Tag: fema

RBI moves to ease overseas direct investment regulations under FEMA

Banking & Finance

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The Reserve Bank of India is planning to rationalise the existing provisions governing overseas direct investment regulations under the Foreign Exchange Management Act (FEMA), 1999.

This is to further liberalise the regulatory framework and promote ease of doing business, per the RBI’s draft Foreign Exchange Management/FEM (Non-debt Instruments – Overseas Investment) Rules, 2021 and the draft Foreign Exchange Management (Overseas Investment) Regulations, 2021.

Where a person resident in India wants to make any financial commitment or disinvesting such financial commitment has an account appearing as a Special Mention Account-1/2 or non-performing asset (NPA) or wilful defaulter or is under investigation by a regulatory body or investigative agencies in India, a no-objection certificate has to be obtained from these entities before making financial commitment or undertaking disinvestment of such financial commitment.

Where the disinvestment by the person resident in India pertains to ODI, the transferor shall not have any dues outstanding for receipt.

Restrictions

A person resident in India is prohibited from making ODI in a foreign entity engaged in (i) Real estate activity; (ii) Gambling in any form; and (iii) Offering financial products linked to Indian Rupee except for products offered in an International Financial Services Centre (IFSC).

Overseas investment by a person resident in India shall not be made in a foreign entity located in countries/ jurisdictions that are not FATF (Financial Action Task Force)and IOSCO (International Organisation of Securities Commission) compliant country or any other country/ jurisdiction as may be prescribed by the Central Government.

The Financial Commitment by a person resident in India in a foreign entity that has invested or invests into India which is designed for the purpose of tax evasion/ tax avoidance by such person is not permitted and any contravention under this rule shall be considered to be a contravention of serious/sensitive nature.

Acquisition of immovable property outside India (1) A person resident in India may acquire immovable property outside India by way of inheritance or gift or purchase from a person resident in India who has acquired such property as per the foreign exchange provisions in force at the time of such acquisition.

ODI in financial entity

An Indian entity which is engaged in financial services activity in India may make ODI in a foreign entity, which is directly or indirectly engaged in financial services activity subject to conditions, including the regulated Indian entity Indian entity posting net profits during the preceding three financial years.

An listed India entity having a minimum net worth of ₹500 crore based on the last audited balance sheet, can make ODI including by way of contribution in an Overseas Technology Fund, for the purpose of investing in overseas technology start-ups engaged in an activity which is in alignment with the core business of such Indian entity.

An Indian entity may engage in agricultural operations, including purchase of land incidental to such activity, either directly or through an office outside India.

Financial commitment

The total financial commitment made by an Indian entity, excluding capitalization of retained earnings, in all the foreign entities taken together at the time of undertaking such commitment shall not exceed 400 per cent (or as directed by the Reserve Bank from time to time) of its net worth as on the date of the last audited balance sheet.

However, financial commitment made by “Maharatna” public sector undertakings (PSUs) or “Navratna” PSUs or subsidiaries of such PSUs in foreign entities outside India engaged in strategic sectors shall not be subject to the limits laid down above.

The limit shall not apply where the investment is made out of the balances held in its EEFC (Exchange Earners Foreign Currency) account.

Overseas portfolio investment

A listed Indian company may make Overseas Portfolio Investment including by way of reinvestment within the limit of 50 per cent of its net worth as on the date of its last audited balance sheet.

An Indian entity, which is a software exporter, or any other entity as may be prescribed by the Central government in this regard, may receive foreign securities up to 25 per cent of the value of exports made to a foreign software company irrespective of whether such company is listed or not.

A registered trust or a registered society engaged in the educational sector or which has set up hospital(s) in India, with the prior approval of the Reserve Bank, may make ODI in a foreign entity. This is subject to the foreign entity being engaged in the same sector that the Indian trust or society is engaged in.

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Fall in outward remittances good news for India’s current account, BFSI News, ET BFSI

Banking & Finance

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India’s outward remittances fell by as much as $6 billion in FY21 as the pandemic put brakes on ordinary overseas travel and student traffic to campuses abroad, partly contributing to the current account surplus of $24 billion.

This is the first time annual remittance outflows contracted since 2015 when the Reserve Bank of India (RBI) doubled the annual limit for sending money abroad to $250,000 and allowed more current account transactions under the Liberalised Remittance Scheme (LRS).

Total outflows contracted 32% in FY21 as major heads like travel, overseas studies and maintenance of close relatives saw a sharp dip. But outflows under permissible capital account transactions like investment in overseas deposits picked up.

“The fall is largely due to complete restrictions on travel. Nil MICE (meetings & incentive) movements, and there are no trade fairs and exhibitions due to Covid,” said Harsh Kumar Bhanwala, executive chairman of Capital India Finance, which makes outward remittances under the RemitX brand.

Curbs on leisure travel contributed to this trend while outbound student traffic was almost nil last year as overseas universities moved online to check the spread of the pandemic, Bhanwala said.

Outward remittances fell to $12.7 billion during FY21, from $18.7 billion in FY20, RBI data showed. Under the LRS started in 2004, all resident individuals, including minors, are allowed to remit up to $250,000 per financial year for any permissible current or capital account transaction or a combination of both.

These include private visits to any country (except Nepal and Bhutan), gift or donation, going abroad for employment, emigration, maintenance of close relatives abroad, travel for business, or for meeting medical expenses, or for studies abroad or any other current account transaction which is not covered under the definition of current account in FEMA 1999.

Two heads — travel and remittance for studies abroad – accounted for about 56% of outward remittance during the year as the pandemic induced lockdown globally even restricted essential travel forcing students to defer their travel plans for overseas studies. While travel outgo dipped 53% to $3.2 billion, expenses for studies abroad dipped 23% to $3.8 billion during the year.

Significantly, capital account transactions like resident individual investments in overseas financial markets rose during the year, albeit on a small base, with investors likely eying the combined benefit of rising yields and dollar strength over a period of time. Investment in overseas equity and debt rose 9.4 per cent to $472 million and investment in overseas deposits rose per 9.1 cent to $680.4 million.



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ED issues show cause notice to WazirX, directors under FEMA

Banking & Finance

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In a move that further raises concerns over the functioning of crypto-currency exchanges, the Enforcement Directorate has issued a show-cause notice to one of the largest domestic crypto-exchange, WazirX, and its Directors Nischal Shetty and Sameer Hanuman Mhatre for alleged violation of the Foreign Exchange Management Act on transactions involving crypto-currencies worth ₹2,790 crore.

WazirX was bought out by Chinese crypto-currency firm Binance in 2019.

WazirX launches NFT marketplace for Indian artists

In a statement on Friday, the ED said it has initiated a probe on the basis of its ongoing money-laundering investigation into Chinese-owned illegal betting applications. In September, the agency had searched 15 locations in Delhi, Gurugram, Mumbai and Pune and busted a worth ₹1,268-crore online betting racket involving Chinese companies. In December, the ED said a large amount of money was inexplicably transferred using crypto-currency.

On Friday, the ED said the investigations had revealed some Chinese nationals had laundered proceeds of crime amounting to about ₹57 crore, by converting Indian rupee deposits into crypto-currency Tether and then transferring it to Binance (the exchange is registered in Cayman Islands) Wallets on instructions from abroad.

Range of transactions

“WazirX allows wide range of transactions with crypto-currencies, including exchange into Indian rupees and vice-versa; exchange of crypto-currencies; and even transfer/receipt of crypto-currency held in its pool accounts to wallets of other exchanges which could be held by foreigners in foreign locations,” the ED said.

Crypto exchanges bet big on India

WazirX does not collect documents, in clear violation of the mandatory Anti-Money Laundering (AML) and Combating of Financing of Terrorism (CFT) norms and FEMA guidelines, it said.

In the period under investigation, users of WazirX have, through its pool account, received crypto-currency worth ₹880 crore from Binance accounts and moved out crypto-currency worth ₹1,400 crore to Binance accounts.

No audit trail

The main concern for the investigative agency is that none of these transactions is available on blockchain for any audit/investigation. Also, It was found that WazirX customers could transfer ‘valuable’ crypto-currencies to any person irrespective of his/her location and nationality without any documentation, making it a safe haven for those looking to launder money or for other illegitimate activities.

Nischal Shetty, CEO and Founder, WazirX, however, said the company is yet to receive any show-cause notice from the ED.

“WazirX is in compliance with all applicable laws. We go beyond our legal obligations by following Know Your Customer (KYC) and AML processes and have always provided information to law enforcement authorities. We are able to trace all users on our platform with official identity information. Should we receive a formal communication or notice from the ED, we will fully cooperate in the investigation,” he said in a statement. The cryptocurrency exchange also tried to ease investor concerns. “Your funds are absolutely safe,” it said in a tweet. While last week, the RBI said it has major concerns around crypto-currencies, most crypto exchanges in the country say the concerns are unfounded as all transactions are based on proper AML and KYC processes.

 

 

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Cryptos put India’s richie rich in a catch-22 situation, legality of transaction may be questioned, BFSI News, ET BFSI

Personal Finance

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It’s a Catch-22 situation for wealthy Indians who bought Bitcoins from overseas markets and held them in offshore wallets as the fate of cryptos hangs in limbo in India. They are now in a quandary over how to account for, and whether to disclose, these ‘digital assets’.

If they hide these investments from the taxman, they may be pulled up later. But if they share the information while filing their annual income tax returns, they may be questioned on the legality of transactions they undertook. Some have acquired Bitcoins and other popular crypto currencies from international sellers by transferring funds from India under the Reserve Bank of India’s liberalised remittance scheme (LRS) which allows a resident to invest up to $250,000 a year abroad in stocks, bonds and properties among other things.

Others have purchased cryptos online from foreign sellers using their debit and credit cards. But there are question marks whether the LRS route and bank cards can be used to buy cryptos abroad. Bankers who remit LRS money say the facility cannot be used for direct purchase of Bitcoins from India as it does not figure in the permissible list of capital account transactions.

It’s one thing to subscribe to Coinbase IPO, but it’s another thing to buy Bitcoins directly. At least, that’s the impression they gather in their interactions with RBI.

But what if a person avails the LRS window to open a dollar or Euro account with a bank overseas and subsequently uses the money to buy Bitcoins abroad? Well, it’s none of our business, the bankers say. But is it beyond RBI’s jurisdiction as well? A RBI spokesman declined to comment on whether one can invest in cryptos under LRS. The use of debit or credit cards is done under the pretext that trades in cryptos are ‘current account’ (not capital account) transactions—a stand that can be challenged.

“While there is no specific provision dealing with purchase of Bitcoins under the LRS and while RBI has not specifically banned crypto currencies in India, there remains ambiguity whether individuals would be permitted to purchase the same. Further, in the absence of clarity on whether crypto currencies amount to “currencies” or merely a “contract / digital asset” in the hands of the recipient, it would be difficult to classify the same for reporting under the LRS since the fields provided for reporting under the form do not provide for such a disclosure,” said Tushar Ajinkya, founder and managing partner, ThinkLaw. However, according to Jaideep Reddy, leader (technology law) at Nishith Desai Associates, the RBI has not clarified the treatment of crypto-assets under FEMA but has stated that they do not amount to currency.

“They could hence be treated as intangible assets like intellectual property or software. Import of an intangible asset is permitted as a current account transaction. However, every transaction has to be analysed according to its specific facts and context,” said Reddy. Even as ambiguity prevails on the use of LRS, investors are now grappling with the dilemma over disclosure. Resident Indians are required to mention details of foreign bank accounts (including accounts in which they are signing authorities), immovable properties, or other assets located outside the country.

Here, the question that crops up is: should resident Indians disclose their overseas crypto holdings while filing returns for the assessment year 2021-22? A spokesperson for the direct tax body CBDT refused to comment while the professional accounting body ICAI had no views to share on the subject. Some of the tax professionals have told their clients to avoid cryptos while investing under LRS. “We believe RBI does not allow the use of LRS for purchase of crypto currencies as these are not in the list of permitted securities specified for purchase under LRS. However, no action has been taken by RBI till now as it may not have collected the data,” said Rajesh P Shah, who heads the research committee of The Chamber of tax Consultants.



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