Re:FEMA- Individual Investment or Nominee Investment
Mani
Learned members Please enlighten,
A and B, Indian professionals, became subscriber to a co without writing as being Nominee of Foreign co.
Post incorporation, Inward Remittance received in the name of A and B separately from parent co.
Then subscription shares issued to A and B.
Can the money sent by parent co to A and B be treated as towards parent co subscription through A and B, which is the real intent also?
OR
Will it be treated as towards purchase of Shares from A and B as Nominee status was not put in MAOA subscription?
Per my view, as no nominee status is put in MAoA, any remittance by parent co to subscriber shall be a share purchase and thus transfer and not be treated as subscription, even though share certificates were issued to subscribers subsequent to receipt of inward remittance from parent company.
Best Regards and Thanks,
Regards, Rahul Jain, 91-9953605999
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Best Regards,
Mani Srinivasan,M.Com, AICWA,FCS, ACIS(UK),LL.B
A 3/8 Triveni Apartments
B-3, Vasundhara Enclave
Delhi-96
Mobile: 9810347583
Vivek Hegde
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Warm Regards
CS Vivek Hegde,B.com, ACS, CWA
Company Secretary in Practice
No. 405, 4th Block, 7th Cross
Koramangala, Bangalore-560034
Mob: 09019756940/09900898223
Mani
Vivek Hegde
Mani
Vivek Hegde
CS Vivek Hegde,B.com, ACS, CWA
Company Secretary in Practice
No. 405, 4th Block, 7th Cross
Koramangala, Bangalore-560034
Mob: 09019756940/09900898223
See Yes Vj
See Yes Vj
- An Indian is a partner (say, A) in a partnership firm
- A stays abroad for more than 182 days, thus A becomes a Non-resident Indian & continues to be a partner
- The said partnership firm holds shares in Indian company under the name of A as partnership cannot hold shares on its own name
- Think, if the said partnership firm wants to change its holder from A (NRI) to B (Indian), will it attract any provisions of FEMA?
- The holding of company's shares remains with the same firm but the holders are amended in the records of the company by way of transfer.
Hello,
For FDI with the Repatriation benefits , funds should be sent from abroad in specified foreign exchange and the same has to be reported to RBI.
In such scenario , the investment made by an Indian resident on behalf of a non-resident cannot be considered as repatriable FDI and can be construed as FDI with non-repatriable benefits.
These investments can be considered as a beneficial interest on behalf of a non-resident on non-repatriable basis.
Regards,
R.V.Seckar
Pl do visit my blogs :http://rvsekar.blogspot.com/
http://rvseckarfema.blogspot.com/
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See Yes Vj
Dear Mr VJ,
There is no attraction of FEMA provision in this case , A held shares on behalf of partnership firm and later became an NRI.
The shares were acquired by him while he was a resident in India.
There is no harm in transferring the shares to B as there is no involvement of flow of foreign exchange under repatriation scheme. In fact , B is going to hold such shares as the nominee of the partnership firm.
I find no attraction of FEMA from this transaction.
Regards,
R V SECKAR
Thanks for your compliments.
It keeps me to perk up more research on the subject.
Regards
R.V.Seckar
Mani
Dear Mr. Makarand,
With due respects, my comments on your observations are given below in italics.
Regards,
Mani
Dear Mr. Mani,
I tempt not to agree with your views on FEMA and 187C about holding of shares through nominee.
Each one of us is entitled to his/her own views. The official position of the regulator (RBI) will decide the case.
In my view both provisions are independent and not contradicting with each other.
I have never said that the provisions under FEMA,99 & CA 56 are dependent or contradict with each other. FEMA ,99 being a central enactment to consolidate and amend the law relating to foreign exchange, any transaction falling within the ambit of FEMA 99 must comply with the appropriate rules/regulations or a specific permission from the RBI should be obtained.
RBI itself refers certain types of transactions to the Ministry of Finance for their comments before taking further action. For a professional colleague, I was following up a certain case referred by RBI to the Ministry of Finance. This case was referred further to various Govt. agencies. Finally,it took almost two years to get the clearances and RBI approval despite my best efforts.
Compliance with CA,1956 does not grant automatic approval under FEMA,99. Since FEMA governs foreign exchange transactions, at the threshold level, one should ensure that the FEMA provisions are complied with in respect of any transactions with non residents before proceeding further under any law including CA, 1956.
For example, CA,56 recognises issue of shares for consideration other than cash. FEMA,99 does not recognise such adla badli transactions involving a non resident under the automatic route. If a company wants to issue any security to a non resident for consideration other than cash, the automatic route under FEMA,99 is not available.
I know cases where companies were incorporated without considering the sectoral caps/SSI reservation norms under FEMA. Such companies become dormant or had to change their business plan in order to bring in enough funds from abroad in accordance with the sectoral caps under FEMA.
One should therefore carefully examine the FDI policy and FEMA requirements before starting the incorporation process involving non residents/FDI. If the issue/allotment of shares/ any security to a non resident hits any FEMA provisions, it will indeed be an illegal issue/allotment. There cannot be any second opinion in this regard.
If it is not possible to comply with sectoral caps due to FEMA constraints, mere incorporation of a company is of no value. Such companies end up doing no business resulting in clogging the MCA data base.
Section 187c recognizes the right of a shareholder to hold the shares through nominee by filing necessary declarations. This is an exception carved out to a golden rule of “ no notice of trust will be recognized under the companies act”
The issue on hand is not the scope and sweep of section 187C of the CA,1956. The real issues for discussion are:
1) Whether a transaction u/s 187C of the CA,56 resulting in a beneficial share holder who is a non resident and a resident share holder who is the ostensible share holder is a transfer within the meaning of section 2 of FEMA,99.
2)If yes, whether the automatic route for reporting the transfer of securities under FEMA,99 is available in such cases.
My views are:
1)Yes.The inclusive nature of the definition of the word “transfer”in section 2(ze)of FEMA,99 is wide enough to cover any transaction falling within the ambit of section 187C of the CA,1956 also. In the case of non residents ,compliance with CA,1956 u/s 187 C should not be construed as due compliance with sections 6 (2),6 (3) of the FEMA,99 and the applicable Regulations there under unless the necessary approval from RBI is in place.
2)No. A careful examination of the relevant paras of master circular dated 1/7/2010 and form FC TRS reveals that this form is meant for cases where the shares have been valued and consideration is paid as per the FEMA guidelines only.
Therefore all cases of transfers of securities involving a non resident u/s 187C of CA,1956 should be referred to RBI for specific approval since Form FC TRS and the existing guidelines granting automatic reporting of transfer do not deal with such transactions.
Presuming a company files the e-form 22B with necessary declarations u/s 187C of the CA 1956 from a non resident beneficial holder & a resident ostensible holder and the RoC registers the same, can we come to a conclusion that all the requirements under section 6(2) read with 6(3) of the FEMA 99 are also duly complied with? The answer is obviously in the negative.
The position can be reverse involving a non resident ostensible share holder. But , that will not alter my above views.
If there is any general/specific circular covering the transactions u/s 187C issued under FEMA,99, then ,above views will become redundant.
Holding of shares by foreign companies through nominee is a common practice in India and adopted basically to comply with the provisions of minimum number of members (in absence of single member company concept).
One should examine the scope of the term “transfer” in section 2 of FEMA,99. It is inclusive in nature and widely worded to bring within its ambit any kind of transfer of securities.
The issue is whether such common practice is in accordance with section 6 (2) & (3)of FEMA,99 or not. Is there any general circular/notification by RBI under FEMA,99 to support this practice under reference?
RBI also recognizes the same by approving the form FC GPR containing such holdings. Even I have few letters from RBI recording such nomination in share holding.
The form FC GPR is taken on record on the basis of declaration and certificate(s) forming part and parcel of the form. This form is intended only for reporting the compliance with the conditions for issue of the specified securities under the automatic route in accordance with para 18 of the master circular dated issued 1/7/2010 issued by RBI.
One should give only the relevant information in a relevant statutory form. Reporting a transfer in a form meant for issue/allotment of securities is a wrong practice.
Even if such forms are taken on record, it does not mean that approval has been granted for the appointment of the resident nominee share holder by a non resident beneficial holder or vice versa.
There cannot be any estoppel against a statute.Therefore, in such cases, RBI/the appropriate authority under FEMA,99 can initiate penal proceedings notwithstanding such disclosures.
As already stated the inclusive nature of the definition of “transfer” in section 2 of FEMA,99 is wide enough to bring within its ambit the act of constitution of a nominee under section 187C of CA,1956.
On this point alone, one can conclude that the approval of the form FC GPR by the local branch of RBI should not be construed as RBI’s approval for constitution of a nominee which involves a transfer of shares even though without consideration.
The well settled position of law is that the principle of estoppel does not lie against any Statute. Unless the appropriate authority in the RBI issues the necessary approval in accordance with FEMA,99 or the transaction is covered under a general permission , mentioning a transaction in a wrong form or in a letter addressed to RBI will not provide any relief.
Please see para 6.1 of Annex-3 to the master circular dated 1/7/2010. The onus is on the part of the resident in India to submit the form TRS within the time frame though both parties to the transaction are supposed to comply with all the legal requirements in India/abroad.
RBI is gradually imposing the concept of strict liability on the part of the residents regarding FEMA compliances. Legal professionals should not therefore expose residents to the severe penalties under FEMA unless the proposed transaction between a resident and non resident is supported by a special permission or the general permission from RBI.
Section 4 also recognizes holding of shares through nominee and allows such companies to remain as private limited (section 4 (7)) even they have individual residents as holders.
The section 4 of the CA, 1956 deals with holding subsidiary relationship. As far as sub section 7 of section 4 of the CA 1956 is concerned, it is a concession to the foreign bodies corporate to incorporate a private company which will enjoy the full status and benefits available to a private company (simplicitor) irrespective of the status of such bodies corporate under the CA,1956 provided 100% of the paid up capital of such private company is held by one or more of such foreign body/bodies corporate. This sub section , though worded negatively, provides some positive relief to foreign investors under the CA,56 only.
One can infer that since two members are required under the CA,1956, to form a company, a nominee can be appointed in cases where the foreign body corporate is unable to find another such investor or does not want one more share holder. But this inference cannot be crystallised into a valid action unless the necessary approval from RBI under FEMA is made available to the foreign body corporate. We should not draw any inference which will run counter to any provision of FEMA,99.Even at the cost of repetitive usage, I must say that there cannot be any estoppel against a statute.
I know well reputed law firms in India,who after due consideration of FEMA 99 and CA,1956 , always bring in two different bodies corporate incorporated abroad to invest in the Indian private companies at the time of incorporation.
If a foreign body corporate is unable to comply with the minimum number of members under the Act, it should approach the RBI for constitution of a nominee share holder who will also subscribe to the MoA on its behalf unless there is a specific circular/notification from RBI to this effect. For the sake of complying with CA,1956 regarding the minimum number of members, we cannot take compliances under FEMA,99 as granted.
Every business expects from us to act as facilitator to provide lawful solutions to add value to their growth.
Mani Srinivasan,M.Com, AICWA,FCS, ACIS(UK),LL.B
A 3/8 Triveni Apartments
B-3, Vasundhara Enclave
Delhi-96
Mobile: 9810347583
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Mani
Regulations, 2000 published under Notification No. FEMA 20 /2000-RB dated 3rd May 2000 by RBI reads as under.
Provided that a security issued prior to, and held on, the date of commencement of these Regulations, shall be deemed to have been issued under these Regulations and shall accordingly be governed by these Regulations;
Provided further that the Reserve Bank may, on an application made to it and for sufficient reasons,permit a person resident outside India to issue or transfer any security, subject to such conditions as may be considered necessary."
Regards,
Dear Mr. Mani,
Please accept my heartiest thanks for bringing to fore this nominee shareholder issue under FEMA.
You are of the view that since there is no specific provision, which allows such holding of shares by non-resident, proper compliance would be to obtain prior specific approval from RBI.
My humble submission is that if a law is silent on something, CAN THERE BE A PREUMPTION THAT THE SAME IS STRICTLY PROHIBITED OR CAN BE DONE ONLY AFTER OBTAINING SPECIFIC APPROVAL OF THE CONCERNED AUTHORITY.
I have just tried to outline below one such situation, please peruse and point out the FEMA provision for whose violation can prosection be launched against any of the parties involved in the transaction.
Situation
Mr. A (Resident / Non Resident) holder of __ equity shares of X Ltd (Indian co., 100% FDI allowed under automatic route) as a nominee, for and on behalf of Y Ltd. (Foreign non resident co.) / Mr. B (Non Resident).
Analyis
Mr. A = holder of registered ownership rights in the equity shares
Y Ltd. / Mr. B = holder of beneficial ownership rights (i.e. w.r.t. dividend, voting rights etc.) in the equity shares
Register of Members adequately shows the above arrangement for aforesaid equity shares and necessary compliance under CA, 56 was done.
Now lets try to analyze the compliance requirement under FEMA:
The money to purchase shares should come from benficial owner, so in this case NR paid the entire share consideration (including purchase price for nominee's shares also) through foreign remittance. The company files intimation with RBI within 30 days of receipt of share subscription amount and allots within 180 days and file FC-GPR A accordingly.
Regards
Rajiv Ranjan
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From: share...@gmail.com
Date: Fri, 17 Dec 2010 20:30:48 +0530
Subject: Re: [CharteredSecretaries] Re: FEMA- Individual Investment or Nominee Investment
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__,_._,___
Vivek Hegde
CS Vivek Hegde,B.com, ACS, CWA
Company Secretary in Practice
No. 405, 4th Block, 7th Cross
Koramangala, Bangalore-560034
Mob: 09019756940/09900898223
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Mani
In the light of above, I am of the view that there is an express prohibition under FEMA,99 to transfer shares in favor of a nominee in such cases, unless RBI allows it.
I am not aware of any prosecution launched by RBI in such cases. Nevertheless, I should say that the Principle of Estoppel does not lie against a Statutue. If RBI is silent or does not initiate any action,it does not grant any immunity from action at a later date.Of course, the matter is within the competence of the RBI to issue any notification and/or deal with such cases in an appropriate manner as it deems fit in accorance with FEMA,99 on a case to case basis.
Best Regards,
Mani
Mani Ji,
Plese answer the following:1. You are of the view that of envisage arrangement u/s 187C of CA 1956 is not allowed under FEMA?whether FEMA is silent or is there specific prohibition?2. Can you share any documentary evidence wherein RBI has launched prohibition against the concerned parties for such volations.Please don't feel prove.
Date: Sat, 18 Dec 2010 15:10:36 +0530