TRS with the
AD Category-I bank. The AD Category-I bank, would forward the same to its link office.
The link office would consolidate the Form FC-TRS and submit a monthly report to the
Reserve Bank.

Reporting of FCCB/DR Issues

The domestic custodian shall report the issue/transfer of sponsored/unsponsored depository

receipts as per DR Scheme 2014 in ‘Form DRR’ within 30 days of close of the issue/ program.

Q15: Whether a society registered under the Societies Registration Act, 1860, may be
amalgamated with any other society? State the procedure for such amalgamation. (IMP Q)
Ans: Under section 12 of the main Act, a society may be amalgamated with any other society, either
wholly or partially by the governing bodies of the societies for the better utilisation of the
properties, resources or any other purpose.

The procedure is mandatory (Prasanna Venkatesa Ra v. K. Srinivasa Ra). The following actions are
to be complied with —

 Submission of the proposal of amalgamation by the governing body to the members of the
society by a printed report;
 Holding special general meeting by giving ten days’ notice to the members for consideration
and passing resolution for the proposed amalgamation by 3/5th majority of the members,
present thereat;
 Convening another special general meeting after a month for confirmation to the first
resolution passed at the first special general meeting by 3/5th majority of the members
present thereat.

The majority of a body cannot alter the fundamental principles of the body unless such power is
especially reserved. The Government may order division or amalgamation of a society after giving the
society an opportunity to represent against such proposal.

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Cabinet Clears 100% FDI In RaIlways

infrastructure, 49% in defence

New Delhi: Moving ahead with the economic reforms, the Cabinet on Wednesday cleared the long-delayed
proposal for raising FDI limit in defence to 49 percent and fully opened up the railway infrastructure
segment, like high-speed trains, for foreign investment.
The decisions taken at the Cabinet meeting headed by Prime Minister
Narendra Modi here came barely two weeks after the one to raise the cap
of FDI in insurance sector from 26 percent to 49 percent.
FDI ceiling in the sensitive defence sector has been hiked to 49 percent
from current 26 percent, with the condition that of the control in joint
venture manufacturing defence equipment will remain Indian hands.
The move is aimed at boosting domestic industry of a country which
imports up to 70 percent of its military hardware.
The proposal had been pending for several years as it was first mooted by the Commerce Ministry during
the previos UPA government. However, the then Defence Minister A K Antony had blocked it, citing
national security concerns.
The NDA government has been arguing that the FDI limit needs to be hiked in defence to help expand the
domestic industrial base in the sector.
The Cabinet also approved a proposal to open up cash-strapped railways to foreign investment by allowing
100 percent FDI in areas such as high-speed train systems, suburban corridors and dedicated freight line
projects implemented in PPP mode.
The FDI liberalisation in the sector would help in modernisation and expansion of the railway projects.
However, FDI will not be allowed in train operations and safety.
According to estimates, the sector is facing a cash crunch of around Rs 29,000 crore and allowing of FDI
will help mop up resources.
The FDI liberalisation in the sector is expected to help in modernisation and expansion of the railways.

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At present, there is a ban on any kind of FDI in railways sector except mass rapid transport systems. The
move will also help in development of its infrastructure for industrial purposes.
With the FDI nod, the proposed Mumbai - Ahmedabad high speed rail corridor is expected to get a push.
The construction of exclusive rail corridor for freight movement is also likely to be boosted.
However, FDI is not allowed in train operations and safety.
The FDI proposal for railways was pending for some time with the Home Ministry resisting it, citing
concerns with regard to rail infrastructure in border areas.
Finance Minister Arun Jaitley had in his budget speech for 2014-15 announced plans to increase FDI in
defence sector while Railways Minister D V Sadananda Gowda had mentioned opening up of cash-starved
railways for foreign investment.
The Cabinet also cleared a proposal to set up Mahatma Gandhi Central University in Motihari in Bihar.

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