Monday 30 March 2020

EVOLUTION OF FOREIGN EXCHANGE REGULATIONS IN INDIA


v  Foreign Exchange Regulation Act, 1947 and Foreign Exchange Regulation Act, 1973
Scarcity of Foreign Exchange in India led to its control since the beginning of World War II.  Exchange control was introduced in India under the Defence of India Rules on September 3, 1939 on a temporary basis. The statutory power for exchange control was provided by the Foreign Exchange Regulation Act (FERA) of 1947.
Foreign Exchange Regulation Act, 1947 was enacted initially for a period of ten years in temporary basis. However, 10 years of economic development did not ease the foreign exchange constraint, FERA permanently entered the statue book in the year 1957. Subsequently, Foreign Exchange Regulation Act, 1947 was replaced by the Foreign Exchange Regulation Act, 1973 (FERA, 1973), which came into force with effect from January 1, 1974. FERA, 1973 came into force, for regulating certain payments, dealings in foreign exchange and securities, transactions indirectly affecting foreign exchange and the import and export of currency, for the conservation of the foreign exchange resources of the country and the proper utilization thereof in the interests of the economic development of the country.

v  Foreign Exchange Regulation Act, 1973, ‘The Major Constraints’

·  In the year 1974, FERA was completely overhauled with all violations being considered as criminal offences with mens rea. The Enforcement Directorate was empowered to arrest any person without even an arrest warrant.

·  In 1991 government of India initiated the policy of Economic Liberalization, Privatization and Globalization. Foreign investments in many sectors were permitted. This resulted in increased flow of foreign exchange in India and foreign exchange reserves increased substantially, hence the government engaged itself in framing a law containing a comprehensive framework for dealing and regulating the foreign exchange inflow and outflow in India.

·  In 1997, the Tarapore Committee on Capital Account Convertibility (CAC) constituted by the Reserve Bank, which recommended change in the legislative framework governing foreign exchange transactions.

·  Keeping in view the changed environment, the Foreign Exchange Management Act (FEMA) was enacted in 1999 to replace FERA. FEMA became effective from June 1, 2000. The philosophical approach was shifted from that of conservation of foreign exchange to the management of foreign exchange,  facilitating trade and payments as well as developing orderly foreign exchange market.

Authorities governing the enforcement of FEMA

·      Foreign Exchange Department of Reserve Bank of India (RBI) – fema.rbi.org.in
· Directorate of Enforcement, Department of Revenue, Ministry of Finance- http://directorateofenforcement. gov.in
· Capital Markets Division, Department of Economic Affairs, Ministry of Finance – http:// finmin.nic.in/the ministry/dept eco affairs/
· Investment Division, Department of Economic Affairs, Ministry of Finance - https://dea.gov.in/divisionbranch/investment-division#IT
· Foreign Trade Division, Department of Economic Affairs, Ministry of Finance – http:// finmin.nic.in/theministry/dept eco affairs/

Machinery responsible for various aspects of FEMA
·      Enforcement Directorate
·      Adjudicating Authority
·      Special Director (Appeals)
·      Appellate Tribunal 
·      Foreign Exchange Department of RBI
·      Foreign Investment Promotion Board*
·      Department for Promotion of Industry and Internal Trade (DIPP)**


*Erstwhile FIPB was mandated to play an important role in the administration and implementation of the Government’s FDI policy. The Central Government has since abolished the Foreign Investment Promotion Board, and the work of granting of approval for foreign investment has been entrusted to the concerned Administrative Ministry/Department vide office Memorandum issued by Ministry of Finance F.No. 01/01/FC12017 –FIPB dated 5th June, 2017.

**The Department for Promotion of Industry and Internal Trade (DIPP) was established in 1995 and has been reconstituted in the year 2000 with the merger of the Department of Industrial Development. DIPP is responsible for formulation and implementation of promotional and developmental measures for growth of the industrial sector, keeping in view the national priorities and socio-economic objectives. The government has notified changed the name of the Department of Industrial Policy & Promotion (DIPP) to the Department for Promotion of Industry and Internal Trade (DPIIT) under the Ministry of Commerce and Industry. The DPIIT shall also be responsible for (a) the promotion of internal trade (including retail trade); (b) the welfare of traders and their employees;(c) matters relating to facilitating Ease of Doing Business; and (d) matters relating to start-ups.

Type of transactions under FEMA

v  Capital account transaction (CAT) -These transactions are of capital nature. It alters assets or liabilities including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India,. CAT are regulated by Foreign Exchange Management (Permissible Capital Account Transactions) regulations, 2000 and covers, among others, the following transactions:
·      Foreign Direct Investment (FDI);
·      Overseas Direct Investment (ODI);
·      External Commercial Borrowings (ECBs);
·      Sale and purchase of Immovable property either in or Outside India;
·      Investment in firms or proprietary concerns in India.

v  Current account transaction (CuAT)-These transactions  other than capital account transactions. CuAT are regulated by Foreign Exchange Management (Current Account Transaction) rules, 2000. Most of the current account transactions do not require the Reserve Bank’s prior approval. Approval of the Reserve Bank is required for those transactions listed in Schedule–III to the Foreign Exchange Management (Current Account Transactions) Rules, 2000, where the remittance to be made is beyond the stipulated limit.

Important change under FEMA regulating governing CAT

The Finance Act,  amended Section 6 (Capital Account Transaction), Section 46 (Power of Central Government to make rules) and section 47 (Power of RBI to make rules) of the Foreign Exchange Management Act, 1999 (FEMA, 1999). These amendments has the effect of  altering the powers of the Central Government and Reserve Bank of India (RBI).

 In terms of  amended prosions of FEMA, the Central Government has made Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 ("NDI Rules") on October 17, 2019 superseding the erstwhile Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017 ("TISPRO") and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018, whereas RBI has notified Foreign Exchange Management (Debt Instruments) Regulations, 2019 superseding TISPRO, and the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019, which provides for reporting requirements in relation to any investment made under the NDI Rules.

v  Non-Debt Instruments:
·      All investments in equity in incorporated entities (public, private, listed, unlisted)
·      Capital participation in LLPs
·      Instruments of investment as in FDI policy
·      investment in units of Alternative Investment Funds, Real Estate Investment Trust and Infrastructure Investment Trusts;
·      investment in units of mutual funds and Exchange-Traded Fund which invest more than fifty per cent in equity;
·      Juniormost layer (e.g. equity tranche) of securitization structure
·      Acquisition, sale or dealing directly in immovable property
·      Contribution to trusts
·      Depository receipts issued against equity instruments

v  Debt Instruments

Debt  Instruments means all instruments other than non-debt instruments enumerated above.

v  Hybrid  Securities: A definition of “hybrid securities ” has been included in the Non-Debt Rules.

v  Hybrid securities means s instruments such as optionally or partially convertible preference shares or debentures and other such instruments as specified by the Central Government from time to time, which can be issued by an Indian company or trust to a person resident outside India.

However, the Non Debt Rules, as notified by the Central Government do not contain any provision regarding FDI in the hybrid securities. For the reason not apparently clear Reserve Bank of India have yet frame directions regarding the Non Debt incorporated Rules and Debt Regulations

Key Changes in Reporting Machanism of Foreign Direct Investment in India since 1973 till March 2020


v  Physical Form
From the time of introduction of the FERA and FEMA, 1999 and till 2016, reporting was to be made in physical form.

v  e-Biz platform
Later, with a view to promote the ease of reporting of transactions related to Foreign Direct Investment (FDI), RBI has enabled online filing of the returns through the e-Biz portal. On 1st February 2016, RBI vide AP (DIR) Series Circular No. 40 (Ref Notification No. RBI/2015-16/303) introduced the concept of online filing/ reporting through e-Biz platform (http://www.ebiz.gov.in). which was made effective from 8th February 2016.

v  FIRMS (Foreign Investment Reporting and Management System)
With the objective of integrating the extant reporting structures of various types of foreign investment in India, RBI vide A.P (DIR) Circular No. 30 dated 7th June 2018 (Ref Notification No. RBI/2017-18/194) introduced Single Master Form (SMF), which shall be filed online. This form provides facility for reporting of total foreign investment in an Indian entity as per FEMA FDI Regulations, 2017. SMF is a master form containing 9 reports. They are FC-GPR, FC-TRS, LLP-I, LLP-II, CN, ESOP, DRR, DI and InVi. which was made effective from 1st September 2018.

Thursday 26 March 2020

Upcoming Mandatory Compliance by Listed Companies towards "Good Corporate Governance"

1.   An Introduction

The Market Regulator, Securities and Exchange Board of India (SEBI) issued amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulation, 2015 vide its circular dated 09th and 10th May 2018 taking into consideration the recommendations issued by Kotak Committee under the chairmanship of Mr. Uday Kotak in the field of Good Corporate Governance. Most of the amendments were effective w.e.f. 1st April, 2019, while other amendments applicable on listed entities w.e.f. 1st April, 2020. This article will acquaint readers about those amendments which are decided to be effective from 01.04.2020.

Explanation for reader: The top 500 and 1000 entities shall be determined on the basis of market capitalisation, as at the end of the immediate previous financial year.

2.   Amendments to be effective from 01st April 2020

  v  Composition of Board

A proviso to Regulation 17 (1)(a) has been inserted which reads as:

Provided that the Board of directors of the top 500 listed entities shall have at least one independent woman director by April 1, 2019 and the Board of directors of the top 1000 listed entities shall have at least one independent woman director by April 1, 2020; “

Commentary: The women director is now proposed to be independent for top 1000 Listed entities. At present, most of the women directors are either from the family of the promoters or the wife/daughter of the directors. Therefore, in order to increase gender diversity on the Board and reduce the biasness to make the board effective.  the SEBI took such initiative.

  v  Minimum no. of directors in listed entities
  
       New sub-clause to regulation 17(1)(c) as appended below:
“the board of directors of the top 1000 listed entities (with effect from April 1, 2019) and the top 2000 listed entities (with effect from April 1, 2020) shall comprise of not less than six directors.”

Commentary: The proposed amendment mandates the minimum no. of directors to be not less than six, which is double the requirement for public companies as prescribed under Companies Act 2013, for the top 2000 listed entities.

 v Separation of role of Non-Executive Chairman and Managing Director/Chief Executive Office (MD/CEO)
  
       New sub-clause to regulation 17(1B) as appended below:
“(1B). With effect from April 1, 2020, the top 500 listed entities shall ensure that the Chairperson of the board of such listed entity shall -

(a) be a non-executive director;

(b) not be related to the Managing Director or the Chief Executive Officer as per the definition of the term “relative” defined under the Companies Act, 2013”

Commentary: In order to ensure working of the board in best interest of the Company and all stakeholder, the Chairman of 500 listed would required to be a non-executive director and not related to MD or the CEO in light of definition of relative provided under the Companies Act, 2013.

However, the SEBI as on January 10, 2020 vide notification No. SEBI/ LAD-NRO/GN/2020/02. notified Securities and Exchange Board Of India (Listing Obligations And Disclosure Requirements) (Amendment) Regulations, 2020, hence in the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, in regulation 17 (1B), the number “2020” shall be substituted by the number “2022”, which means the amended regulation 17(IB) shall be effective from 01.04.2022. 


v  Quorum of BM

New regulation 17(2A) as appended below:

“(2A) The quorum for every meeting of the board of directors of the top 1000 listed entities with effect from April 1, 2019 and of the top 2000 listed entities with effect from April 1, 2020 shall be one-third of its total strength or three directors, whichever is higher, including at least one independent director”

Commentary: The proposed regulation requires 1/3rd of the total strength or 3 directors, whichever is higher, including at least one independent director, w.e.f. 01.04.2020 for top 2000 listed entities. As this is more stringent than provisions as specified in Companies Act 2013, which requires the presence of 1/3rd of the total strength or 2 directors, whichever is higher, for a valid meeting , this amendment was inserted  so that strength of board increased would be enhance along with presence of at least one independent director to ensure the working of board in best interest of all stakeholders especially minority shareholders.


  v  Number of directorship
 New regulation 17A as appended below:

“(1) A person shall not be a director in more than eight listed entities with effect from April 1, 2019 and in not more than seven listed entities with effect from April 1, 2020:
Provided that a person shall not serve as an independent director in more than seven listed entities.”

(2) Notwithstanding the   above, any person   who is serving   as a whole time director / managing director in any listed entity shall serve as an independent director in not more than three listed entities”

Commentary: The regulations have been stricter because the Committee believes that multiple directorships beyond a reasonable limit may lead to a director not being able to allocate sufficient time. Hence, w.e.f. 01.04.2020, number of listed entities in which a person can hold directorship is restricted to 8 from 01.04.2019 and to 7 from 01.04.2020. Further, a person who has been appointed as a whole time director or as a managing director in any listed company would not be able to serve as an independent director in more than three listed company.


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