FEMA guidelines for FDI in e-commerce entities

FEMA guidelines for FDI in e-commerce entities

‘E-commerce’ means buying and selling of goods and services including digital products over digital & electronic network.

‘E-commerce entities’ are the following entities conducting the e-commerce business:

•    a company incorporated under the Companies Act, 1956 or the Companies Act, 2013.

•   a foreign company covered under section 2 (42) of the Companies Act, 2013.

•   an office, branch or agency in India owned or controlled by a person resident outside India.

There are three models in which e-commerce entities conduct their business activities which are as mentioned below:

                                       

a.     B2B E-commerce: The entities conducting B2B e-commerce would engage only in Business to Business (B2B) e-commerce and not in retail trading, inter alia implying that existing restrictions on FDI in domestic trading would be applicable to e-commerce as well. Guidelines on cash and carry wholesale trading apply to B2B e-commerce activities also.

b.  ‘Inventory based model of e-commerce’ means an e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly.

    It is noteworthy that foreign investment is not permitted in Inventory based model of e-commerce.

c.     ‘Market place model of e-commerce’ means providing of an information technology platform by an e-commerce entity on a digital & electronic network to act as a facilitator between buyer and seller.

    It is pertinent to mention here that 100% foreign investment under automatic route is  permitted in ‘Market place model of e-commerce’.

    Further there are certain other conditions which need to be complied by ‘Market place model of e-commerce’ which are as follows:

(i)     Digital & electronic network mentioned above will include network of computers, television channels and any other internet application used in automated manner such as web pages, extranets, mobiles etc.

(ii)    Marketplace e-commerce entity is permitted to enter into transactions with sellers registered on its platform on B2B basis.

(iii)    Marketplace e-commerce entity is permitted to provide support services to sellers in respect of warehousing, logistics, order fulfilment, call centre, payment collection and other services. Order fulfilment services relate to receiving, processing and delivering orders to end customers.

(iv)      Marketplace e-commerce entity cannot exercise ownership or control over the inventory i.e. goods purported to be sold.

            Explanation: Inventory of a vendor will be deemed to be controlled by marketplace e-commerce entity if more than 25% of purchases of such vendor are from the marketplace e-commerce entity or its group companies which will render the business of marketplace e-commerce entity into inventory based model, in which FDI is not permitted.

(v)      An entity having equity participation by e-commerce marketplace entity or its group companies or having control on its inventory by e-commerce marketplace entity or its group companies, will not be permitted to sell its products on the platform run by such marketplace entity.  

It means that the market place e-commerce entity will not sell the products of any vendor on its platform where (i) the marketplace entity or its group companies has contributed in the share capital of such vendor company or (ii) where more than 25% of purchases of such vendor are from the marketplace e-commerce entity or its group companies.

In this connection it may pertinent to point out that prior to amendment to FDI regulations on 31 January, 2019, which came into force from 1 February, 2019, as per earlier FDI regulations, E-commerce entity providing a marketplace could not exercise ownership over the inventory i.e. goods purported to be sold. Such an ownership over the inventory was to render the business of the marketplace entity into inventory based model. Further, an e-commerce entity was not to permit more than 25 percent of the sales value on financial year basis affected through its marketplace from one vendor or their group companies.

In other words, as per amended regulations, the marketplace e-commerce entity is not permitted to own any shares of the vendor company. Earlier there was no concept of control of the vendor company by the marketplace e-commerce entity. As per amended regulations the marketplace e-commerce entity which the owns (in part or full) the vendor company or controls the inventory of the vendor company, is not allowed to sell the products a such a vendor on the platform run by such marketplace entity.

(vi)     For the goods/ services that are made available for sale electronically on website, marketplace e-commerce entity is required to clearly provide name, address and other contact details of the seller. Post sales, delivery of goods to the customers and customer satisfaction is the responsibility of the seller.

(vii)   Payments for sale may be facilitated by the marketplace e-commerce entity in conformity with the guidelines issued by the Reserve Bank in this regard.

(viii)     Any warranty/ guarantee of goods and services sold is also the responsibility of the seller.

(ix)         E-commerce entities providing marketplace will not, directly or indirectly, influence the sale price of any goods or services and shall maintain level playing field. Services should be provided by e-commerce marketplace entity or other entities in which e-commerce marketplace entity has direct or indirect equity participation or common control, to vendors on the platform at arm’s length and in a fair and non discriminatory manner.

Explanation: Such services will include but not limited to fulfilment, logistics, warehousing, advertisement/marketing, payments, financing etc. Cash back provided by group companies of marketplace entity to buyers shall be fair and non-discriminatory. For the purposes of this clause, provision of services to any vendor on such terms which are not made available to other vendors in similar circumstances will be deemed unfair and discriminatory.

Prior to amendment the relevant regulation read as under: E-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain level playing field.

It did not talk of the provisions of services to the vendors in fair and non-discriminate manner.

(x)         No e-commerce marketplace entity can mandate any seller to sell any of their product exclusively on its platform.

(xi)      All existing investments are mandated to be in compliance with the above conditions with effect from 1 February, 2019.

Annual Compliances under FEMA:

The e-commerce entity is now required to annually furnish a certificate along with a report of statutory auditor to the Reserve Bank of India, confirming compliance of the e-commerce guidelines.

While the e-commerce sector in India has seen tremendous growth in the past few years, it will be interesting to see how much impact these policy measures will have in the long run and how the e-commerce giants will comply with these norms.

Core Investment Company

Core Investment Companies, (CIC) are those non-banking financial companies which have their assets primarily as investments in shares of group companies but not for trading, and also do not carry on any other financial activity.

The RBI directions applicable to the Core Investment Companies are contained in the Master Direction - Core Investment Companies (Reserve Bank) Directions, 2016 dated August 25, 2016 (as updated on June 07, 2018).As per the above referred Master Direction, Core Investment Company (CIC) means:

Core Investment Company (CIC) is a non-banking financial company carrying on the business of acquisition of shares and securities and which satisfies the following conditions as on the date of the last audited balance sheet:-

i. it holds not less than 90% of its net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies;

ii. its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies and units of Infrastructure Investment Trust only as sponsor constitute not less than 60% of its net assets as mentioned in clause (i) above;

Provided that the exposure of such CICs towards InvITs shall be limited to their holdings as sponsors and shall not, at any point in time, exceed the minimum holding of units and tenor prescribed in this regard by SEBI (Infrastructure Investment Trusts) Regulations, 2014, as amended from time to time.

iii. it does not trade in its investments in shares, bonds, debentures, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment;

iv. it does not carry on any other financial activity referred to in Section 45I(c) and 45I (f) of the Reserve Bank of India Act, 1934 except

(a) investment in

(i) bank deposits,

(ii) money market instruments, including money market mutual funds and liquid mutual funds

(iii) government securities, and

(iv) bonds or debentures issued by group companies,

(b) granting of loans to group companies and

(c) issuing guarantees on behalf of group companies.

As per the above referred Master Direction:

1. Core Investment Companies (CIC) with an asset size of less than Rs. 100 Crore will not be required to register themselves with Reserve Bank of India.
2. Core Investment Companies (CIC) having total asset size of 100 Crore or more either individually or in aggregate along with other CICs in the Group and which raises or hold public funds will be regarded as Systemically Important Core Investment Companies (CICs-ND-SI) and shall be required to get themselves registered with Reserve Bank of India .

Besides registration, there are also certain other provisions which are only applicable on Systematically Important Core Investment Companies (CICs-ND-SI).

One such provision applicable only to CICs-ND-SI is contained in Paragraph 27 of the above Master Directions which provides that a systemically important CIC shall require prior written permission of the Reserve Bank of India for any change in the management of the CICs which results in change in more than 30 per cent of the directors, excluding independent directors. There is some ambiguity regarding the calculation of the percentage prescribed by the Reserve Bank of India in the above direction. For example, a CIC was having three directors. A new director had to join the CIC. The management of the CIC did not seek prior approval of Reserve Bank of India, because as per their understanding, addition on one director to the existing three directors in the company would amount to 25% change and therefore did not require prior approval of the Reserve Bank of India. But when the company subsequently intimated the Bank regarding the change in their directors, Reserve Bank of India advised them the addition of fourth director amounted to change in more than 30 per cent of the directors of the company and as such they should have taken prior written permission of the Reserve Bank of India for that change.

In this connection, paragraph 46 of the above Regulations provides that ‘the interpretation of any provision of these Directions given by the Bank shall be final and binding on all the parties’. 

Thus, the company was required to explain to the RBI the reason for their not seeking prior permission of the RBI for the change in the number of directors of the company, as also to seek post facto approval of the Reserve Bank of India for change their number of directors from three to four.

Another point that baffles the NBFCs relates to the compliance and reporting requirements.It is pertinent to mention here that though the directions applicable to Core Investment Companies are contained in Master Direction - Core Investment Companies (Reserve Bank) Directions, 2016 dated August 25, 2016 (as updated on June 07, 2018). In addition to these directions, there are certain other directions which are applicable to Core Investment Companies as are mentioned in other Master Directions issued by Reserve Bank of India from time to time which are equally important and should be adhered to.Further, sometimes the NBFCs are asked to comply with the directions and report to RBI which as per their understanding, are not related to their NBFC. The NBFCs are however obliged to comply with the RBI directions, as per the provisions of Section 45M of the Reserve Bank of India Act, 1934, they are duty-bound to follow RBI comply with the directions given to them by RBI.

Section 45M is reproduced below for perusal:

45M. Duty of non-banking institutions to furnish statements, etc., required by Bank.

It shall be the duty of every non-banking institution to furnish the statements, information or particulars called for, and to comply with any direction given to it, under the provisions of this Chapter. 

Accordingly, Core investment companies should not only comply with the directions contained in the Master Direction - Core Investment Companies (Reserve Bank) Directions, 2016 dated August 25, 2016 (as updated on June 07, 2018), they should not miss out on other relevant directions as applicable to them contained in other NBFC Directions issued by Reserve Bank of India from time to time.

GD Chugh

Associate Partner

Implementation of System for Monitoring of Foreign Investment in Listed Company

The Foreign Investment in India is regulated in terms of clause (b) of sub-section 3 of section 6 and section 47 of the Foreign Exchange Management Act, 1999 (FEMA) read with Foreign Exchange Management (Transfer or Issue of a Security by a Person resident Outside India) Regulations, 2017 issued vide Notification No. FEMA 20(R)/2017-RB dated November 7, 2017.

FEMA prescribes the various foreign investment limits in listed Indian companies for Foreign Portfolio Investors, Non-Resident Indians and sectoral gaps & compliance thereof.

Brief Introduction of measures by SEBI and RBI

As a purposive drive of Indian Government for keeping the track over the foreign Investment in India and related compliances thereto, the Securities Exchange Board of India (SEBI) in consultation with Reserve Bank of India (RBI) has introduced a new system for Monitoring of Foreign Investment limits in listed companies and prescribed guidelines w.r.t. the necessary infrastructure, data to be provided by listed Indian companies and other related matters.

In nutshell, the SEBI on 5^th April, 2018 had issued circular directing market regulators to put in place a new system for depositories to monitor the foreign investment limits in listed Indian companies and such Indian company to submit the required information for FDI received till date within the specified date.

The circular provided that the last date for submission of data as 30^th April, 2018, however, the stated day has been extended as for submission of information by companies by 15^th May, 2018 and operationalizing the monitoring mechanism by depositories to 18^th May, 2018.

Why monitoring system to be implemented

• The objective is to enable listed Indian companies to ensure compliance with the various foreign investment limits;
• To maintain the data of investment received within the allowed limit of FDI by the foreign investors in India;

 Compliance under the Circulars

For depositories

• The National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) shall put in place the necessary infrastructure and IT systems for operationalizing the monitoring mechanism described in Annexure A of SEBI’s circular IMD/FPIC/CIR/P/2018/61 dated 5th April, 2018.
• Depositories shall provide an interface where the company shall submit the requisite information including company identification number, name, date of incorporation, PAN number, Permissible Aggregate Limit for investment by FPIs and Permissible Aggregate Limit for investment by NRIs

 For Stock Exchanges

The Stock Exchanges (BSE, NSE and MSEI) shall also put in place the necessary infrastructure and IT systems for disseminating information on the available investment headroom in respect of listed Indian companies.

For Listed Companies

• In accordance with Para 6 of Annexure A of the circular dated April 05, 2018 which provides the Architecture of the System for Monitoring Foreign Investment Limits in listed Indian companies, requires all listed Indian companies to provide the specified data/ information on foreign investment to the depositories latest by 30th May, 2018 which has been extended to 15th May, 2018.  
• The company shall appoint any one depository to act as a Designated Depository for the purpose of monitoring the foreign investment limit.
• In an event of any change in any of the details pertaining to the company, such as increase or decrease of the aggregate FPI or NRI limits or the sectoral cap or a change of the sector of the company, the firm needs to inform such changes along with the supporting documentation to its designated depository.

Activation of Red Flag Alert

The circular provides that the  system  shall  calculate  the  percentage  of  NRI  &  FPI  holdings and other investment in the Company

If the total foreign investment in a company is within 3% or less than 3% of the sectoral cap, then a red flag shall be activated for that company, where the same shall be displayed by depositories and stock exchanges. Such data shall be updated on day to day basis.

Breach of foreign investment limits

In case of breach of aggregate NRI/FPI investment limits or the sectoral cap for a given company, the depositories shall inform the exchanges about the breach, the exchange issue circular/notification on its website and halt further purchases by FPIs, if the aggregate FPI limit is breached, NRIs, if the aggregate NRI limit is breached or All foreign investors, if the sectoral cap is breached. The circular further provides for manner of disinvestment so as to bring the excess FDI within the limit.

Therefore, in concluding remark it is to be stated that the Circular codifies the process of monitoring foreign investment limits. In case any FPIs/ NRIs who has breached the FDI limit, shall be required to disinvest in the manner as stated in the circular, where such breach will be informed through the custodians/ AD banks respectively along with the method for disinvestment which can opt in accordance with provisions of law.

Relevant links:

SEBI circular no. IMD/FPIC/CIR/P/2018/61 dated 5th April, 2018- https://www.sebi.gov.in/legal/circulars/apr-2018/monitoring-of-foreign-investment-limits-in-listed-indian-companies_38575.html

Circular by NSDL no. Ref No: NSE/CML/2018/11 dated 25th April, 2018- https://www.nseindia.com/content/equities/NSE_Circular_25042018.pdf

RBI Notification no.: - RBI/2017-18/172 A.P. (DIR Series) Circular No. 27 [(1)/20(R)] dated 3^rd May, 2018- https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11270&Mode=0

 Compiled by Ms. Deepika Sharma

(Senior Associate at Factum Legal Advocates & Solicitors)

Import of Goods and Services under FEMA

Foreign Exchange Management Act, 1999 (FEMA) came into force with effect from June 1, 2000, Preamble of the FEMA reads as under:

An Act to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India

FEMA provisions relating to import of goods and services are being reproduced below:

Section 2 (p) of FEMA defines import as under:

“import”, with its grammatical variations and cognate expressions, means bringing into India any goods or services;

Section 2(j) of FEMA defines current account transaction as under:

 “current account transaction” means a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transaction includes,—

(i) payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business,

(ii) payments due as interest on loans and as net income from investments,

(iii) remittances for living expenses of parents, spouse and children residing abroad, and

(iv) expenses in connection with foreign travel, education and medical care of parents, spouse and children;

Section 2e) of FEMA defines capital account transaction as under:

“capital account transaction” means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India, and includes transactions referred to in sub-section (3) of section 6;

From the above definitions of the FEMA, it is understood that the foreign trade including import of goods and services is a current account transaction.

To make payment against the import of goods and services, the importer is permitted in terms of provisions of Section 5 of FEMA to approach the AD bank for purchase of foreign exchange and make remittance for import to the non-resident supplier.

Section 5 of FEMA is as under:

5.  Current account transactions

Any person may sell or draw foreign exchange to or from an authorised person if such sale or drawal is a current account transaction:

Provided that the Central Government may, in public interest and in consultation with the Reserve Bank, impose such reasonable restrictions for current account transactions as may be prescribed.

In terms of Section 46 of FEMA, Central Government has the power to make rules:

46.  Power to make rules

 The Central Government may, by notification, make rules to carry out the provisions of this Act.   Without prejudice to the generality of the foregoing power, such rules may provide for,—

 (a)the imposition of reasonable restrictions on current account transactions under section 5;

(b) the manner in which the contravention may be compounded under sub-section (1) of section 15;

(c) the manner of holding an inquiry by the Adjudicating Authorities under sub-section (1) of section 16;

(d) the form of appeal and fee for filing such appeal under sections 17 and 19;

(e) the salary and allowances payable to and the other terms and conditions of service of the Chairperson and other Members of the Appellate Tribunal and the Special Director (Appeals) under section 23;

(f) the salaries and allowances and other conditions of service of the officers and employees of the Appellate Tribunal and the office of the Special Director (Appeals) under sub-section (3) of section 27;

(g) the additional matters in respect of which the Appellate Tribunal and the Special Director (Appeals) may exercise the powers of a civil court under clause (i) of sub-section (2) of section 28;

(h) the authority or person and the manner in which any document may be authenticated under clause (ii) of section 39; and

(i) any other matter which is required to be, or may be, prescribed.

In exercise of the powers conferred by Section 5 and sub-section (1) and clause (a) of sub-section (2) of Section 46 of the Foreign Exchange Management Act, 1999, and in consultation with the Reserve Bank, the Central Government has made Foreign Exchange Management (Current Account Transactions) Rules, 2000;

Import of Goods and Services into India is being allowed in terms of Section 5 of the Foreign Exchange Management Act 1999, read with Foreign Exchange Management (Current Account Transaction) Rules, 2000. 

Reserve Bank of India also issues directions to Authorised Persons under Section 11 of the FEMA. These directions lay down the modalities as to how the foreign exchange business has to be conducted by the Authorised Persons with their customers/constituents.

The directions issued on import of goods and services into India have been compiled in this Master Direction on Import of Goods and Services dated January 1, 2016 (Updated as on February 02, 2018).

Import trade is regulated by the Directorate General of Foreign Trade (DGFT) AD Category – I banks are required to ensure that the imports into India are in conformity with the Foreign Trade Policy in force and Foreign Exchange Management (Current Account Transactions) Rules, 2000 and the Directions issued by Reserve Bank under Foreign Exchange Management Act, 1999 from time to time.

AD Category I Banks can allow remittance for making payments for imports into India, after ensuring that all the requisite details are made available by the importer and the remittance is for bona fide trade transactions.

In terms of Section 10(6) of the Foreign Exchange Management Act, 1999 (FEMA), any person acquiring foreign exchange is permitted to use it either for the purpose mentioned in the declaration made by him to an Authorised Dealer Category – I bank under Section 10(5) of the Act or for any other purpose for which acquisition of foreign exchange is permissible under the said Act or Rules or Regulations framed there under.

Where foreign exchange acquired has been utilised for import of goods into India, the AD Category – I bank has to ensure that the importer furnishes evidence of import.

In terms of the extant regulations, remittances against imports should be completed not later than six months from the date of shipment, except in cases where amounts are withheld towards guarantee of performance, etc.

AD Category – I banks can consider granting extension of time for settlement of import dues up to a period of six months at a time (maximum up to the period of three years) irrespective of the invoice value for delays on account of disputes about quantity or quality or non-fulfilment of terms of contract; financial difficulties and cases where importer has filed suit against the seller. In cases where sector specific guidelines have been issued by Reserve Bank of India for extension of time (i.e. rough, cut and polished diamonds), the same will be applicable.

While granting extension of time, AD Category –I banks are required to ensure that:

• The import transactions covered by the invoices are not under investigation by Directorate of Enforcement / Central Bureau of Investigation or other investigating agencies;
• While considering extension beyond one year from the date of remittance , the total outstanding of the importer does not exceed USD one million or 10 per cent of the average import remittances during the preceding two financial years, whichever is lower; and
• Where extension of time has been granted by the AD Category – I banks, the date up to which extension has been granted may be indicated in the ‘Remarks’ column in IDPMS.
• Cases not covered by the above instructions / beyond the above limits, may be referred by the AD bank to the concerned Regional Office of Reserve Bank of India.

RBI has also issued Operational Guidelines to the AD banks for matters relating to advance remittances for imports, Interest on Import Bills, Remittances against Replacement Imports, Guarantee for Replacement Import, Import of Equipment by Business Process Outsourcing (BPO) Companies for their overseas sites, Receipt of Import Bills/Documents by the Importer Directly from Overseas Suppliers, Evidence of Import, Import Data Processing and Monitoring System(IDPMS), Follow up for Import Evidence, Import of Gold, Import of Other Precious Metals, Import Factoring, Merchanting Trade, Import Payments through Online Payment Gateway Service Providers and Settlement of Import transactions in currencies not having a direct exchange rate.

Wherever the AD bank feels necessary; it may make a reference to the Reserve Bank seeking instructions in the case.

Compiled by Mr. G. D. Chugh

(Associate Partner in Factum Legal Advocates & Solicitors)

Current and Capital Account Transactions under FEMA

The Foreign Exchange Management Act, 1999 (FEMA) came into force with effect from June 1, 2000, and as per the Preamble of FEMA, the Act was made  with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India.

Under the FEMA, foreign exchange transactions are divided into two broad categories:

• Current Account Transactions, and
• Capital Account Transactions. 

As per FEMA, transactions that alter the assets or liabilities, including contingent liabilities outside India, of persons resident in India or assets or liabilities in India of persons resident outside India are classified as capital account transactions, whereas, all other transactions are current account transactions.

As part of the obligations assumed under Article VIII of the charter of its membership of International Monetary Fund, India accepted the move towards full current account convertibility in August 1994. Most of the quantitative and sectoral restrictions were, therefore, removed for the current account transactions. As such most of current account transactions do not require prior approval of the Reserve Bank.

The Government of India has notified the Foreign Exchange Management (Current Account Transactions) Rules, 2000, governing the current account transaction.

These Rules list the current account remittances under three categories.

• First, the transactions, the remittances for which are prohibited;
• Second, the transactions, remittances for which is made after obtaining the approval of Government of India; and
• Third, the transactions, remittances for which may be made by the Authorised Dealer, up to the limits given in the Rules. Prior approval of RBI is required, where the amount to be remitted exceeds the stipulated limit. 

Under these Current Account Transactions Rules, powers have been delegated to the Authorised Persons (APs) to allow permitted remittances which are of current account in nature, in a hassle-free manner.

While FEMA formalised the current account convertibility with the Common Law principle “all that is not forbidden is permitted”, it did the reverse with respect to capital account transactions: “all that is not permitted is forbidden”.

Presently India is not fully convertible on the capital account. Reserve Bank has been progressively relaxing and simplifying the procedures for capital account transactions. Accordingly, certain capital account transactions involving foreign direct investment, external commercial borrowings and the overseas direct investment have been permitted to be undertaken under automatic route/general permission. In respect of transactions which are not covered under general permission, the entities are required to approach the Reserve Bank through their authorized dealers for necessary approvals.

The Reserve Bank, in consultation with the Government of India, has notified comprehensive, simple and transparent regulations under the FEMA, 1999 for capital account transactions. The regulations distinctly indicate the types of permissible capital account transactions and simplified procedures for undertaking transactions. The regulations grant substantial powers to the Authorised Dealer Category – I banks to undertake capital account transactions on behalf of their clients.

Compiled by Mr. G. D. Chugh

(Associate Partner in Factum Legal Advocates & Solicitors)