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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Corporate and Economic Laws

Case: Bharat Pharma Ltd, a company in Hyderabad, receives a foreign remittance from a US investor for Rs 40 crore in exchange for equity shares. Under FEMA, which classification best describes this transaction, and how is it governed?

The foreign investment in equity shares is a capital account transaction under FEMA. It is regulated by the rules on non-debt instruments, which prescribe automatic or government approval routes and sectoral caps, rather than being a free current account transaction.

  1. AA current account transaction, freely permitted without any restrictions
  2. BA capital account transaction, governed by FEMA rules on non-debt instruments and permitted subject to entry routes and sectoral capsCorrect
  3. CA transaction outside FEMA because the company is Indian
  4. DA current account transaction requiring prior RBI approval in all cases

Explanation

Investment in equity shares by a person resident outside India is a capital account transaction, regulated through the Non-debt Instruments Rules, with automatic or approval routes and sectoral caps. It is not a current account transaction. FEMA applies to the transaction because it involves a non-resident.

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