Category: 2018

CLOSURE OF COMPANY

Avoid Deactivation / Defunct

As future is always uncertain, it is better to complete all DIR-3-KYC and ITR filings before 31st August 2018. It is always safe to avoid penalties and misfortunes. One of the punishment of not filing Annual Returns with ROC will be considering the Company to be defunct and striking-off. Consequently, the DIN of the of the Directors will be considered as Default. The process of such strike-off and after effect were detailed in this month’s edition.

The article will follow with the our usual Legal terms and News Bites related to notifications by MCA, SEBI, RBI, IT and GST.

CEO Saranya Deivasigamani,
CEO

Closure of Company

It is well known that every year the Companies incorporated in India should close it’s financials on 31st March and file it’s Income Tax Return before 31st July and conduct AGM to adopt the accounts within 6 months of closure of books and file ROC returns in respective forms. If the Companies fails to submit such returns, the Registrar of Companies (“ROC”) shall vide Section 248 (5) of the Companies Act, 2013 (“Act”) strike off the name of the Company from the register of Companies. In this article, we will be seeing about the procedure that the name of the Company be struck-off from the register of Companies maintained by the ROC. The procedure of strike off can be done only through Strike-off mode and Fast Track Exit (FTE) mode is no longer exist. The provisions relating to Strike Off provide an opportunity to the defunct Companies to get their names struck off from the records of the ROC.

MODES OF STRIKE OFF

There are two modes of strike off under the provisions of the Act and Rules such as: 1. By ROC itself under Section 248(1) of the Act; and 2. By way of filing application by the Company under Section 248(2). For the purpose of this article, Strike-off u/s 248 (1) and its remedial actions were discussed.

1. STRIKE OFF BY ROC U/S 248(1)

1. 1. Power of removal of name by ROC:

Section 248(1) of the Act provides that, “where the ROC has reasonable cause to believe that:

(a) a Company has failed to commence its business within one year of its incorporation; [or]

(b) a Company is not carrying on any business or operation for a period of two immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant Company under section 455, he shall send a notice to the Company and all the Directors of the Company, of his intention to remove the name of the Company from the register of Companies and requesting them to send their representations.” Accordingly, the ROC may initiate the process of Strike Off if the Company has failed to commence its business within one year of its incorporation or had not been doing business or operation for last two financial years and has not applied with the ROC for the status of dormant Company.

1.2. Companies Excluded from Applicability of the provisions of Strike off:

The following categories of Companies shall not be removed from the register of Companies under rule 3 and 4 in terms of section 248(1) by the ROC:-

(i) Listed Companies;

(ii) Companies that have been delisted due to non-compliance of listing regulations or listing agreement or any other statutory laws;

(iii) Vanishing Companies;

(iv) Companies where inspection or investigation is ordered and being carried out or actions on such order are yet to be taken up or were completed but prosecutions arising out of such inspection or investigation are pending in the Court;

(v) Companies where notices under section 234 of the Companies Act, 1956 (1 of 1956) or section 206 or section 207 of the Act have been issued by the Registrar or Inspector and reply thereto is pending or report under section 208 has not yet been submitted or follow up of instructions on report under section 208 is pending or where any prosecution arising out of such inquiry or scrutiny, if any, is pending with the Court;

(vi) Companies against which any prosecution for an offence is pending in any court;

(vii) Companies whose application for compounding is pending before the competent authority for compounding the offences committed by the Company or any of its officers in default;

(viii) Companies, which have accepted public deposits which are either outstanding or the Company is in default in repayment of the same;

(ix) Companies having charges which are pending for satisfaction; and

(x) Companies registered under section 25 of the Companies Act, 1956 or section 8 of the Act.

1.3. Procedure to be followed by ROC for strike off by its own motion:

The ROC has to follow the following procedures for strike off by its own motion:

a) Serving of Notice: ROC shall sent a notice in writing in Form STK – 1 to all the Directors of the Company at the addresses available on record, by registered post with acknowledgement due or by speed post. The notice shall:

  • contain the reasons on which the name of the Company is to be removed; and
  • seek representations, if any, against the proposed action from the Company and its Directors along with the copies of relevant documents, if any, within a period of thirty days from the date of the notice.

b) Representation of Company: The ROC shall consider the representation of the Company if it has received the same. If the ROC is not satisfied with the representation made by the Company and its Directors, it may proceed further for the strike off the name of Company.

c) Publication of notice: the notice for removal of name u/s 248 (1) shall be in Form STK 5 and the same be –

  • placed on the official website of the MCA on a separate link established on such website in this regard;
  • published in the Official Gazette;
  • published in English language and at least once in vernacular language, both having wide circulation in the State in which the registered office of the Company is situated.

d) Intimation to regulatory authorities: The ROC shall simultaneously intimate the concerned regulatory authorities regulating the Company, about the proposed action of removal or striking off the names of such Companies and seek objections, if any, to be furnished within 30 days of notice.

e) Strike off the name and publish notice of dissolution of the Company: in accordance with section 248 (5), the ROC may, at the expiry of the time mentioned in the notice, unless cause to the contrary is shown by the Company, strike off its name from the register of Companies, and publish notice thereof in the Official Gazette. The Company shall stand dissolved on the publication of this notice in the Official Gazette.

f) Sufficient provision has been made for realization of all amounts due: ROC, before striking off, shall satisfy itself that sufficient provision has been made for realization of all amounts due to the Company and for the payment or discharging of its liabilities.

1.4. Effect of Company notified as dissolved:

As per Section 250 of the Act, if a Company stands dissolved under section 248, it shall on and from the date mentioned in the notice of dissolution, cease to operate as a Company and the Certificate of Incorporation issued to it shall be deemed to have been cancelled from such date except for the purpose of realizing the amount due to the Company and for the payment or discharge of the liabilities or obligations of the Company.

1.5. Liabilities of Directors, managers, officers and members to be continue:

The liability, if any, of every Director, manager or other officer who was exercising any power of management, and of every member of the Company dissolved under this section, shall continue and may be enforced as if the Company had not been dissolved.

2. RESTORATION ORDER

Section 252 of the Act empowers the Tribunal, to pass an order for the restoration of Company which has been struck off by the ROC, in the following manner:

2.1. On appeal filed by any person:

Any person aggrieved by the order of the ROC may file an appeal before the Tribunal within 3 years of the order passed by ROC and if the Tribunal is of the opinion that the removal of name of Company is not justified in view of the absence of any of the grounds on which the order was passed by the ROC, it may pass an order for restoration of the name of the Company in the register of Companies after giving a reasonable opportunity of making representations and of being heard to the ROC, the Company and all the persons concerned.

2.2. On application filed by ROC:

The ROC may, within a period of three years from the date of passing of the order dissolving the Company under section 248, file an application before the Tribunal seeking restoration of name of such Company if it is satisfied that the name of the Company has been struck off from the register of Companies either inadvertently or on the basis of incorrect information furnished by the Company or its Directors.

2.3. On application filed by Company or any member or creditor or workmen:

The Tribunal, on an application made by the Company, member, creditor or workman before the expiry of 20 years from the publication in the Official Gazette of the notice of dissolution of the Company, if satisfied that:

a) the Company was, at the time of its name being struck off, carrying on business or in operation; or

b) otherwise it is just that the name of the Company be restored to the register of Companies,

may order the name of the Company to be restored to the register of Companies. Further, the Tribunal may also pass an order and give such other directions and make such provisions as deemed just for placing the Company and all other persons in the same position as nearly as may be as if the name of the Company had not been struck off from the register of Companies.

By providing restoration provisions, the Company which has been struck off may get a chance to restore its name in the register and get active with the permission of Tribunal. The Companies are required to take due care while receiving such notices and it should be kept in mind that strike off does not relieve the Directors and members from their liabilities. And the Directors will not be able to create any new Companies or proceed with any filing in ROC for a period of 5 consecutive years. These consequences can be avoided by Company going under voluntary Strike-off before receiving ROC notice u/s 248 (2).

Legal Term

Entrapment

The action of tricking someone into committing a crime in order to secure their prosecution.

NewsBites

MCA Updates

  • Commencement of Section 5, 6, 10, and 36 of the Companies Act.
  • Order regarding Constitution of “Committee to review offences under Companies Act, 2013” dated 13.07.2018.

SEBI Updates

  • Enhanced monitoring of Qualified Registrars to an Issue and Share Transfer Agents.
  • Role of Sub-Broker (SB) vis-a-vis Authorized Person (AP).

RBI Updates

  • Diversification of activities of Standalone Primary Dealers-Foreign Exchange Business.

Income Tax Updates

  • DTAA with Qatar.

GST Updates

  • No major notifications.

FII REPORTING IN SINGLE MASTER FORM

Lots of Compliances

We could call July be the month of compliances. The closure of books and compliance starts with this month. Income Tax Compliance being due on 31st July. As you all aware, laws are becoming strict with heavy penalties imposed to avoid non-compliance.

In addition to the existing compliances, MCA introduced DIR-3-KYC and RBI introduced a Single Master Form (SMF) substituting all the existing reports to be submitted by the entities on Foreign Investment in India. In this edition, we will be discussing about such SMF phase introduced for FIRMS. The article will follow with the our usual Legal terms and News Bites related to notifications by MCA, SEBI, RBI, IT and GST.

CEO Saranya Deivasigamani,
CEO

FII Reporting in single master form

The Reserve Bank, in the First Bi-monthly Monetary Policy Review dated April 5, 2018 announced that, with the objective of integrating the extant reporting structures of various types of foreign investment in India, it will introduce a Single Master Form (SMF) subsuming all the existing reports.

In order to implement this announcement, the Reserve Bank is introducing an online application, FIRMS (Foreign Investment Reporting and Management System), which would provide for the SMF. FIRMS would be made online in two phases. In the first phase, the first module viz., the Entity Master, would be made available online. Instructions in this regard were already issued through A. P. Dir. Series Circular No. 30 dated June 07, 2018.

In the second phase, the second module containing 9 reports would be made available with effect from August 01, 2018. With the implementation of SMF, the reporting of FDI, which is presently a two-step procedure viz., ARF and FC-GPR would be merged into a single revised FC-GPR. The SMF also introduces reporting of indirect foreign investment through form DI and reporting of inflows in investment vehicles through Form InVi. Further, the reporting in FC-TRS, LLP-I, LLP-II, ESOP, DRR and CN would also be made in SMF only. The finalized structure of SMF and operational instructions thereof would be made available in the Master Direction on Reporting under FEMA, 1999.

The first module will be available to the public for data entry between June 28 (at 1:00 pm) and July 12, 2018 which has now been extended till July 20, 2018. It would provide an interface for Indian entities [as defined in Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2017 dated November 07, 2017 and as amended from time to time] to input their existing foreign investment (including indirect foreign investment) data. Entities shall provide data with respect to all foreign investments received, irrespective of the fact that the regulatory reporting to the Reserve Bank for the same has been made or not and whether the same has been acknowledged or not.

Indian entities not complying with these instructions will not be able to receive foreign investment (including indirect foreign investment) and will be treated as non-compliant with Foreign Exchange Management Act, 1999 (FEMA) and regulations made thereunder and liable for action as laid in FEMA or the regulations made thereunder.

Let us see in detail who has to comply with these regulations and the procedure for the same.

Who is an Entity?

Entity would be any one of the following category who involves in foreign investment in India.

A company within the meaning of section 1(4) of the Companies Act, 2013

A Limited Liability Partnership (LLP) registered under the Limited Liability Partnership Act, 2008

A startup which complies with the conditions laid down in Notification No. G.S.R 180(E) dated February 17, 2016 issued by Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India.

Process Flows for Entity Master

Process Flows for Entity Master

Entity User

An Entity User is a person authorized by the entity (Company/LLP/Startup) to register an entity in the Entity Master of FIRMS application.

The Entity User would be the sole person authorized to add/update the foreign investment details of an Entity in the Entity Master and would be entirely responsible for the data entered.

One entity can have only one entity user. If the entity wishes to change the Entity user, it may contact RBI helpdesk, the details of which are available under “Contact Us”.

One person can also be an entity user for more than one entity. However, the person has to obtain separate registrations for the same as the registration is entity specific.

Registration for an Entity User

For every registration there will be a Pre-requisites, for entity user registration, the pre-requisites are:

  • Authority letter: The entity may issue an authority letter, in the format as given at Link 1 and Link 2 to the identified personnel authorizing him/her for registering as an Entity user for the entity.
Registration Process
  • Uniform Resource Locators (URL) of the application is https://firms.rbi.org.in
  • The person, for registering as Entity User, may access the login page of the FIRMS application using the above URL on the internet.

Landing page for Registering an Entity User

Creation of new Entity user

Step 1: Click on Registration form for New Entity User

Step 2: A pop-up box showing Entity User Registration form opens.

Step 3: Fill all the details in the Entity User Registration Form.

Step 4: Click on Submit button after filling all the details.

Step 5: Message “Record Saved Successfully” pops up. User has created its user ID.

Authority Letter submitted by the entity user will be verified by RBI and after RBI’s approval, the user will receive the password on their registered email ID from RBI email ID autoreply-fid@rbi.org.in.

Entity Master

Logging on to Entity Master

Enter your user name and new password.

Entry in Entity Master:

On successful login the home page (dashboard) is displayed.

Step 1: Click on the top – left option button to open Menu.

Step 2: Click on the Master Setup under Menu. Then click Entity Master.

Step 3: Click ADD button. The Entity details page is displayed.

Step 4: Click Entity Details tab. Enter the fields in the Entity Details.

Step 5: Click Particulars Tab. Enter the details.

Step 6: Click Foreign Investment in Company / LLP Tab.

(a) If Company:

Paid-up Capital of the company on a fully diluted basis (where paid up capital on fully diluted basis= paid up shares on fully diluted basis * face value) in INR

Fully diluted basis means the total number of shares that would be outstanding if all possible sources of conversion are exercised. It includes:

  1. Equity shares: As equity shares
  2. CCDS/ CCPS: Equivalent Equity shares. (If the conversion ratio is not fixed upfront, the company may enter the maximum number of equity shares possible upon conversion in compliance with the pricing guidelines)
  3. Share warrants: Equivalent Equity shares considering 100% exercise upfront
  4. ESOPs: Equivalent Equity shares considering 100% exercise upfront

Note: If a start-up company has issued, convertible notes the same shall not be included in the paid-up capital on fully diluted.

To report only Capital Instruments held by persons resident outside India on a repatriable basis

5. The Indian companies who have made downstream investment in another Indian company for which it is considered as indirect foreign investment in terms of Regulation 14 of Foreign Exchange  Management (Transfer or issue of security by a person resident outside India) Regulations, 2017 dated November 7, 2017 and as amended from time to time, shall inform the same to the Indian investee company for the purpose of providing details of indirect foreign investment in Entity Master.

(b) If LLP: Total Capital contribution in LLP (in INR)

(c) Foreign Investment

The entity should also report indirect foreign investment received by it.

The entity shall provide the details of all foreign investment as on date on an aggregate level as below. This will also be inclusive of all foreign investment, irrespective of the fact that the regulatory reporting to RBI for the same has been made or not or whether the same has been acknowledged or not.

Step 7: Click Foreign Investment Info tab.

Enter all Foreign Investment received by the entity since the date of incorporation. (Details of each Issue / transfer (and not investor wise) have to be filled in this page, one after the other i.e. After entering the details of one issue user should click the Add Button (top right corner of the screen) and add the details of the next issue / transfer.)

The fields in the Foreign Investment Info tab are described in the following table.

(Note: In case a company that has created the entity master, allots shares which are not reported in the Entity Master and reports the same on e-biz, the company has to update the entity master at ‘Foreign Investment in Company / LLP’ and ‘Foreign Investment Info’)

Declaration

Step 8: After all the issues / transfers have been added, user will have to click the declaration check box to enable submission of the entity master.

Submission

Step 9: Only after the declaration is checked, the entity user can submit the details.

Once the details of the company have been submitted it will be available on the Entity Master page.

Legal Term

Plausible

(of an argument or statement) seeming reasonable or probable.

(of a person) skilled at producing persuasive arguments, especially ones intended to deceive.

 

NewsBites

MCA Updates

  • Form DIR-3-KYC has been notified and available in Download Page for processing.
  • Forms MGT-7, AOC-4 and Additional Attachment are likely to be revised on MCA21 Company Forms Download page w.e.f 14th JULY 2018.
  • Invitation for public comments on Draft National Guidelines on Social, Environment & Economic Responsibility of Business,2018.

SEBI Updates

  • Investment by Foreign Portfolio Investors (FPI) through primary market issuances.

RBI Updates

  • Investment by Foreign Portfolio Investors (FPI) in Debt – Review.

Income Tax Updates

  • Revision of monetary limits for filing of appeals by the DIAT, HC and SLPs/appeals before SC-measures for reducing litigation-Reg..

GST Updates

  • No major notifications.

FEMA (TISPROI) REGULATIONS, 2018

NEW FORMS FOR DIN/DPIN

You might be aware that DIN is integrated with SPICe Forms issuance of DPIN was suspended temporarily. Now DIR-3 and DiR-6 were revised w.e.f. June 15, 2018 to facilitate to obtain DPIN for LLPs.

In this edition, we will be discussing about monitoring Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2018. Specifically about Regulation 10 which came into force from June 02, 2018. Along with the article our usual Legal terms and News Bites related to notifications by MCA, SEBI, RBI, IT and GST.

CEO Saranya Deivasigamani,
CEO

FEMA (TISPROI) REGULATIONS, 2018

When a person resident outside India holding capital instruments of an Indian company or units, they have to follow guidelines and regulations set by RBI named as Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2018.

Everytime securities of Indian company is issued or transferred to a person resident outside India, he/she has to comply with the conditions, if any, specified in the following terms and condition:

(1) A person resident outside India, not being a non-resident Indian or an overseas citizen of India or an erstwhile overseas corporate body may transfer by way of sale or gift the capital instruments of an Indian company or units held by him to any person resident outside India;

Explanation: It shall also include transfer of capital instruments of an Indian company pursuant to liquidation, merger, de-merger and amalgamation of entities/ companies incorporated or registered outside India

Provided that

(i) prior Government approval shall be obtained for any transfer in case the company is engaged in a sector which requires Government approval.

(ii) where the person resident outside India is an FPI and the acquisition of capital instruments made under Schedule 2 of these regulations has resulted in a breach of the applicable aggregate FPI limits or sectoral limits, the FPI shall sell such capital instruments to a person resident in India eligible to hold such instruments within the time stipulated by Reserve Bank in consultation with the Central Government. The breach of the said aggregate or sectoral limit on account of such acquisition for the period between the acquisition and sale, provided the sale is within the prescribed time limit, shall not be reckoned as a contravention under these Regulations. The guidelines issued by Securities and Exchange Board of India in this regard shall be applicable.

(2) An NRI or an OCI holding capital instruments of an Indian company or units on repatriation basis may transfer the same by way of sale or gift to any person resident outside India;

Provided that

(i) prior Government approval shall be obtained for any transfer in case the company is engaged in a sector which requires Government approval.

(ii) where the acquisition of capital instruments by an NRI or an OCI under the provisions of Schedule 3 of these regulations has resulted in a breach of the applicable aggregate NRI/ OCI limit or sectoral limits, the NRI or the OCI shall sell such capital instruments to a person resident in India eligible to hold such instruments within the time stipulated by Reserve Bank in consultation with the Central Government. The breach of the said aggregate or sectoral limit on account of such acquisition for the period between the acquisition and sale, provided the sale is within the prescribed time, shall not be reckoned as a contravention under these Regulations.

(3) A person resident outside India, holding capital instruments of an Indian company or units in accordance with these Regulations may transfer the same to a person resident in India by way of sale/ gift or may sell the same on a recognised stock exchange in India in the manner prescribed by Securities and Exchange Board of India;

Provided that

(i) the transfer by way of sale shall be in compliance with and subject to the adherence to pricing guidelines, documentation and reporting requirements for such transfers as may be specified by Reserve Bank from time to time;

(ii) where the capital instruments are held by the person resident outside India on a non-repatriable basis, conditions at proviso (i) above shall not apply

(4) A person resident in India holding capital instruments of an Indian company or units, or an NRI or an OCI or an eligible investor under Schedule 4 of these Regulations, holding capital instruments of an Indian company or units on a non-repatriation basis, may transfer the same to a person resident outside India by way of sale, subject to the adherence to entry routes, sectoral caps/ investment limits, pricing guidelines and other attendant conditions as applicable for investment by a person resident outside India and documentation and reporting requirements for such transfers as may be specified by Reserve Bank from time to time;

Provided the entry routes, sectoral caps/ investment limits, pricing guidelines and other attendant conditions shall not apply in case the transfer is to an NRI or an OCI or an eligible investor under Schedule 4 of these Regulations acquiring such investment on non-repatriation basis.

(5) A person resident in India holding capital instruments or units of an Indian company or an NRI or an OCI an eligible investor under Schedule 4 of these Regulations holding capital instruments or units of an Indian company on a non-repatriation basis may transfer the same to a person resident outside India by way of gift with the prior approval of the Reserve Bank, in the manner prescribed, and subject to the following conditions:

(a) The donee is eligible to hold such a security under relevant schedules of these Regulations;

(b) The gift does not exceed 5 percent of the paid up capital of the Indian company/ each series of debentures/ each mutual fund scheme;

Explanation: The 5 percent will be on cumulative basis by a single person to another single person

(c) The applicable sectoral cap in the Indian company is not breached;

(d) The donor and the donee shall be ‘relatives’ within the meaning in section 2(77) of the Companies Act, 2013;

(e) The value of security to be transferred by the donor together with any security transferred to any person residing outside India as gift during the financial year does not exceed the rupee equivalent of USD50,000;

(f) Such other conditions as considered necessary in public interest by the Reserve Bank;

(6) An NRI or an OCI or an eligible investor under Schedule 4 of these Regulations holding capital instruments of an Indian company or units on a non-repatriation basis, may transfer the same by way of gift to an NRI or an OCI or an eligible investor under Schedule 4 of these Regulations who shall hold it on a non-repatriable basis;

(7) A person resident outside India holding capital instruments of an Indian company containing an optionality clause in accordance with these Regulations and exercising the option/ right, may exit without any assured return, subject to the pricing guidelines prescribed in these Regulations and a minimum lock-in period of one year or minimum lock-in period as prescribed in these Regulations, whichever is higher;

(8) An erstwhile OCB may transfer capital instruments subject to directions issued by the Reserve Bank from time to time in this regard.

Explanation: ‘Overseas Corporate Body (OCB)’ means an entity derecognized through Foreign Exchange Management [Withdrawal of General Permission to Overseas Corporate Bodies (OCBs)] Regulations, 2003;

(9) In case of transfer of capital instruments between a person resident in India and a person resident outside India, an amount not exceeding twenty five percent of the total consideration

a can be paid by the buyer on a deferred basis within a period not exceeding eighteen months from the date of the transfer agreement; or

b can be settled through an escrow arrangement between the buyer and the seller for a period not exceeding eighteen months from the date of the transfer agreement; or

c can be indemnified by the seller for a period not exceeding eighteen months from the date of the payment of the full consideration, if the total consideration has been paid by the buyer to the seller.

Provided the total consideration finally paid for the shares shall be compliant with the applicable pricing guidelines.

(10) In case of transfer of capital instruments between a person resident in India and a person resident outside India, a person resident outside India may open an Escrow account in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016. Such Escrow account may be funded by way of inward remittance through banking channels and/ or by way of guarantee issued by an authorized dealer bank, subject to terms and conditions as specified in the Foreign Exchange Management (Guarantees) Regulations, 2000.

(11) The pricing guidelines prescribed in these Regulations shall not be applicable for any transfer by way of sale done in accordance with Securities and Exchange Board of India regulations where the pricing is prescribed by Securities and Exchange Board of India.

(12) The transfer of capital instruments of an Indian company or units of an Investment Vehicle by way of pledge is subject to the following terms and conditions:

(a) Any person being a promoter of a company registered in India (borrowing company), which has raised external commercial borrowing (ECB) in compliance with the Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2000 may pledge the shares of the borrowing company or that of its associate resident companies for the purpose of securing the external commercial borrowing (ECB) raised by the borrowing company subject to the following conditions:

(i) the period of such pledge shall be co-terminus with the maturity of the underlying external commercial borrowing;

(ii) in case of invocation of pledge, transfer shall be in accordance with these Regulations and directions issued by the Reserve Bank;

(iii) the Statutory Auditor has certified that the borrowing company will utilise/ has utilised the proceeds of the external commercial borrowing for the permitted end­use/s only;

(iv) no person shall pledge any such share unless a no-objection has been obtained from an Authorised Dealer bank that the above conditions have been complied with.

(b) Any person resident outside India holding capital instruments in an Indian company or units of an investment vehicle may pledge the capital instruments or units, as the case may be:

(i) in favour of a bank in India to secure the credit facilities being extended to such Indian company for bona fide purposes,

(ii) in favour of an overseas bank to secure the credit facilities being extended to such person or a person resident outside India who is the promoter of such Indian company or the overseas group company of such Indian company,

(iii) in favour of a Non-Banking Financial Company registered with the Reserve Bank to secure the credit facilities being extended to such Indian company for bona fide purposes,

(iv) subject to the Authorised Dealer bank satisfying itself of the compliance of the conditions stipulated by the Reserve Bank in this regard.

(c) In case of invocation of pledge, transfer of capital instruments of an Indian company or units shall be in accordance with entry routes, sectoral caps/ investment limits, pricing guidelines and other attendant conditions at the time of creation of pledge.

Legal Term

Docile

Ready to accept control or instruction; submissive.

 

NewsBites

MCA Updates

  • Revised form—SPICE MOA, SPICE AOA, DIR-3, DIR-6.
  • Order regarding extension for a period of one month for the Steering Committee on CSR with effect from 3rd June,2018-reg.
  • Commencement of Sections—22, 24, 25, 26 and 71.

SEBI Updates

  • Amendment to Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999.
  • Amendments to Prevention of Money-laundering (Maintenance of Records) Rules, 2005 .

RBI Updates

  • Investment by Foreign Portfolio Investors (FPI) in Debt – Review.
  • Foreign Investment in India – Reporting in Single Master Form.
  • External Commercial Borrowings (ECBs) – Monthly reporting through ECB 2 Return.
  • Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2018.

Income Tax Updates

  • No major Notifications.

GST Updates

  • No major Notifications.

FOREIGN INVESTMENT LIMITS

Heavy Penalty Starts Soon

The Companies (Registration Offices and Fees) Second Amendment Rules 2018 has been notified on 7th May 2018. Accordingly, in case the due date of filings under Section 92 (Annual Return) or 137 (Annual Financial Statement) of the Companies Act, 2013 expires after 30/06/2018, the additional fee @Rs.100 per day shall become payable in respect of MGT-7, AoC-4, AoC-4 XBRL and AoC-4 CFS. In all other cases where the belated annual returns or balance sheet/financial statement which were due additional fee as per the applicable slab for the period of delay up to 30th June 2018 plus @Rs.100 per day w.e.f 1st July 2018 shall become payable. Plan all the belated returns accordingly.

It is time to advice all your clients to complete all non-compliance for previous year at the earliest. Remember, we are always ready to help you with ROC matters and other Compliance related issues.

In this edition, we will be discussing about monitoring FI limits in listed companies along with our usual Legal terms and News Bites related to notifications by MCA, SEBI, RBI, IT and GST.

CEO Saranya Deivasigamani,
CEO

Foreign Investment Limits

Reserve Bank of India (RBI) usually receives data on investment made by Foreign Portfolio Investors (FPI) and Non-resident Indians (NRI) on stock exchanges from the custodian banks and Authroised Dealer banks for their respective clients. Now RBI along with hands of SEBI imposed restrictions beyond a threshold limit on FPI / NRI investment in listed Indian Companies.

In order to enable listed Indian companies to ensure compliance with the various foreign investment limits, RBI in consultation with SEBI, has decided to put in place a new system for monitoring foreign investment limits, for which the necessary infrastructure and systems for operationalising the monitoring mechanism, will be made available by the depositories. The same has been notified by SEBI vide Circular – IMD/FPIC/CIR/P/2018/61 dated April 05, 2018 read with Circular IMD/FPIC/CIR/P/2018/74 dated April 27, 2018.

In terms of para 6 of Annexure A of the circular dated April 05, 2018, all listed Companies are required to provide the specified data / information on foreign investment to the depositories. The requisite information may be provided before May 15, 2018. The listed Indian companies, in non-compliance with the above instructions will not be able to receive foreign investment and will be non-compliant with Foreign Exchange Management Act, 1999 (FEMA) and regulations made thereunder.

Further, upon implementation of the new monitoring system, all Authorised Dealer Banks would be required to provide RBI, the details of investment made by their respective NRI clients to the depositories in the format as provided by the depositories / SEBI. In addition, the reporting to RBI in the existing system, viz., LEC (NRI) and LEC (FII), would continue.

Items in SEBI Circular:

1. Foreign Investment in India is regulated in terms of clause (b) of sub-section 3 of section 6 and section 47 of the Foreign Exchange Management Act, 1999 (FEMA) read with Foreign Exchange Management (Transfer or Issue of a Security by a Person resident Outside India) Regulations, 2017 issued vide Notification No. FEMA 20(R)/2017-RB dated November 7, 2017. FEMA prescribes the various foreign investment limits in listed Indian companies. These include the aggregate FPI limit, the aggregate NRI limit and the sectoral cap. The RBI Master Direction (FED Master Direction No. 11/2017-18) dated January 04, 2018 provides a compilation of the instructions issued on Foreign Investment in India and its related aspects under FEMA.

2. As per FEMA, the onus of compliance with the various foreign investment limits rests on the Indian company. In order to facilitate the same, SEBI and RBI has decided to put in place a new system for monitoring the FI limits.

3. The depositories (NSDL and CDSL) and the Stock Exchanges (BSE, NSE and MSEI) shall put in place the necessary infrastructure and IT systems for operationalizing the monitoring mechanism.

4. The depositories shall issue the necessary circulars and guidelines for collecting data on foreign investment from listed companies. The system for collecting this data from the companies shall go live on the date of the issuance of this circular. The companies shall provide the necessary data to the depositories latest by April 30, 2018.

5. The new system for monitoring foreign investment limits in listed Indian companies shall be made operational on May 01, 2018. The existing mechanism for monitoring the foreign investment limits shall be done away with once the new system is operationalized. RBI shall issue the necessary guidelines in this regard.

Annexure A

Architecture of the System for Monitoring FI Limits in listed Indian companies housing of the system

1. The system for monitoring the foreign investment limits in listed Indian companies shall be implemented and housed at the depositories (NSDL and CDSL).

Designated Depository

2. A Designated Depository is a depository which has been appointed by an Indian company to facilitate the monitoring of the foreign investment limits of that company. As defined at Regulation 2(xxiii) of FEMA, the term ‘Indian company’ means a company incorporated in India and registered under the Companies Act, 2013.

3. The Designated Depository shall act as a lead depository and the other depository shall act as a feed depository.

Company Master

4. The company shall appoint any one depository as its Designated Depository for the purpose of monitoring the foreign investment limit.

5. The stock exchanges (BSE, NSE and MSEI) shall provide the data on the paid-up equity capital of an Indian company to its Designated Depository. This data shall include the paid-up equity capital of the company on a fully diluted basis. As defined at Regulation 2(xvii) of FEMA, the term “fully diluted basis” means the total number of shares that would be outstanding if all possible sources of conversion are exercised.

6. The depositories shall provide an interface wherein the company shall provide its basic information to its Designated Depository. The information provided by the companies shall be stored in a Company Master database.

7. In the event of any change in any of the details pertaining to the company, may include: i. Board of Directors resolution approving the increase/decrease; ii. General body resolution approving the increase/decrease; iii. Company Secretary certificate for compliance with FEMA, 1999

Reporting of trades

8. The present SEBI guidelines, the custodians are reporting confirmed trades of their FPI clients to the depositories on a T+1 basis reporting shall continue.

9. With respect to NRI (repatriable) trades, Authorized Dealer (AD) Banks shall report the transactions of their NRI clients to the depositories.

Activation of a Red Flag Alert

10. The monitoring of the FI limits shall be based on the paid-up equity capital of the company on a fully diluted basis to ensure that all FI are in compliance with the FI limits.

11. A red flag shall be activated whenever the FI within 3% or less, the aggregate NRI/FPI limits or the sectoral cap.

12. The depositories shall inform the exchanges about the activation of the red flag for the identified scrip. The exchanges shall issue the necessary circulars/public notifications on their respective websites. Once a red flag has been activated for a given scrip, the foreign investors shall take a conscious decision to trade in the shares of the scrip, with a clear understanding that in the event of a breach of the aggregate NRI/FPI limits or the sectoral cap, the foreign investors shall be liable to disinvest the excess holding within five trading days from the date of settlement of the trades.

Breach of foreign investment limits

13. Once the aggregate NRI/FPI investment limits or the sectoral cap for a given company have been breached, the depositories shall inform the exchanges about the breach. The exchanges shall issue the necessary circulars/public notifications on their respective websites.

14. In the event of a breach of the sectoral cap/aggregate FPI limit/aggregate NRI limit, the foreign investors shall divest their excess holding within 5 trading days from the date of settlement of the trades, by selling shares only to domestic investors.

Method of disinvestment

15. The proportionate disinvestment methodology shall be followed for disinvestment of the excess shares so as to bring the foreign investment in a company within permissible limits. In this method, depending on the limit being breached, the disinvestment of the breached quantity shall be uniformly spread across all foreign Investors/FPIs/NRIs which are net buyers of the shares of the scrip on the day of the breach. The foreign investors are required to disinvest the excess quantity by selling them only to domestic investors, within 5 trading days of the date of settlement of the trades that caused the breach.

17. In the case of FPIs which have been identified for disinvestment of excess holding, the depositories shall issue the necessary instructions to the custodians of these FPIs for disinvestment of the excess holding within 5 trading days of the date of settlement of the trades.

18. In the case of NRIs which have been identified for disinvestment of excess holding, the depositories shall issue the necessary instructions to the Authorized Dealer (AD) Banks for disinvestment of the excess holding within 5 trading days of the date of settlement of the trades.

19. The depositories shall utilize the FPI trade data provided by the custodians, post custodial confirmation, on T+1 day, where T is the trade date. The breach of investment limits (if any) shall be detected at the end of T+1 day and therefore, the announcement pertaining to the breach shall be made at the end of T+1 day. The foreign investors who have purchased the shares of the scrip during the trading hours on T+1 day shall also be given a time period of 5 trading days from the date of settlement of such trades, to disinvest the holding accruing from the aforesaid purchase trades. In other words, the purchase trades of such foreign investors which have taken place of T+1 day, shall be settled on T+3 day and thereafter a time period from T+4 day to T+8 day shall be available to them to disinvest their entire holding arising from purchases on T+1 day.

20. If T+1 is a settlement holiday, then the custodial confirmation of the trade executed on T day shall be done on T+2 day and the subsequent settlement of the trade on T+3 day. In such a scenario, the breach would be detected at the end of T+2 day.

21. In the event the foreign shareholding in a company comes within permissible limit during the time period for disinvestment, on account of sale by other FPI or other group of FPIs, the original FPIs, which have been advised to disinvest, would still have to do so within the disinvestment time period, irrespective of the fresh availability of an investment headroom during the disinvestment time period.

22. There shall be no annulment of the trades which have been executed on the trading platform of the stock exchanges and which are in breach of the sectoral caps/aggregate FPI limits/aggregate NRI limits.

Failure to disinvest within 5 trading days

23. If a breach of the investment limits has taken place on account of the FPIs and the identified FPIs have failed to disinvest within 5 trading days, then necessary action shall be taken by SEBI against the FPIs.

Fees

24. The Designated Depository shall levy reasonable fee/charges on the company towards development, ongoing maintenance and monitoring costs at an agreed upon frequency.

Legal Term

Manslaughter

The crime of killing a human being without malice aforethought, or in circumstances not amounting to murder.

 

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