Annual Return on Foreign Liabilities and Assets (FLA) is now additionally required for AIFs, Partnership Firms

Reserve Bank of India (RBI) vide RBI/2018-19/226 A.P. (DIR Series) Circular No. 37 have introduced Reporting in Foreign Liabilities and Assets Information Reporting (FLAIR) system wherein the annual return on Foreign Liabilities and Assets (FLA) is required to be submitted by the entities which have received FDI (Foreign Direct Investment) and/or made FDI abroad (i.e. overseas investment/ODI) in the previous year(s) including the current year i.e. who holds foreign assets or/and liabilities in their balance sheets. With the introduction of this system the existing mechanism of email-based submission of FLA forms is discontinued. These directions are effective from 28^th June, 2019.

Highlights of the revised reporting system are as follows:

1. Additionally following entities are required to file FLA - SEBI registered Alternative Investment Funds (AIFs) , Partnership Firm, Public Private Partnerships (PPP) etc.
2. A Web-portal interface has been introduced for reporting on which all entities need to register
3. RBI shall provide Login Name and Password after successful registration on the web-portal through which FLA submission can be made.
4. Reporting entities will get system-generated acknowledgement receipt upon successful submission of the form.
5. Investor-wise direct investment, information on FATS related variables, other financial details along-with information on first year of receipt of FDI/ODI and disinvestment are required to be provided.
6.  Entities can revise, view, download the data/information submitted.
7.  Entities can submit FLA information for earlier year/s after receiving RBI confirmation on their request email.

Last date of FLA form submission is July 15, 2019. Non submission of FLA within prescribed time will be treated as non-compliance under Foreign Exchange Management Act, 1999.

DPT 3

Whether the loan taken from foreign body corporate will be treated as Deposit?

Deposit is defined u/s 2(31) of the Companies Act, 2013 (the 'Act') which states that "deposit" includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India. Any money falling under prescribed 18 categories prescribed in rules are not considered as deposit.

The question which is discussed in this article is:

Whether the loan taken from foreign body corporate will be treated as Deposit 

Provision:

Rule 2(c) of Companies (Acceptance of Deposit) Rules, 2014 defines deposit as-

Deposit" includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include –

(ii) any amount received from foreign Governments, foreign or international banks, multilateral financial institutions (including, but not limited to, International Finance Corporation, Asian Development Bank, Commonwealth Development Corporation and International Bank for Industrial and Financial Reconstruction), foreign Governments owned development financial institutions, foreign export credit agencies, foreign collaborators, foreign bodies corporate and foreign citizens, foreign authorities or persons resident outside India subject to the provisions of Foreign Exchange Management Act, 1999 (42 of 1999) and rules and regulations made there under;

Analysis:

In this, we have to look into the following:

1.Whether the amount is received from any of party mentioned in rule 2(c)(ii) – Yes(loan is taken from Foreign body Corporate) 

2.Whether the Company has complied with the provisions of FEMA Act

If the answer to the question 2(above) is YES, the loan received by the company from the foreign body Corporate will not be treated as deposit. It is imperative to note that the any amount from foreign parties as mentioned in rule 2(c)(ii) is subject to the compliance of FEMA though the e-form DPT-3 provides for the compliance of FEMA in case of amount received from Persons residents outside India. To exclude the amount from the purview of deposit, both the conditions are required to be complied with.

Conclusion:  

Any amount received from the foreign parties if is in compliance of FEMA Act, is excluded from the purview of deposit.

Are you interested in buying property outside India?

Reserve Bank of India (RBI) vide Foreign Exchange Management (Acquisition and transfer of immovable property outside India) Regulations, 2015 have framed provisions for prohibiting, restricting or regulating the acquisition or transfer of immovable property outside India by persons residents in India. Let’s take a look at the provisions by which property can be purchased/ acquired by a person resident in India. 

The modes through which property can be purchased/acquired outside India:

1. Pursuant to Section 6(4) of Foreign Exchange Management Act (FEMA): An individual Resident Indian can hold immovable property situated outside India, if property was acquired when that individual was Non Resident Indian.
2. A resident individual  acquires the property as an Inheritance/ gift from a person
3. Remittance out of Resident Foreign Currency (RFC) account
4. An individual resident receives the Gift from persons at (b) & (c) above, provided he is a relative of such persons
5. An individual resident Indian acquires/purchases property Under Liberalised Remittance Scheme (LRS)  - Under the LRS, Authorised Dealers may freely allow remittances by resident individuals up to USD 2,50,000 per Financial Year (April-March) for any permitted current or capital account transaction or a combination of both.  The restrictions mentioned in Immovable Property Regulations do not apply to acquisition of property outside India by a person resident in India on a lease not exceeding five years.
6. An individual resident Indian acquires/purchases property jointly with a resident relative  -  Remittances under the LRS can be consolidated in respect of family members subject to individual family members complying with its terms and conditions. However, clubbing is not permitted by other family members for capital account transactions such as opening a bank account/investment/purchase of property, if they are not the co-owners/co-partners of the overseas bank account/ investment/property Resident individuals are permitted to include resident relative(s) as joint holder(s) in their Resident Foreign Currency account on ‘former or survivor’ basis. However, such resident Indian relative joint account holder shall not be eligible to operate the account during the life time of the resident account holder.
7. Individual resident with Non Resident relative:- An Individual resident Indian can acquire immovable property outside India jointly with a relative who is a person resident outside India, provided there is no outflow of funds from India.
8. Indian company having overseas offices

 

AN ADVANCE BEYOND 365 DAY –DEPOSIT?

If Business advance received from a Company is not appropriated for either supply of goods or providing services within 365 days, will it be treated as a Deposit?

Introduction:

Deposit is defined u/s 2(31) of the Companies Act, 2013 (the 'Act') which states that "deposit" includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India. Any money falling under prescribed 18 categories prescribed in rules are not considered as deposit.

The question which we are discussing in this article is as follows:

Amount received by the Company from another Company as business advance for the purpose of either supply of goods or provided services; not appropriated for the purpose within 365 days from the date of acceptance of such advance – will that amount be treated as deposits?

For the purpose of this question, following provisions are important

Rule 2(c) of Companies (Acceptance of Deposit) Rules, 2014 defines deposit as-

Deposit" includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include – …

(vi) any amount received by a company from any other company; …
(xii) any amount received in the course of, or for the purposes of, the business of the
company,-

(a) as an advance for the supply of goods or provision of services accounted for in any manner whatsoever provided that such advance is appropriated against supply of goods or provision of services within a period of three hundred and sixty five days from the date of acceptance of such advance:

Provided that in case of any advance which is subject matter of any legal proceedings before any court of law, the said time limit of three hundred and sixty five days shall not apply: …

Analysis:
Now the question is
1. Whether the money received by the Company is from another Company? – Yes
2. (a) Whether the money received by the Company is from another Company as business advance? - Yes
(b) Whether the money received by the Company is from another Company as business advance is appropriated for the purpose of either supply of goods or provided services within 365 days from the date of acceptance of such advance? No

It is imperative to note that the condition mentioned under sub-clause (vi) is fully complied whereas the condition mentioned under sub-clause (xii) is half complied

Out of the 18 categories, none of exclusions states that if conditions are not complied money received will be considered as deposit except under sub-clause (vii) viz., if the allotment is not made within 60 days from the date of share application money received, it will be considered as deposit.

Conclusions:
If the money is received in full compliance of either under rule 2(c)(vi) or rule 2(c)(xii), then that money gets exempted from the definition of deposit.

Thus, any money received by a company from another company, regardless of the purpose it will be covered under rule 2(c)(vi) and will not be considered as deposit even if it falls under other categories of exclusions prescribed in rules.

An Insight on Demand Notice under IBC

Demand Notice: To initiate a Corporate Insolvency Resolution Process (hereinafter referred to as "CIRP") under the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as, the "IBC Code"), the creditor is required to deliver a demand notice to the Corporate Debtor demanding payment of the operational debt in respect of which the default has occurred.

Explanation to section 8 of IBC Code states that, a “demand notice” means a notice served by an operational creditor to the corporate debtor demanding payment of the operational debt in respect of which the default has occurred.

Details in the notice: The demand notice contains the following details:

• The total amount of debt,
• The details of transactions,
• Date from which the debt begin accruing,
• Amount claimed by the creditor,
• Particulars of securities held by the creditor (if any),
• Records of previous defaults (if any),
• Documents supporting the claim filed by the creditor, etc.

Form of Notice: A demand notice can be submitted in Form No.3 or a copy of an invoice attached with a notice in Form 4 as per Rule 5(1) of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.

Payment pursuant to notice: The payment of debt is required to be made within 10 days of demand notice. The corporate debtor within 10 days of the receipt of demand notice or copy of invoice may bring to the notice of the operational creditor:-

a)      Existence of a dispute, if any and record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute

 OR

b)      Make the payment of unpaid operational debt by

i)         sending an attested copy of electronic transfer record of unpaid amount from the bank account of the corporate debtor; OR

ii)        by sending an attested copy of record that the operational creditor has encashed a cheque issued by corporate debtor

Modes of Delivery of Notice: The demand notice can be delivered to the corporate debtor at the registered office with acknowledgement due in following modes by  

• hand OR
• registered post OR
• speed post OR
• Electronic mail (E-mail) service to a whole time director or designated partner or key managerial personnel, if any

Voluntary Retention Route’ (VRR) for Foreign Portfolio Investors (FPIs) investment in debt

Reserve Bank of India (RBI) vide RBI/2018-19/187 A.P. (DIR Series) Circular No.34 [1] dated May 24, 2019 have amended Voluntary Retention Route’ (VRR) Scheme for Foreign Portfolio Investors (FPIs) investment in debt. This scheme was introduced by RBI vide circular [2] dated March 1, 2019 to enable FPIs to invest in debt markets in India. but on the feedback received the Scheme have been revised.

These investments will be free of the macro-prudential and other regulatory norms applicable to FPI investments in debt markets, provided FPIs voluntarily commit to retain a required minimum percentage of their investments in India for a period.

Gist of VRR Scheme after changes is highlighted below:

1. Definitions
Committed Portfolio Size (CPS), General Investment Limit, Related FPIs, Retention Period, Repo and Reverse Repo, VRR-Corp and VRR-Govt, VRR- Combined have been defined under the scheme.

2. Eligible investors

Any FPI registered with SEBI is eligible to participate through this Route. Participation through this Route shall be voluntary.

3. Eligible instruments

• For VRR-Govt- Any Government Securities i.e., Central Government dated Securities (G-Secs), Treasury Bills (T-bills) and State Development Loans (SDLs).

• For VRR-Corp- Any instrument listed under Schedule 5 of FEM (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 dated November 07, 2017, other than dated Government securities/ treasury bills and Units of domestic mutual funds.

• Repo transactions and Reverse repo transactions

4. Features

• Investment through this Route shall be in addition to the General Investment Limit.
• Cap of Investment through this route for shall be capped at Rs. 75000 crore or higher, which shall be allocated among VRR-Govt , VRR – Corp and VRR- Combined as may be decided by RBI.
• The mode of allotment, allocation to VRR-Govt and VRR-Corp categories and the minimum retention period shall be announced by the Reserve Bank ahead of allotment.
• No FPI (including its related FPIs) shall be allotted an investment limit greater than 50% of the amount offered for each allotment by tap or auction in case there is a demand for more than 100% of amount offered.
• The minimum retention period shall be three years, or as decided by RBI for each allotment.
• FPIs shall invest the amount allocated, called the Committed Portfolio Size (CPS) in the relevant debt instruments and remain invested at all times during the voluntary retention period, subject to the certain relaxations.

5. Key changes of the revised VRR scheme:

• Introduction of a separate category, viz., VRR-Combined
• The requirement to invest at least 25% of the Committed Portfolio Size within one month of allotment has been removed
• FPI are provided with an additional option at the end of the retention period, viz., continue to hold their investment until the date of maturity or the date of sale, whichever is earlier.

6. The provisions for management of portfolio, other relaxations, auction process for allocation and hedging of exchange rate risk on account of investments made under the Voluntary Retention Route (VRR) have been provided in the circular.

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[1] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/APDIR187VRR1BB1700685F042D1A4F868415C6C91F5.PDF

[2] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT1351FEEE1395FD24E55842D4968AA7EF9AE.PDF

The Art of Selling Business

The Art of Selling Business

Why the deal? In most cases, the business owners sell their businesses for lifestyle, not financial, reasons. Usually, the return on the sale of successful businesses, after taxes, tends to be lower than what the owner was earning out of the business. Where sale is for lifestyle reasons, it’s likely that there is some flexibility in that date and accordingly, the deal price can vary a lot.

Primary Drivers for sale price:

·         Earnings or Owner’s Cash Flow

·         Market Multiple

Timing the sale: The best time to sell is when both Earnings and Market multiple are high. If the economy goes into a recession, both those numbers will probably go down and this can result in a much lower sale price than what you would have gotten before the recession.

Investors’ Expectation: The owner will then be expected to return the earnings to a higher level for about a year before a buyer will see the higher results and take those into account in presenting an offer. Buyers don’t just look at historical figures; they also look at the expected future outlook. If the sales and profits start to go down, a buyer may pull out of a deal or offer a lower price.

CASE Study: Let’s have a look at how the Sahara group – Air Sahara exited the aviation industry at peak and saved itself from the punitive conditions that haunt the industry till date.

The need to get your business on the market may not seem urgent when everything looks rosy, but it in fact is, if now is the right time.

• By 2007, Air Sahara had a market foothold of 12%
• In April 2007, Jet Airways, the then leading airline, acquired Air Sahara for a sum of INR 1,450 Cr. and continued operations as a wholly owned subsidiary under the name Jet Lite (India) Ltd.
• The deal helped the Sahara Group exit the airline business and concentrate on its other businesses-financial services, publishing and real estate
• The airline industry by that time had become extremely competitive as the costs incurred by the airlines were on the rise and they were unable to hike their fares
• All airlines slid deep into red with the combined losses of industry being INR 48 bn
• The operating margins in 2007-08 were at a negative 15 percent as the airlines could not pass cost on to the customers because of intense competition.
• The economic downturn of 2008-09 worsened the situation as the operating profits reduced further.
• By FY 2017-18, Jet Lite (India) Ltd. contributed 44% to the consolidated losses of its parent Jet Airways Ltd., thereby adding to the woes of the now distressed airline

Waiting to sell could mean you have to work many more years before you can get a good enough price to afford to do so. The need to get your business on the market may not seem urgent when everything looks rosy, but it in fact is, if now is the right time.

Informal Guidance on hosting of financials of subsidiaries on website of Holding Company

Background:-

Under SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015 (SEBI LODR Regulations), pursuant to an amendment on 9 May 2018, Reg 46 was amended by way of insertion of Reg 46(2)(s) which provides that the separate audited financial statements of each subsidiary of the listed entity, in respect of relevant financial year, be uploaded on the website of the listed entity at least 21 days prior to the date of the Annual General Meeting which has been called to inter alia consider the accounts of that financial year. This amendment is effective from 1^st April 2019.

There was already a similar requirement under 4^th proviso to Section 136(1) of the Companies Act, 2013, which provided that every listed company having subsidiary or subsidiaries shall place separate audited accounts in respect of each of subsidiary on its website, if any. Under 5^th proviso to Section 136(1), an exemption is given for listed companies having foreign subsidiaries, as follows:-

·         where foreign subsidiary is statutorily required to prepare consolidated financial statement under any law of the country of its incorporation, the requirement of this proviso shall be met if consolidated financial statement of such foreign subsidiary is placed on website of the Company.

·         where foreign subsidiary is not required to get its financial statement audited under any law of the country of its incorporation and which does not get such financial statement audited, the holding Indian listed company may place such unaudited financial statement on its website

·         where such financial statement is in a language other than English, a translated copy of the financial statement in English shall also be placed on website.

On comparison of this Section 136(1) under Companies Act, 2013 and Regulation 46(2)(s) of SEBI LODR Regulations, following are the key points:-

1.      The Companies Act does not provide for timeline of hosting the audited financial statements on website of the Company. However, SEBI LODR Regulations provide the timeline of hosting, i.e., at least 21 days prior to the date of Annual General Meeting (presumably of the listed company though it is not clearly mentioned so in SEBI LODR Regulations).

2.      The exemption in case of foreign subsidiaries provided under Companies Act, 2013 is not provided under SEBI LODR Regulations.

Hence there was an ambiguity as to whether the exemption under Companies Act, 2013 for foreign subsidiaries can be claimed even for the purpose of SEBI LODR Regulations (as SEBI LODR Regulations are silent in this regard)?

Facts of the Case:-

1.      HCL Technologies Ltd (“the Company”) has 125 foreign direct / step down subsidiaries, in addition to certain direct / step down subsidiaries in India. During financial year 2018-19, the Company had acquired a Company named Actian Corporation (“Actian”) in Delaware, USA having 15 direct / step down subsidiaries, out of which 13 entities were foreign direct / step down subsidiaries.

2.      In accordance with the laws of countries of incorporation of Actian and /or some of its foreign direct / step down subsidiaries, there is no statutory requirement to get the annual financial statements audited. However, Actian shall be preparing audited consolidated financial statements in accordance with the local GAAP of the country of its incorporation.

3.      By claiming the exemption provided under Section 136(1) of Companies Act, 2013, the Indian listed Company proposed to place on its website 21 days prior to its date of AGM the following:-

(a)    The audited consolidated financial statements prepared by Actian

(b)   Unaudited financial statements of those direct / step down subsidiaries, where there is no statutory requirement to get the financial statements audited as per local laws of the countries of their incorporation

(c)    Audited financial statements of those direct / step down subsidiaries, where there is a statutory requirement to get the financial statements audited as per local laws of the countries of their incorporation

Query Asked:-

1.      Whether hosting the above mentioned documents on website of Company in accordance with Section 136(1) of the Companies Act, 2013 would meet the compliance requirement under Regulation 46 of SEBI LODR Regulations?

2.      Can they follow same practice for all of their foreign direct / step down subsidiaries?

Reply given by SEBI:-

SEBI has re-iterated the exemption provided under Section 136(1) of Companies Act, 2013 and replied that if the same is followed, then it shall meet the compliance requirement under Regulation 46 of SEBI LODR Regulations.

Copy of the Informal Guidance by SEBI can be accessed at the below link:

https://www.sebi.gov.in/sebi_data/commondocs/may-2019/SEBI%20Letter%20-%20Informal%20Guidance%20issued%20in%20the%20matter%20of%20HCL%20Technologies%20Limited_p.pdf