CS Executive · Setting Up of Business, Industrial and Labour Laws

Setting up of Business outside India and Issues Relating thereto: formula sheet

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Key formulas

Capital account transaction: Transaction altering assets or liabilities (including contingent liabilities) outside India of residents, or in India of non-residents; Section 2(e) FEMA. Overseas investment by an Indian company falls here. A current account transaction is any transaction other than this.
Drawal of foreign exchange: Any person may sell or draw foreign exchange to or from an authorised person for a capital account transaction, subject to section 6(2); Section 6(1). Limits and conditions are set by the RBI (debt instruments) or the Central Government (others).
Who sets the rules: Debt instruments: RBI, in consultation with Central Government (s 6(2)). Non-debt instruments: Central Government, in consultation with RBI (s 6(2A)); Use this split to say who prescribes classes, limits and conditions.
Person resident in India: Residing in India for more than 182 days in the preceding financial year, or a person or body corporate registered or incorporated in India; Section 2(v). An Indian company is always resident in India. Its overseas branch or office is also treated as resident in India.
Protected drawal: No restriction on drawal of foreign exchange for amortisation of loans or depreciation of direct investments in the ordinary course of business; Proviso to section 6(2).
Mode comparison: Branch: no separate legal entity | WOS: 100% owned separate entity | JV: shared ownership and control; Use as the base of any compare-and-contrast answer.
ODI test: ODI = unlisted foreign equity, OR ≥ 10% of a listed foreign entity, OR any stake in a listed foreign entity with control; Control means the right to appoint a majority of directors or to control management or policy decisions. If the investment is not ODI, check whether it is OPI.
OPI: OPI = overseas investment in foreign securities that is not ODI; Certain items are excluded from OPI, such as unlisted debt instruments. Do not call every small foreign shareholding OPI without checking control.
ODI financial commitment ceiling (automatic route): Total financial commitment in all foreign entities ≤ 400% of net worth of the Indian entity; Net worth is taken from the last audited balance sheet. Above this limit, prior Reserve Bank approval is needed.
OPI limit for a listed Indian company: OPI ≤ 50% of net worth as per last audited balance sheet; Applies to listed Indian entities. Unlisted Indian entities cannot make OPI.
OPI by resident individuals: OPI within the LRS limit of USD 250,000 per financial year; Check the current LRS limit in the latest Reserve Bank directions before quoting it.
Financial commitment: Financial commitment = equity capital + debt + guarantees and similar non-fund-based support given to the foreign entity; Guarantees count towards the ceiling, not only cash invested.
Sectors barred without specific approval: No ODI in a foreign entity engaged in real estate activity, gambling of any form, or dealing in financial products linked to the Indian rupee; Financial services activity abroad is allowed only subject to specified conditions.
General prohibition (section 4): Resident in India + acquires/holds/owns/possesses/transfers foreign exchange, foreign security or foreign immovable property = prohibited, unless the Act provides otherwise; Three asset types and five verbs. Quote them in the answer.
Exception: assets from non-resident days (section 6(4)): Allowed if acquired, held or owned while resident outside India, or inherited from a person resident outside India; The test is residence at acquisition or of the person from whom inherited.
Reverse rule (section 6(5)): Person resident outside India may hold Indian currency, security or immovable property acquired while resident in India, or inherited from a resident in India; Mirror of section 6(4). Do not mix up the two.
General penalty (section 13(1)): Up to 3 × sum involved, or up to ₹2,00,000 if not quantifiable; plus up to ₹5,000 per day for a continuing contravention after the first day; Imposed upon adjudication.
Undisclosed foreign assets (sections 13(1A), 13(1C), 37A): Value above the prescribed threshold: penalty up to 3 × sum involved, confiscation of equivalent value in India, and imprisonment up to 5 years with fine; Section 37A allows seizure of equivalent value in India. Prosecution is only on a written complaint by an officer not below Assistant Director.
Trigger for seizure: Reason to believe + reasons recorded in writing + asset outside India suspected held in contravention of section 4; Order is passed by the Authorised Officer prescribed by the Central Government. Section 37A(1).
What is seized: Value equivalent, situated within India, of the foreign exchange, foreign security or immovable property; The Indian asset seized is of equal value. The foreign asset itself is not seized.
Threshold proviso: No seizure if aggregate value of the foreign assets < value prescribed; The amount is prescribed in rules. Do not quote a figure unless it is given in the question.
Placing before Competent Authority: Within 30 days from the date of seizure; The Authorised Officer places the order with relevant material before the Competent Authority, an officer not below the rank of Joint Secretary to the Government of India. Section 37A(2).
Disposal period: Within 180 days from the date of seizure; Confirm or set aside after hearing the Directorate of Enforcement and the aggrieved person. Court stay period is excluded, and at least 30 more days are given after the stay is vacated. Section 37A(3).
Duration of confirmed seizure: Continues till disposal of adjudication proceedings; Adjudicating Authority then gives directions on further action. Section 37A(4).
Bring-back relief: Disclose asset + bring back into India + apply + hearing = appropriate order, including setting aside seizure; Available at any stage of proceedings under the Act. Proviso to section 37A(4).
Appeal and section 15: Appeal against Competent Authority order to the Appellate Tribunal; section 15 does not apply; Section 37A(5) and (6). Section 15 is the compounding provision, so compounding is not available under this section.
Penalty under Section 13(1): Up to 3 × sum involved (quantifiable); up to ₹2,00,000 (not quantifiable); plus up to ₹5,000 per day after the first day for a continuing contravention; Imposed only upon adjudication. It is a ceiling, not a fixed amount.
Confiscation and repatriation, Section 13(2): Adjudicating Authority may confiscate currency, security or property and direct foreign exchange holdings to be brought back to India or retained outside India; Additional to the penalty. Property includes bank deposits and Indian currency into which it was converted.
Assets abroad above prescribed threshold, Section 13(1A) and (1C): Penalty up to 3 × sum involved and confiscation of equivalent value in India; additionally imprisonment up to 5 years and fine under (1C); Applies where the aggregate value exceeds the threshold under the proviso to Section 37A(1). Court cognizance only on written complaint by an officer not below Assistant Director (Section 13(1D)).
Authorised person penalty, Section 11(3): Up to ₹10,000, plus up to ₹2,000 per day for a continuing contravention; Applies to a bank or authorised person that breaches RBI directions or fails to file a return. RBI must first give a reasonable opportunity of being heard.
Compounding, Section 15: Application by contravener; compounded within 180 days of receipt of application; After compounding, no proceedings can start or continue for that contravention.
Appeal, Section 19: Within 45 days of receiving the order; penalty to be deposited, unless the Tribunal dispenses with it for undue hardship; Late appeal can be entertained on sufficient cause. Tribunal endeavours to dispose of the appeal within 180 days.

Quick revision

Section 4: a resident in India shall not acquire, hold, own, possess or transfer foreign exchange, foreign security or foreign immovable property, save as the Act provides.
Section 6(4): a resident may keep foreign assets acquired while resident outside India, or inherited from a person resident outside India.
Section 6(1): a person may sell or draw foreign exchange through an authorised person for a capital account transaction, subject to Section 6(2).
Section 37A: the Authorised Officer may seize the value equivalent in India after recording reasons in writing.
No seizure under Section 37A if the aggregate foreign asset value is below the prescribed value.
The seizure order goes to the Competent Authority within thirty days; the Competent Authority must be an officer not below Joint Secretary rank.
The Competent Authority decides within one hundred eighty days, after hearing the Directorate of Enforcement and the aggrieved person.
Court stay periods are excluded from the one hundred eighty days, and at least thirty more days are given after the stay is vacated.
Disclosing the asset and bringing it back into India can lead to the seizure being set aside.
Appeal against the Competent Authority's order lies to the Appellate Tribunal.
Section 13(1): penalty up to thrice the sum involved if quantifiable, or up to ₹2,00,000 if not, plus up to ₹5,000 per day for a continuing contravention.
Section 13(1C): above the threshold, imprisonment up to five years and fine, and court cognizance only on a written complaint by an officer not below Assistant Director.

Common mistakes

Saying a foreign branch is a separate legal entity. Fix: A branch is part of the Indian company, so the company is directly liable. Only a subsidiary is a separate legal person.
Treating a JV and a WOS as the same thing. Fix: A WOS has one owner holding all shares. A JV has two or more partners sharing ownership and control.
Treating every investment below 10% in a foreign company as OPI. Fix: Check for control, such as a right to appoint a majority of directors. A stake below 10% in a listed foreign entity with control is still ODI.
Counting only the equity invested while testing the 400% ceiling. Fix: Include debt and guarantees, and add commitments already made in all foreign entities, not just the new one.
Saying section 4 bans residents from holding foreign assets absolutely. Fix: Always add 'save as otherwise provided in this Act' and give the section 6(4) exception.
Using nationality instead of residence. Fix: FEMA works on residence. An Indian citizen living abroad is a person resident outside India for this purpose.
Saying the Authorised Officer seizes the foreign asset itself. Fix: Write that only value equivalent, situated within India, is seized because the foreign asset is out of reach.
Mixing up the 30-day and 180-day periods. Fix: 30 days is for placing the order before the Competent Authority. 180 days is for the Competent Authority to dispose of the matter.
Stating the penalty as a fixed amount, such as exactly three times the sum. Fix: Always write 'up to thrice the sum involved'. The Adjudicating Authority decides the actual amount.
Applying the ₹5,000 daily penalty from day one. Fix: Write 'for every day after the first day during which the contravention continues'.

Exam tips

For 'distinguish' questions, use the same four or five heads on both sides so the examiner can award marks easily.
Always add a FEMA line. Quote section 2(e) for the definition and section 6 for drawal of foreign exchange.
Learn the split between section 6(2) (RBI, debt instruments) and section 6(2A) (Central Government, others) as a short note.
In case-based questions, end with a clear recommendation tied to the company's goal, not just a list of modes.
Use the current law only. Write FEMA, not the old FERA.
Begin every answer by defining ODI and OPI. Many questions are really about classification, so the definition earns the first marks.
Learn the two numbers well: 400% of net worth for ODI financial commitment and 50% of net worth for OPI by listed Indian entities. Show the calculation in numerical questions.
Name the source of power: Central Government rules under section 46, Reserve Bank regulations under section 47, and Reserve Bank directions to authorised persons under section 11. Cite sections only where you are sure.