Whether exemption from open offer can be claimed in case of Gift of

 Shares?

SEBI issues informal guidance to Deepak Nitrite Limited under the Informal Guidance Scheme read with SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI LODR) Regulations, 2015 and clarifies on whether the Company is required to take approval of stock exchanges under Regulation 31A(2) of SEBI (LODR) Regulations, 2015 and also can the company claim exemption under Regulation 10(1) of SEBI (SAST) Regulations, 2011.

     The facts of the case are as follows:

•   Deepak Nitrite Limited is listed on BSE and NSE
• Mr. Chimanlal Mehta,  Mr. Deepak Mehta and Mr. Ajay Mehta  are the promoters of the Company
• Mr. Ajay Mehta is not holding any shares in the company and hence his name is not reflected in the   list of promoters and promoters group in the shareholding pattern filed by the Company under     LODR. 

However, he is disclosed as promoter in other earlier offer documents of the Company 

• Mrs. Kantaben Mehta – mother of Mr. Deepak Mehta and Mr. Ajay Mehta holds 9,70,000 equity shares in the company and is being shown as Promoter Group in the shareholding pattern.
• Mrs. Kantaben Mehta  is desiring to gift  9,00,000 shares to her grandson, Mr. Param Ajay Mehta( Son of Ajay Mehta), who is presently not holding any equity shares

     The Company has sought informal guidance on the following queries:

• Whether the proposed transaction should be treated as modification or reclassification of shares as per Regulation 31A(2)?
• Wether the company should obtain permission from BSE and NSE for the proposed transaction
• Whether the proposed transaction falls under Regulation 10(1) of SEBI (SAST) Regulations, 2011?

  SEBI has given the following answers to queries raised by the company:

Reply to Query 1 and 2:

Regulation 31A(2) states that the Stock Exchange, shall allow modification or reclassification of the status of the shareholders, only upon receipt of a request from the concerned listed entity or the concerned shareholders along with all relevant evidence and on being satisfied with the compliance of conditions mentioned in the regulation.

Post gift of shares, Mrs. Kantaben Mehta will hold 70,000 shares and Mr. Param Ajay Mehta will hold 9,00,000 equity shares. Mr. Ajay Mehta is not holding any shares at present and his name is also not reflected in the list of promoters. However, Mr. Param Ajay Mehta is an immediate relative of Mr. Ajay Mehta and hence he would be considered as a member under Regulation 2(1)(zb) of SEBI (ICDR) Regulations, 2009

 SEBI stated that proposed transaction is neither modification nor reclassification of the status of the shareholders.   Hence, the Company is not required to obtain permission from BSE and NSE.

Query 3:

Regulation 10(1) of SEBI (SAST) Regulations, 2011 deals with exemption from the obligation to make an open offer under Regulation 3 and Regulation 4 subject to fulfillment of conditions stipulated in Regulation 10

Transaction between grandson and grandmother is not exempted under SEBI (SAST) Regulations, 2011. After the proposed transaction, holding of Mr. Param Ajay Mehta will be 0.69% and that of the entire promoter group will be 46.57% [no change in entire promoter group] The proposed transaction would not trigger any open offer and hence claiming exemption under Regulation 10(1) of SEBI (SAST) Regulations, 2011 will not be required.

Whether Foreign Portfolio Investors can hold delisted Non-Convertible Debentures?

SEBI has issued informal guidance to Puranik Buildcon Private Limited wherein it is stated that a company is permitted to de-list from the relevant stock exchanges, the existing listed NCDs that has been subscribed by a Foreign Portfolio Investor (FPI) prior to the date of amendments in SEBI Foreign Portfolio Investors Regulations, 2014 (SEBI FPI Regulations) and Regulation 5(4) read with Schedule 5 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (FEMA Regulations) issued by Reserve Bank of India, coming into effect. However, if the company is involved in real estate business, capital market and purchase of land, FPI cannot be permitted to hold the NCDs after the same is delisted.

Facts of the case:

         The Company, Puranik Buildcon Private Limited is engaged in the real estate business.

       On 26^th April, 2016, company had issued and allotted secured, redeemable, non-convertible   debentures to a registered FPI and is solely held by them. The said NCDs are listed on BSE.

      At the time of issuance of the NCDs, as per SEBI Foreign Portfolio Investors Regulations, 2014 and Regulation 5(4) read with Schedule 5 of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000, a foreign portfolio investor was permitted to invest in listed debentures. 

    After allotment, relevant regulations were amended and FPIs were permitted to invest in unlisted NCDs issued by Indian Companies subject to certain conditions such as restrictions on the investment in real estate business, capital market and purchase of land

Pursuant to relevant amendments the Company has sought following informal guidance from SEBI

Whether NCDs can be delisted from the relevant stock exchanges which were subscribed by the FPI prior to the amendments coming into effect?

          Whether FPI can hold such de-listed NCDs after delisting?

SEBI stated that pursuant to relevant amendments and RBI Circular dated 17^th November, 2016 and SEBI circular dated 28^th February, 2017, FPIs are permitted to invest in unlisted corporate debt securities in the form of NCDs/bonds issued by public or private Indian Companies subject to conditions mentioned below viz., .

         End use-restrictions on the investment in real estate business,

        Capital market and

            Purchase of land

SEBI’s reply to above referred queries:

 1:

In this case FPIs are allowed to invest in unlisted NCDs subject to end use restriction on investment in real estate business, capital market or purchase of land.

2:

As the Company is engaged in real estate business, SEBI assumed that the proceeds of the said issue of NCDs might have been utilized for the real estate business. Hence, stated that FPIs cannot be permitted to hold the NCDs after the same is delisted.

Foreign Exchange Management (Cross Border Merger) Regulations, 2018

Reserve Bank of India (RBI) vide Notification No- FEMA. 389 /2018-RB [1]dated 20^th March, 2018 have notified the regulations relating to merger, amalgamation and arrangement between Indian companies and foreign companies. The regulations are called as Foreign Exchange Management (Cross Border Merger) Regulations, 2018. These regulations have defined various concepts such as Cross border Merger, Inbound merger, Outbound merger, Resultant Company etc.

Summary of the regulations can be referred from below table:

	Inbound Merger	Outbound Merger
Meaning	A cross border merger where the resultant company is an Indian company	A cross border merger where the resultant company is a foreign company
Issue or transfer any security	The resultant Indian Company may issue/transfer any security and/or a foreign security to Non Residents as per FDI Regulations, 2017. Where the foreign company is a JV/WOS/Step down subsidiary of Indian Company, it shall comply with Overseas Direct Investment (ODI) Regulations, 2004	A person resident in India may acquire/hold securities of the resultant Foreign company in accordance with the ODI Regulations, 2004. Further, in addition to above, a resident individual may acquire securities outside India within the limits prescribed under the Liberalized Remittance Scheme.
Office of the resultant company	An office outside India of the foreign Company shall be deemed to be the branch/office outside India of the resultant Indian Company.	An office in India of the Indian Company may be deemed to be a branch office in India of the resultant Foreign company.
Guarantees /Outstanding borrowings	Guarantees/outstanding borrowings of foreign company from overseas sources which become the borrowing of the resultant Indian company shall conform, within a period of two years, to the External Commercial Borrowing/ Trade Credit/ other borrowing norms. Further, the conditions with respect to end use shall not apply.	Guarantees/outstanding borrowings of Indian company shall be repaid as per the Scheme sanctioned by NCLT. The resultant company shall not acquire any liability payable towards a lender in India in Rupees which is not in conformity with the Act/ rules /regulations. No-objection certificate (NOC) to this effect should be obtained from the lenders in India of the Indian company
Acquire and hold any asset	- Resultant Indian Company can acquire/hold any asset outside India which they are permitted to acquire under the provisions of the Act, rules or regulations -  Resultant Indian Company shall sell such asset /security and extinguish any liability outside India which is not permitted under the provisions of the Act within a period of two years from the date of sanction of the Scheme. The sale proceeds to be repatriated to India immediately.	-  Resultant Foreign Company may acquire/hold any asset in India which they are permitted to acquire under the provisions of the Act, rules or regulations. -  Resultant Foreign Company shall sell such asset /security and extinguish any Indian liabilities which are not permitted under the provisions of the Act within a period of two years from the date of sanction of the Scheme. The sale proceeds to be repatriated outside India immediately.
Opening of  bank account	The resultant Indian Company may open a bank account in foreign currency in the overseas jurisdiction for transactions incidental to the merger for a maximum period of two years from the date of sanction of the Scheme by NCLT.	The resultant Foreign Company may open a Special Non-Resident Rupee Account (SNRR Account) in accordance with the Deposit Regulations, 2016 for transactions incidental to the merger for a maximum period of two years from the date of sanction of the Scheme by NCLT.

Other Conditions-

-          Any transaction on account of cross border mergers undertaken in accordance with these regulations shall be deemed to have prior approval of RBI. This will assist in curtailing timelines of cross border merger.

-          The valuation of the Indian company and the foreign company shall be done in accordance with Rule 25A of the Companies (Compromises, Arrangement or Amalgamation) Rules, 2016.

-          All the entities involved in the cross-border merger are required to comply with any regulatory action by the Government department on account of non-compliance, contravention, and violation, of any provision of Act, Rules or Regulations before going for merger.

-          If RBI prescribes to furnish any reports pursuant to the scheme of merger, the said reports shall be furnished within due dates.

-          Compliance Certificate from MD / WTD and Company Secretary, if any, to be filed with the application to the NCLT, ensuring the compliance of this Regulation.

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[1] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/CBM28031838E18A1D866A47F8A20201D6518E468E.PDF

Compounding of offences under FEMA

Reserve Bank of India (RBI) has been active in case of any non-compliance under Foreign Exchange Management Act, 1999 [hereinafter referred as “FEMA”]. RBI vide notification[1] have introduced the concept of payment of Late Submission Fee (LSF) for any delays in reporting of Foreign Direct Investment (FDI). The LSF is for reporting delays in FDI only. For other contraventions under FEMA, to make default good compounding is the only recourse.

With following FAQs let us understand compounding of offences under FEMA:

1.      What is Compounding of Offence?

§  Compounding refers to the process of voluntarily admitting the contravention, pleading guilty and pursuing redressal.

2.      What does Contravention Means?

§  Contravention is a breach of the provisions of the FEMA and prescribed rules/regulations issued thereunder.

3.      Who has the power to Compound?

§  Section 15 of FEMA provides that RBI/ officers of RBI and the Director of Enforcement/officers of the Directorate of Enforcement has the power to compound any contraventions  u/s 13 within 180 days from the date of receipt of compounding application.

4.      Which contraventions can be compounded?

§  Any contraventions under FEMA except dealing in/ transferring any foreign exchange or foreign security to any person not being an authorised person can be compounded. (section 3(a) of FEMA).

5.      Who is liable for payment of penalty under compounding?

§  Any person who, at the time the contravention was committed, was in charge of, and was responsible to, the company for the conduct of the business of the Company and the Company.

§  For the purpose of this, company refers any body corporate and includes a firm or other association of individuals.

6.      What is the maximum amount of penalty?

§  Where the amount involved is quantifiable- Up to thrice the sum involved in such contravention

§  Where the amount involved is not quantifiable- Up to Rs.2 lakhs

§  Where such contravention is a continuing one- Further penalty which may extend to Rs.5,000 for every day after the first day during which the contravention continues.

7.      What is the process for compounding?

§  Any person who contravenes any provision of the FEMA can apply for compounding to the RBI by making application along with the prescribed documents and payment of prescribed fees (As of now the compounding fees is  Rs. 5,000 only).

§  On receipt of the application along with prescribed fees for compounding, RBI shall examine the application and whether contravention is quantifiable and if so, the amount of contravention.

§  RBI may call for any information, record or any other additional documents & if applicant fails to submit then the compounding application shall be liable for rejection.

§  After this, RBI calls upon personal hearing. In case a person opts not to attend the personal hearing he may indicate his preference in writing. The application would be disposed of on the basis of documents submitted to the Compounding Authority. It may be noted that appearing for or opting out of the personal hearing does not have any bearing whatsoever on the amount imposed in the compounding order

§  On the basis of all the details submitted, RBI will levy penalty on the applicant as per guidance note provided in Master Directions.

8.      How much amount of penalty is levied?

Master directions provides guidance note for the amount of penalty to be levied. The same is detailed here below:  

Overseas Direct Investment (ODI)	Formula
Non reporting/delay in reporting of acquisition/setup of subsidiaries/step down subsidiaries /changes in the shareholding pattern	Fixed amount : Rs10000/- (applied once for each contravention in a compounding application) + Variable amount as under: ·         Up to 10 lakhs: 1000 per year ·         Above Rs.10 lakhs & below Rs. 40 lakhs: 2500 per year ·         Rs.40 lakhs or more and below Rs. 100 lakhs: 7000 per year ·         Rs.1-10 crore : 50000 per year ·         Rs.10 -100 Crore : 100000 per year ·         Above Rs.100 Crore : 200000 per year
Annual Performance Report (APR)/Share certificate delays In case of non-submission/ delayed submission of APR/ share certificates	Rs.10000/- per APR delayed. Delayed receipt of share certificate –Rs.10000/- per year, the total amount being subject to ceiling of 300% of the amount invested.
Corporate Guarantee Issue of Corporate Guarantees without Unique Identification Number (UIN)/without permission wherever required /open ended guarantees or any other contravention related to issue of Corporate Guarantees.	Rs.500000/- + given percentage: 1st year : 0.050% 1-2 years : 0.055% 2-3 years : 0.060% 3-4 years : 0.065% 4-5 years : 0.070% >5 years : 0.075% In case the contravention includes issue of guarantees for raising loans which are invested back into India, the amount imposed may be trebled.
External Commercial Borrowings (ECB)
Non submission of ECB statements or any other reporting contraventions	Fixed amount : Rs10000/- (applied once for each contravention in a compounding application) + Variable amount as under: ·       Up to 10 lakhs: 1000 per year ·          Above Rs.10 lakhs & below Rs. 40 lakhs: 2500 per      year ·         Rs.40 lakhs or more and below Rs. 100 lakhs: 7000 per year ·     Rs.1-10 crore : 50000 per year ·      Rs.10 -100 Crore : 100000 per year      Above Rs.100 Crore : 200000 per year
Liaison Office/Branch Office/Project Office (LO/BO/PO)
Reporting contraventions	Fixed amount : Rs10000/- (applied once for each contravention in a compounding application) + Variable amount as under: ·   Up to 10 lakhs: 1000 per year ·      Above Rs.10 lakhs & below Rs. 40 lakhs: 2500 per year ·         Rs.40 lakhs or more and below Rs. 100 lakhs: 7000 per year ·      Rs.1-10 crore : 50000 per year ·       Rs.10 -100 Crore : 100000 per year      Above Rs.100 Crore : 200000 per year Subject to ceiling of Rs.2 lakhs. In case of PO, the amount imposed shall be calculated on 10% of total project cost.
2] Annual Activity Certificate(AAC) delays In case of non-submission/ delayed submission of AAC	Rs.10000/- per AAC Return delayed.
Non-Reporting contraventions	Rs.30000/- + given percentage: 1st year : 0.30% 1-2 years : 0.35% 2-3 years : 0.40% 3-4 years : 0.45% 4-5 years : 0.50% >5 years : 0.75% (For project offices the amount of contravention shall be deemed to be 10% of the cost of project).

Foreign Direct Investment (FDI )	Contraventions before 7th November, 2017 ( Non reporting/Delay in reporting)	[2]Contraventions after 7th November, 2017 (Non reporting)
Reporting inward remittance for issue of shares.(ARF)	Fixed amount : Rs10000/- (applied once for each contravention in a compounding application) + Variable amount as under: Up to 10 lakhs: 1000 per year ·Above Rs.10 lakhs & below Rs. 40 lakhs: 2500 per year ·Rs.40 lakhs or more and below Rs. 100 lakhs: 7000 per year Rs.1-10 crore : 50000 per year ·Rs.10 -100 Crore : 100000 per year ·Above Rs.100 Crore : 200000 per year	Rs.50000/- + given percentage: 1st year : 0.50% 1-2 years : 0.55% 2-3 years : 0.60% 3-4 years : 0.65% 4-5 years : 0.70% > 5 years : 0.75%
Reporting of Allotment (Form FC-GPR
Reporting of transfer of shares from Resident to Non-Resident and Non- Resident to Resident. (form FC-TRS)
Non-allotment of shares or allotment/ refund after the stipulated 180 days	Rs.30000/- + given percentage: 1st year : 0.30% 1-2 years : 0.35% 2-3 years : 0.40% 3-4 years : 0.45% 4-5 years : 0.50% >5 years : 0.75% (For project offices the amount of contravention shall be deemed to be 10% of the cost of project).
In case of non-submission/ delayed submission of FCGPR (B) / FLA Return	Rs.10000/- per FCGPR(B) /FLA Return delayed	Rs.10000/- per FCGPR(B) /FLA Return delayed

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[1] Notification No. FEMA 20(R)/ 2017-RB dated 7th November, 2017

[2]  As per Master Direction on Reporting under Foreign Exchange Management Act, 1999 (Updated as on March 16, 2018) , Late Submission Fees (LSF) will be applicable for reporting delays only and such LSF shall be applicable for the transactions undertaken on or after November 7, 2017