FEMA perspective on loan given by NRI director in Indian company

 A Private limited company is engaged in the business of rendering Management Consultancy Services. The residential status of one of the directors on the board of the Company is non-resident in accordance with the provisions of FEMA Act, 1999 (Hereinafter referred to as the “Act”). The NRI director is also a shareholder equity Share Capital in the Company. The NRI Director wishes to introduce some amount as a loan. 

1) One way to take loan is ECB i.e. External Commercial Borrowings. That means the borrowings can be made by an Indian Company from its NRI Directors or any person resident outside India by way of External Commercial Borrowings in the following way;

1) Currency of borrowing

a) ECB can be raised in any freely convertible foreign currency as well as in Indian Rupees from the lender who is a person resident outside India.

2) Form of Borrowing:

a) The borrowing can be made in the form of Loans, floating/ fixed rate notes/ bonds/ debentures (other than fully and compulsorily convertible instruments);

3) Eligibility of borrowers

a) All entities eligible to receive foreign direct investment, in terms of Foreign Exchange Management (Non-debt Instruments Rules 2019, notified w.e.f. 17th October, 2019, as amended from time to time, including Start-ups.

In the present case since the company is engaged in rendering Consultancy services, FDI and in turn ECB is permissible under automatic route.

4) Eligibility of Lender

a) As per A.P. (DIR Series) Circular No. 17 dated 16th January 2019, The lender should be resident of FATF or IOSCO compliant country, including on transfer of ECB, however Individuals as lenders can only be permitted if they are foreign equity holders.

Definition of Foreign Equity Holder as per the regulation is as under :

Foreign Equity Holder means :

(a) direct foreign equity holder with minimum 25% direct equity holding by the lender in the borrowing entity,

(b) indirect equity holder with minimum indirect equity holding of 51%, or

(c) group company with common overseas parent.

If the NRI director qualifies the definition of Foreign equity holder then he will be considered as Eligible lender.

Draw-downs of borrowing under this shall be made only after obtaining the loan registration number from the Reserve Bank or from the ADs, as per the system put in place by the Reserve Bank. For non-adherence, the borrower may be required to pay penalty as specified by the Reserve Bank from time to time.

To obtain the LRN, borrowers are required to submit duly certified Form ECB, which also contains terms and conditions of the ECB, in duplicate to the designated AD Category I bank.

The borrowers are required to report actual ECB transactions through Form ECB 2 through AD Bank

Another way for accepting loan from NRI Director can be acceptance of deposits as per Foreign Exchange Management (Deposit) Regulations, 2016 on non repatriation basis subject to some conditions

Board resolution for authorisation for entering into restated Shareholders agreement

 

“RESOLVED THAT the consent of the Board of directors be and is hereby accorded to enter into a Amended and Restated shareholders’ agreement to be executed between the Company, its holding Company, __________________________ and their respective shareholders.

RESOLVED FURTHER THAT any of the Directors be and are hereby severally authorized to negotiate and finalise the terms of agreement and to do such acts, deeds and things as the Board in its absolute discretion deems necessary or desirable in connection with the issue, including, but not limiting to, the following:

a)      Execute the shareholders’ agreement and such other deeds, documents, letters and writings as may be required in connection with the shareholders’ agreement (collectively referred to as the “Transaction Documents”); and

b)     do all other acts, deeds and things as may be deemed necessary to give effect to the foregoing and the other terms of this resolution.

RESOLVED FURTHER THAT any of the Directors be and are hereby severally authorized to take all necessary and appropriate steps relating to the Transaction Documents and such other documents including signing and submitting the necessary forms with the Registrar of Companies and other relevant governmental authorities.

RESOLVED FURTHER THAT a certified true copy of this resolution be furnished, as may be required, under the signatures of any of the Directors of the Company.”

What are the analysis of data in collection of notice and agenda of AGM?

Calling and holding of AGM in an unlisted company in India is step by step process and it has to be followed keeping in mind the data and deep analysis keeping in mind the items for approval by the members of the company.

Due date of AGM should be kept in mind. Like, first AGM should be conducted within a period of 9 months from the date of closing of the first financial year e.g. by 31st December. 

In cases where it is other than first AGM, AGM should be held within a period of 6 months from the date of closing of the financial year i.e. 30th September. Interesting thing to note that as per Sebi LODR regulations, top 100 listed entities must hold their AGM within a period of 5 months from the date of closing of financial year. 

Gap between two successive AGMs should be not more than 15 months.

Extension of AGM is possible with prior approval of ROC.

Notice of AGM along with annexures should be sent to the members of the company atleast 21 clear days in advance of meeting. Make sure while calculating the 21 clear days do not include day of sending the notice and day of meeting. 

In case the company wants to hold AGM at shorter notice, then, that is also possible if consent in writing is given by not less than 95% of the members entitled to vote at such meeting.

In short, the process of convening AGM is as below;

1) Appointment of Scrutinizer if required

2) Holding of Board meeting

3) Notice of the AGM

4) Website disclosure

5) Advertisement in newspaper, applicable only in case where resolutions to be passed through e-voting is to be done

6) Remote e-voting

7) Register of Proxy

8) Documents available at the venue

9) Make sure registers of inspection are there at venue

10) Holding of AGM

11) Make sure to read observations in Auditor's report

12) Voting at AGM

13) Announcement of result

14) Minutes of AGM. This to be circulated within 30 days from the date of conclusion of AGM along with the date of entry.

15) Maintenance of Scrutinizer register

16) Forms and documents filing at ROC

Board resolution for conversion of loan into equity as per Indian Companies Act

 

APPROVAL FOR CONVERSION OF LOAN INTO __________ EQUITY SHARES

“RESOLVED THAT pursuant to the provisions of section 42 and 62(1)(c) and other applicable provisions, if any, of the Companies Act, 2013 (including any statutory modifications or re-enactment thereof, for the time being in force), read with the applicable rules, regulations thereto, and provisions of the Articles of Association of the Company, and subject to the approval of members of the Company, the consent of the Board of directors be and is hereby accorded for the conversion of existing unsecured Loan of Rs. _________/- (Rupees _______________________________ only) of ____________ Private Limited into _________________ Equity Shares of the Company of face value of Rs. 10/- (Rupees Ten only) per share at par, for an aggregate amount not exceeding Rs. _________/- (Rupees ________________________________ only), on private placement basis, and on such terms and conditions as detailed in the Explanatory Statement.

RESOLVED FURTHER THAT the Board of Directors do and hereby take on record the Valuation Report issued by the said Registered Valuer.

RESOLVED FURTHER THAT the draft Private Placement Offer Letter contains therein detailed terms and conditions alongwith all other ancillary documents/papers be and is hereby approved and proposed to be  taken on record by the members.

RESOLVED FURTHER THAT the subscription money in respect of said Equity Shares to be offered to Investor has already been paid by the investor due to conversion of loan into Equity Shares.

RESOLVED FURTHER THAT Directors of the Company be and are hereby severally authorized to do all such acts, deeds and things and execute all such deeds, documents and writings, as it may in its absolute discretion deem necessary or incidental, including filling of forms and applications with various authorities as may be necessary for giving effect to the above resolution and the matters incidental and consequential thereto.”

Procedure for issue of Sweat equity shares

 

Section 54 of the Companies Act, 2013 govern the provision of the Sweat Equity Shares.

 

“Sweat equity shares” mean such equity shares as are issued by a company to its directors or employees at a discount or for consideration, other than cash, for providing  their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

 

The detailed procedures for issuance of sweat equity shares are herein given below:

1.       Very first foremost step is to obtain a valuation report from the registered valuer who shall provide proper report addressed to the Board of Directors with justification for such a valuation;

2.       Hold a meeting of the Board:

a)      To approve issue of sweat equity shares to directors/employee subject to approval of members by special resolution;

b)      To fix the day, date, time and agenda for the general meeting for passing a special resolution to issue of sweat equity shares;

c)       To approve draft notice of the general meeting along with the explanatory statement for the purpose of passing the special resolution;

3.       Hold a general meeting to pass the special resolution for issue of sweat equity shares. Please note that the special resolution authorizing the issue of sweat equity shares shall be valid for making the allotment within a period of not more than 12 months from the date of passing of the special resolution.

4.       Hold a meeting of the Bard of pass Board resolution by circulation within a period of not more than 12 months from the date of passing of the special resolution:

a)      To consider the allotment of sweat equity shares;

b)      To authorise CS or CFO or any director of the company to file a return of allotment with ROC.

5.       The company shall maintain the register of sweat equity shares in Form SH-3 and shall forthwith enter therein the particulars of sweat equity shares by CS or any other person authorised by the Board for the purpose.

6.       Make necessary entries in the register of members in Form MGT-1 within 7 days of the Board meeting in which allotment of sweat equity shares was approved;

7.       File a return of allotment with ROC within 30 days from the date of allotment in PAS-3 along with the requisite documents and fees;

8.       Where allotment of sweat equity shares is made to any non-resident, then file form FC GPR to RBI portal within 30 days of allotment;

9.       Where issue of sweat equity shares to person resident outside India, then file a return in Form ESOP within 30 days from the date of issue of sweat equity shares;

10.   Issue the certificates of shares within a period of 2 months in Form SH-1 from the date of allotment to the respective shareholders after payment of stamp duty.

Board resolution for conversion of OCRPS into equity

 

“RESOLVED THAT to Section 55, 179 of the Companies Act, 2013 and the other applicable provisions of the Companies Act, 2013, if any read with the Rules made thereunder (including any amendments thereto or re-enactment thereof) and pursuant to the provisions of Articles of Association, the consent of the Board be and is hereby accorded for conversion of below mentioned Optionally Convertible Preference shares into equity shares detailed as under:

 

a.    _________ Series A Optionally Convertible Preference shares of INR. 10/- each into ________ equity shares of INR. 10/- each.

 

b.    _____________ Series B Optionally Convertible Preference shares of INR. 10/- each into ________ equity shares of INR. 10/- each.

 

c.    __________ Series D Optionally Convertible Preference shares of INR. 10/- each into ________ equity shares of INR. 10/- each.

 

RESOLVED FURTHER THAT consequent to the conversion of above mentioned Optionally Convertible Preference shares, Equity shares be issued and allotted as under:

 

S. No.	Name of the Allottee	No. of Series A OCRPS already held	No. of Series B OCRPS already held	No. of Series D OCRPS already held	No. of equity shares to be allotted

 

RESOLVED FURTHER THAT the said Equity Shares shall rank pari-passu with existing equity shares of the Company.

 

RESOLVED FURTHER THAT the Share Certificates be issued under the signatures of Directors of the Company and for the purpose of giving effect to the aforesaid resolution, the Directors of the Company be and are hereby severally authorized to file the necessary forms with the Registrar of Companies and to update the register of members and to do all other necessary acts, things and deeds to give effect to the above-mentioned allotment.”

Overseas Investment by Core Investment Company (CIC)

As per Master Direction on Core Investment Companies (Reserve Bank) Directions, 2016, CICs;

 

a)        With an asset size of less than Rs. 100 Crore, irrespective of whether accessing public funds or not

 

b)        With an asset size of Rs. 100 Crores and above and not accessing public funds

           are not required to register with the Bank under 45IA of the RBI Act, 1934

Investment in non-financial sector

Exempted CICs making overseas investment in non-financial sector shall not require registration from the Bank and hence, these Directions are not applicable to them. Further, a CIC-ND-SI need not obtain prior approval from Department of Non-Banking Supervision (DNBS), RBI, for overseas investment in non-financial sector. However it shall report to the Regional Office of DNBS where it is registered within 30 days of such investment in the stipulated format and at the prescribed periodicity.

The eligibility criteria for investments abroad and other conditions prescribed for CICs are given in the following paragraphs:

Eligibility Criteria

i. The Adjusted Net Worth (ANW) of the CIC shall not be less than 30% of its aggregate risk weighted assets on balance sheet and risk adjusted value of off-balance sheet items as on the date of the last audited balance sheet as at the end of the financial year. The CIC shall continue to meet the requirement of minimum ANW, post overseas investment. For this purpose, the risk weights applicable shall be as provided for in these directions.

ii. The level of Net Non-Performing Assets of the CIC shall not be more than 1% of the net advances as on the date of the last audited balance sheet.

iii. The CIC shall generally be earning profit continuously for the last three years and its performance shall be satisfactory during the period of its existence.

General Conditions

i. Direct investment in activities prohibited under FEMA shall not be permitted.

ii. The total overseas investment shall not exceed 400% of the owned funds of the CIC.

iii. The total overseas investment in financial sector shall not exceed 200% of its owned funds.

iv. Investment in financial sector shall be only in regulated entities abroad.

v. Entities set up abroad or acquired abroad shall be treated as wholly owned subsidiaries (WOS) /joint ventures (JV) abroad.

vi. Overseas investments by a CIC in financial /non-financial sector shall be restricted to its financial commitment. However with regard to issuing guarantees/Letter of Comfort in this regard the following shall be noted:

1. The CIC can issue guarantees / letter of comfort to the overseas subsidiary engaged in non-financial activity;
2. CICs must ensure that investments made overseas shall not result in creation of complex structures. In case the structure overseas requires a Non-Operating Holding Company, there shall not be more than two tiers in the structure. CICs having more than one non-operating holding company in existence, in their investment structure, shall report the same to the Bank for a review.
3. CICs shall comply with the regulations issued under FEMA, 1999 from time to time;
4. An annual certificate from statutory auditors shall be submitted by the CIC to the Regional Office of DNBS where it is registered, certifying that it has fully complied with all the conditions stipulated under these Guidelines for overseas investment. The certificate as on end March every year shall be submitted by April 30 each year;
5. If any serious adverse features come to the notice of the Bank, the permission granted shall be withdrawn. All approvals for investment abroad shall be subject to this condition.

 

Opening of WOS/JV Abroad by CICs

In the case of opening of a WOS/JV abroad by a CIC, all the conditions as stipulated above shall be applicable. The NoC to be issued by the Bank is independent of the overseas regulators’ approval process. In addition, the following conditions shall apply to all CICs:

(a) The WOS/JV being established abroad shall not be a shell company i.e "a company that is incorporated, but has no significant assets or operations." However companies undertaking activities such as financial consultancy and advisory services shall not be considered as shell companies;

(b) The WOS/JV being established abroad by the CIC shall not be used as a vehicle for raising resources for creating assets in India for the Indian operations;

(c) In order to ensure compliance of the provisions, the parent CIC shall obtain periodical reports/audit reports at least quarterly about the business undertaken by the WOS/JV abroad and shall make them available to the inspecting officials of the Bank;

(d) If the WOS/JV has not undertaken any activity or such reports are not forthcoming, the approvals given for setting up the WOS/JV abroad shall be reviewed;

(e) The WOS/JV shall make disclosure in its Balance Sheet the amount of liability of the parent entity towards it and also whether it is limited to equity / loan or if guarantees are given, the nature of such guarantees and the amount involved;

(f) All the operations of the WOS/JV abroad shall be subject to regulatory prescriptions of the host country.