Ozg FEMA Consultant
Phone # 09811415831-37-61-72-84-92-94
Residence
of Enterprises
An enterprise is said to have a center
of economic interest and to be a resident unit of a country (economic
territory) when the enterprise is engaged in a significant amount of production
of goods and/or services there or when it owns land or buildings located there.
The enterprise must maintain at least one production establishment in the
country and must plan to operate the establishment indefinitely or over a long
period of time.
Free
Reserves and Surplus
(Block 1B, Item 3.1)
Free Reserves and Surplus should include
all unencumbered reserves such as
i) General Reserve net of losses, if
any
ii) Capital Reserve
iii) Development Rebate Reserve
iv) Premium on shares
v) Dividend Equalization Reserve
vi) Investment Allowance (utilized)
Reserve.
Free Reserves and Surplus should exclude Tax provisions and other items such as
i) provision
for deferred taxation
ii) Tax Equalization Reserve
iii)
Investment Allowance (unutilized) and
iv)
Revaluation Reserve
Retained
Profit (Block 1B, Item 3.4)
Retained profit = Profit after tax –
Dividend declared (excluding tax on dividend)
(i.e. Item 3.4 = Item3.2 minus Item
3.3, of Block 1B)
A.
Direct Investment:
Direct investment
is a category of international investment
in which a resident entity in one economy (direct investor (DI) acquires a
lasting interest in an enterprise resident in another economy (Direct
Investment Enterprise (DIE). It consists of two components, viz., Equity
capital and Other Capital.
(i)
Equity
Capital under Direct Investment
It covers (1) Equity in branches and
all shares (except non-participating preferred shares) in subsidiaries and
associates; (2) Contributions such as the provision of machinery, land &
building(s) by a direct investor to a DIE by equity participation; (3)
Acquisition by a DIE of shares in its direct investor, termed as Reserve
investment (i.e. claims on DI).
(a) Foreign Direct Investment in India (Block 2A,
2B)
If the Indian company has issued the
shares to non-resident entities under the FDI scheme in India, then it should
be reported under the Foreign Direct Investment in India (Liabilities), Section
II of the return. If the non-resident entity holds the 10 per cent or more equity/
ordinary shares in the reporting Indian company, then it should reported under
Block 2A (item 1.2, liabilities to direct investment). However, if the
non-resident entity holds less than 10 per cent of the equity capital of
reporting Indian company, then it should be reported under Block 2B
(item 1.2, liabilities to direct investment). In both the cases, the investing
non-resident entity is called as the Direct Investor (DI) while the reporting
Indian company is called as Direct Investment Enterprise (DIE).
If the reporting Indian company
also holds the equity shares in its DI company abroad and if its share
is less than 10 per cent of equity capital of DI company, then it is
called as reverse investment and same should be reported under
item 1.1 (claim on direct investor) of the respective block i.e. Block
2A or 2B.
(b) Foreign Direct Investment abroad by
Indian companies (Block 4A and 4B)
If the reporting Indian company invest
in equity shares of non-resident company, under the Overseas Direct Investment
scheme in India, i.e. investment in Joint venture or Wholly owned subsidiaries
abroad, then it should be reported under the Foreign Direct Investment abroad,
Section III. If the equity holding of Indian company in non-resident company is
10 per cent or more, then it should be reported under Block 4A
(item 1.1 claim on DIE), otherwise, it should be reported under Block
4B (item 1.1, claim on DIE). In both the cases, Indian company is called as
the Direct Investor (DI) while the non-resident company is called as Direct
Investment Enterprise (DIE).
If the non-resident DIE also
holds the equity shares in Indian reporting company (DI) and if its
share is less than 10 per cent of equity capital of reporting company,
then it is called as reverse investment and same should be reported under
item 1.2 (liabilities to DIE) of the respective block i.e. Block 4A or
4B.
(ii)
Other
Capital under Direct Investment (Block 2A, 2B, 4A and 4B)
The other capital (inter-company
debt transactions) component of direct investment
covers the outstanding liabilities or claims arising due borrowing and
lending of funds, investment in debt securities including non-participating
preference shares, trade credits, financial leasing, share application money,
between direct investors and DIEs and between two DIEs that share the same
Direct Investor. Non-participating preferred shares owned by the direct
investor are treated as debt securities & should be included in Other
Capital.
B.
Portfolio Investment:
(i) Portfolio Investment (Block 3A
& 5A)
It covers external claims by or
liabilities to reporting Indian company in equity and debt securities other
than those included in direct investment (Block 2A, 2B and 4A, 4B). Debt
securities include long-term bonds and notes, short-term money market
instruments.
Any investment is made by the
non-resident entities in Indian company under the Portfolio Scheme in
India should be should be reported under Block 3A (Portfolio
liabilities).
Any investment made by the Indian
company in foreign shares and / or debt securities, apart from the
investment made under the Overseas Direct Investment Scheme, should be
reported under Block 5A (Portfolio assets).
(ii)
Equity Securities (Block 3A & 5A, Item 1.0)
Equity securities are instruments acknowledging
the holders' claim to the residual income of the issuing enterprise after the
claims of all creditors have been met. These include ordinary shares, stocks,
participating preference shares, depository receipts (ADRs/GDRs) denoting
ownership of equity securities issued to non-residents, shares/units in mutual
funds & investment trusts,
equity securities that are sold under repurchase agreement, equity securities
that are sold under securities lending arrangement.
(iii) Debt Securities (Block 3A
& 5A, Item 2.0)
These include bonds and notes, money
market instruments.
(iv) Bonds and Notes (Block 3A
& 5A, Item 2.1)
This category includes debt securities
with original contractual maturities of more than one year (long-term). It
includes the long-term securities such as Debentures, Non-participating
preference shares, Convertible bonds, Negotiable certificates of deposit,
Perpetual bonds, Collateralized mortgage obligations, Dual currency, Zero
coupon and other Deep discounted bonds, Floating rate bonds and Index-linked
bonds.
(v) Money Market Instruments (Block 3A
& 5A, Item 2.2)
These short-term instruments include
treasury bills, commercial paper, banker’s acceptances, short-term negotiable
certificates of deposit and short-term notes issued under note issuance
facilities. It may be noted that the instruments that share the characteristics
of money market instruments but are issued with maturities of more than one
year are classified as Bonds and Notes.
C. Financial Derivatives (Block 3B
and 5B)
Financial derivatives are linked to a
specific financial instrument, indicator, or commodity and through which
specific financial risks can be traded in the financial markets in their own
right. Derivative instruments include futures, interest and cross-currency
swaps, forward rate agreements, forward foreign exchange contracts, credit
derivatives and various types of options.
D. Other Investments: (Block 3C
and 5C)
This is a residual category that includes
all financial outstanding not considered as direct investment
or portfolio investment such as:
(i)
Trade Credits (Block 3C & 5C, Item 4.0)
Trade credits are assets and
liabilities that arise from the direct extension of credit from a supplier
to a buyer for transactions in goods and services and advance
payments by buyers for transactions in goods and services and for work in
progress. Trade credit assets are advance payments made by importer
(you) for (your) imports or credit extended by exporter (you)
directly to (your) importer. Trade credit liabilities are advance
payment received by the exporter (you) for (your) exports or credit
received by importer (you) directly from (your) exporter. It may be noted
here that funding provided by an enterprise other than the supplier for
the purpose of purchasing goods or services is treated as a loan and not
as trade credit.
(ii)
Loans (Block 3C & 5C, Item 5.0)
Loans are direct lending of funds by a
creditor to a debtor through arrangements. These include, loans to finance
trade (i.e. Buyers’ credit in which a bank or a financial institution or an
export credit agency in the exporting country extends a loan directly to a
foreign buyer or to a bank in the importing country to pay for the purchase of
goods and services), mortgages, and other loans and advances. Financial leases
and repurchase agreements are also considered loans.
Note that loan received from the
non-resident direct investor should be reported under Other Capital of
Block 2A or 2B while loan extended to your subsidiaries/
associates abroad should be reported under Other Capital of block
4A or 4B. These outstanding loans should be reported under the loan item of
Block 3C or 5C.
(iii)
Other Liabilities and Assets (Block 3C & 5C, Item 6.0)
These are the residual items that
include all external financial liabilities and assets not recorded elsewhere in
the liabilities/assets. These are miscellaneous accounts
receivable and payable such as accounts
relating to interest payments in arrears, loan payments in arrears, wages and
salaries outstanding, prepayments of insurance premiums, taxes outstanding
& the like.
(iv)
Long-term and Short-term Investment (Block 3C & 5C)
Long-term investment
is defined as investment with an
original contractual maturity of more than one year. Short-term investment includes currency, investment
payable on demand or with an original contractual maturity of one year or less.
E. Disinvestments in India and Abroad (Item 3.0 in Block 2A, 2B, 3A, 4A,
4B & 5A)
Any disinvestments
made by non-resident direct investor of the reporting Indian company during the
year should be reported in Block 2A and Block 2B and portfolio disinvestments in Block 3A. Likewise, any disinvestment made by the reporting Indian company in its
DIE abroad during the year should be reported in Block 4A and 4B and portfolio
disinvestments by reporting company should
be reported in Block 5A.
F. Contingent Liabilities (Block 7)
Contingent
liabilities are obligations that arise from a particular discrete event(s),
which may or may not occur. Contingent liabilities are (i) explicit -
arise from a legal or contractual arrangement (Loan & other payment
guarantees, credit guarantees, Contingent credit availability guarantees,
exchange rate guarantees, etc) and (ii) implicit - do not arise from a legal
or contractual source, but recognized after a condition or event is realized.
If
the Indian company has extended a guarantee to a loan taken by non-resident
entity (may be its subsidiary abroad), such guarantees are part of contingent
foreign liabilities. In this case, under column1 of block 7, “Loan Guarantee”
needs to be mentioned.
Country should relate to the country
of location of the non-resident creditor involved in the transaction. To
illustrate, as mentioned above, if the contingent foreign liability is in
connection with guarantees on loans, the country of location of the
non-resident creditor to whom such guarantees are given, needs to be reported
in column 2.
Ozg FEMA Consultant
Phone # 09811415831-37-61-72-84-92-94
