An International Financial Services Centre (IFSC) is a designated hub within a country that caters to customers outside the domestic economy by providing financial services and products. These services typically include banking, insurance, asset management, and capital market services. The primary purpose of an IFSC is to facilitate global financial transactions and attract international businesses. Examples of IFSCs include the Gujarat International Finance Tec-City (GIFT City) in India, Dubai International Financial Centre (DIFC) in the UAE, and International Financial Services Centre (IFSC) in Dublin, Ireland. These centers play a crucial role in integrating the domestic economy with global financial markets.

Table of Contents

1. Introduction
2. What is IFSC?
3. What are the permitted Business Activities in IFSCs?
4. Who can set up the IFSC banking unit?
5. What are the business activities carried out by IFSC Banking unit?
6. What are the licensing requirements for Indian and foreign banks in India’s IFSCs?
7. What are the Capital and Compliance Requirements?
8. How does the authority handle license applications and rejections for Indian and foreign banks in IFSCs?
9. What are the norms for establishing representative or administrative offices?
10. Prudential Regulatory Requirements for Banking Units Operating as IBU or IBC
11. Regulatory Requirements for Banking Units to ensure Financial Stability
12. Leverage Ratio Norms and Guidelines for Banking Units
13. Exposure Ceiling Norms and Guidelines for Banking Units
14. Reserve Requirements for International Banking Units (IBUs) and International Banking Centers (IBCs)
15. Non-Availability of Lender of Last Resort Support for Banking Units
16. Currency Regulations for Conducting Business by Banking Units
17. Banking Units Permitted to Open Foreign Currency Accounts for Individuals and Corporate Entities
18. Transactions through Foreign Currency Accounts
19. Permitted Activities for Banking Units
20. Know Your Customer and Anti-Money Laundering Measures
21. Operational Requirements: Reporting Obligations for Banking Units
22. Maintenance of Books of Account, Records, and Documents
23. Deposits of a Banking Unit: Insurance Coverage under the Deposit Insurance and Credit Guarantee Corporation Act, 1961
24. Exchange of Margins for Non-Centrally Cleared Over-the-counter Derivative Contracts
25. Way forward – New opportunities for Banking Units in IFSC
26. Conclusion

1. Introduction

The International Financial Services Centres (IFSCs) in India, particularly at GIFT City, are designed to cater to the needs of international financial institutions and businesses. These centres offer a conducive regulatory environment for banking units, enabling both Indian and foreign banks to operate with a global focus. IFSC banking units (IBUs) and IFSC banking companies (IBCs) can be set up by eligible Indian and foreign banks, subject to specific licensing and regulatory requirements. An effort has been made in this write-up to provide the provision relating to banking units in IFSC in a simplified manner.

2. What is IFSC?

International Financial Services Centre” means an International Financial Services Centre set up before or after the commencement of this Act, under section 18 of the Special Economic Zones Act, 2005[1].

An International Financial Services Centre (IFSC) is a specialised area within a Special Economic Zone (SEZ) that is developed to establish a global financial hub. It allows financial entities to set up operations and offer various financial services, such as corporate banking, insurance, investment and fund management, and securities trading, to individuals and businesses across borders.

The primary objective of creating an IFSC is to attract foreign investors and encourage their investments in India. This facilitates the inflow of foreign funds into the Indian market and generates local employment opportunities. To entice global participants, providing infrastructure facilities, technological capabilities, and regulatory requirements that meet international standards is crucial.

3. What are the permitted Business Activities in IFSCs?

International Financial Services Centres (IFSCs) host a range of business activities, such as banking, insurance, capital market operations, asset management, and ancillary/support services.

• Banking
• Insurance
• Capital Market
• Asset Management
• Ancillary/Support Services

4. Who can set up the IFSC banking unit?

• Indian Bank
• Foreign Banks

5. What are the business activities carried out by IFSC Banking unit?

• Borrowing & Lending
• Trading & Clearing member
• Deposits
• Bank Guarantee/Short term loans
• ECB/Trade Finance
• Derivative Products

6. What are the licensing requirements for Indian and foreign banks in India’s IFSCs?

To establish a Banking Unit within an International Financial Services Centre (IFSC) in India, both Indian and foreign banks must navigate a structured regulatory framework to ensure compliance and financial stability. This involves obtaining a license or permission from the relevant authority, typically the International Financial Services Centres Authority (IFSCA), which governs the operations within these specialized financial zones.

6.1 Key Points in the Process

6.1.1 Regulatory Approval

Banks must apply for and secure permission from the IFSCA. This regulatory step ensures that only entities that meet stringent standards of financial health, governance, and operational capability can operate within an IFSC.

6.1.2 Types of Banking Units

• IFSC Banking Unit (IBU): An IBU is essentially a branch of a bank set up within an IFSC to carry out permissible banking activities, typically catering to the needs of international clients, such as global corporations, financial institutions, and non-resident Indians.
• IFSC Banking Company (IBC): An IBC is a more integrated entity, potentially offering a broader range of services compared to an IBU. It might be set up as a wholly-owned subsidiary of the parent bank, providing a more permanent presence in the IFSC.

6.1.3 Conversion of IBU to IBC

• Existing IBU Conversion: A parent bank that has already established an IBU in an IFSC may seek to convert this unit into an IBC. This conversion is not automatic and requires prior approval from the IFSCA.
• Application Process: The bank must submit a detailed application outlining its operational plans, financial health, and compliance strategies. The IFSCA will review the application and assess whether the proposed conversion aligns with regulatory standards and the IFSC’s strategic goals.

6.1.4 Compliance and Governance

Both IBUs and IBCs must adhere to the regulatory framework established by the IFSCA, which includes compliance with international financial standards, anti-money laundering (AML) regulations, and other relevant laws. This ensures that operations within the IFSC are transparent, secure, and contribute positively to the global financial ecosystem.

6.1.5 Permissible Activities

IBUs and IBCs can engage in various activities such as lending, borrowing, trade finance, investment banking, and wealth management. The specific range of activities may vary based on the license obtained and regulatory approvals.

6.1.6 Clientele

The primary clients for these units are typically international entities, including multinational corporations, offshore financial institutions, and non-resident Indians, thereby contributing to the globalization of financial services offered by the IFSC.

6.2 Advantages of Establishing Units in IFSC

• Strategic Location: IFSCs are designed to be financial hubs that connect domestic financial markets with the global economy, providing a strategic advantage for banks looking to expand their international footprint.
• Regulatory Benefits: The regulatory framework of IFSCs often includes incentives such as tax benefits, relaxed currency regulations, and streamlined compliance requirements, making them attractive destinations for banking operations.
• Enhanced Services: By operating in an IFSC, banks can offer a more extensive range of services to their international clients, leveraging the sophisticated infrastructure and business-friendly environment of these centres.

Establishing Banking Units in an IFSC represents a significant step for Indian and foreign banks aiming to enhance their global presence and operational capabilities. By obtaining the necessary regulatory approvals and adhering to the compliance framework, these banks can tap into new markets, offer diverse financial services, and contribute to the overall growth and stability of the inter.

7. What are the Capital and Compliance Requirements?

7.1 Capital and Compliance Requirements in IFSC Banking Unit

The applicant shall satisfy the following requirements for the grant of license or permission by the Authority to set up an IFSC Banking Unit:

7.2 Capital and Compliance Requirements in IFSC Company Unit

The applicant shall satisfy the following requirements for the grant of license or permission by the Authority to set up an IFSC Company Unit:

8. How does the authority handle license applications and rejections for Indian and foreign banks in IFSCs?

After considering the application, the authority may grant a license or permission. If the authority decides not to grant the license, it will provide the applicant with reasons and allow 30 days for filing written submissions. If the authority remains unsatisfied upon reviewing the submissions, it will reject the application and communicate the decision in writing within 30 days.

9. What are the norms for establishing representative or administrative offices?

A parent bank may establish its representative or global administrative office in the IFSC under suitable mechanisms and conditions specified by the IFSCA.

10. Prudential Regulatory Requirements for Banking Units Operating as IBU or IBC

The prudential regulatory requirements mandate that Banking Units, whether operating as International Banking Units (IBUs) or International Banking Centers (IBCs), adhere to norms and guidelines prescribed by the Authority. Additionally, IBUs must comply with directions from their Home Regulator unless otherwise specified. These provisions aim to ensure the stability and proper functioning of banking operations in adherence to international and local standards.

11. Regulatory Requirements for Banking Units to ensure Financial Stability

Liquidity ratios are critical financial metrics that Banking Units must maintain to ensure adequate liquidity and financial stability. The Authority specifies these ratios, which include the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). In certain circumstances, the parent bank can maintain these ratios for International Banking Units (IBUs) with the prior approval of the Authority.

12. Leverage Ratio Norms and Guidelines for Banking Units

Banking Units must adhere to the norms and guidelines regarding the Leverage Ratio as specified by the Authority. The Leverage Ratio is a key regulatory metric that ensures banks maintain a minimum level of capital relative to their total assets, thus promoting financial stability and reducing the risk of excessive leverage.

13. Exposure Ceiling Norms and Guidelines for Banking Units

Banking Units must comply with the norms and guidelines regarding exposure ceilings as specified by the Authority. Exposure ceilings limit the maximum amount a bank can lend to a single borrower or group of connected borrowers, mitigating concentration risk and promoting diversified lending practices.

14. Reserve Requirements for International Banking Units (IBUs) and International Banking Centers (IBCs)

Banking Units, specifically International Banking Units (IBUs) and International Banking Centers (IBCs), must adhere to reserve requirements as specified by the Authority. These requirements include exemptions from the Cash Reserve Ratio (CRR) for certain liabilities and mandated reserve ratios for deposits raised from individuals, ensuring the stability and compliance of banking operations within regulatory frameworks.  An IBC shall maintain such reserves and in such manner as are mandated under the Banking Regulation Act, 1949 and the Reserve Bank of India, 1934.

15. Non-Availability of Lender of Last Resort Support for Banking Units

Banking Units are required to operate without the support of a Lender of Last Resort (LOLR). This provision implies that banking units cannot rely on the central bank or any other authority to provide emergency funding in times of financial distress or liquidity crises. This policy encourages Banking Units to maintain robust risk management and sufficient liquidity reserves to withstand financial shocks independently.

16. Currency Regulations for Conducting Business by Banking Units

Banking Units are mandated to conduct business in specified foreign currencies with individuals or entities, whether residents or non-residents, as directed by the Authority. However, with proper authorisation, Banking Units may also conduct business in Indian Rupees (INR), provided the transactions are settled in the specified foreign currencies. These regulations aim to standardise currency usage and ensure effective financial settlements.

The Authority designates specific foreign currencies in which Banking Units can conduct business. These typically include major global currencies like USD, EUR, GBP, and others that are widely accepted in international transactions.

17. Banking Units Permitted to Open Foreign Currency Accounts for Individuals and Corporate Entities

Banking Units can open accounts in specified foreign currencies for individuals and corporate or institutional entities, regardless of whether they are resident in India or abroad. This regulation aims to facilitate smoother transactions connected to permissible current or capital account activities as stipulated by the Reserve Bank of India’s Liberalised Remittance Scheme (LRS). The following sections provide a detailed analysis of the conditions and permissions granted to individuals and entities regarding foreign currency accounts.

18. Transactions through Foreign Currency Accounts

Regulation 12 prohibits cash transactions to ensure traceability and prevent illicit activities. Individuals can open current, savings, or term deposit accounts, while entities can open current or term deposit accounts, subject to conditions specified by the Authority. These measures enhance financial transparency and compliance, with Banking Units responsible for ensuring adherence to the rules. The conditions may include documentation requirements and transaction limits, aiming to maintain the integrity and security of the financial system. Compliance with these provisions is mandatory to uphold financial discipline.

19. Permitted Activities for Banking Units

Banking Units may engage in activities specified under clause (e) of sub-section (1) of Section 3 of the Act and Section 6 of the Banking Regulation Act, 1949. These activities include typical banking operations such as accepting deposits, lending, and other financial services, provided they are not explicitly prohibited by the Home Regulator or the Authority.

Certain activities may be expressly prohibited by either the parent bank’s Home Regulator or the Authority. Banking Units must comply with these prohibitions to ensure adherence to regulatory standards and maintain the integrity of financial operations.

The Authority may specify terms and conditions or guidelines related to the design, execution, and risk management of these activities. Banking Units must follow these guidelines to mitigate risks and ensure safe and sound banking practices.

To eliminate any ambiguity, Regulation 13(2) states that providing “Referral services” is a permitted activity under these regulations. This clarification ensures that Banking Units can confidently include referral services in their range of activities without breaching regulatory compliance.

20. Know Your Customer and Anti-Money Laundering Measures

Know Your Customer (KYC) and Anti-Money Laundering (AML) measures are critical for maintaining the financial system’s integrity. Banking Units must follow stringent guidelines[2] issued by the Authority to combat money laundering, terrorist financing, and other financial crimes.

21. Operational Requirements: Reporting Obligations for Banking Units

Banking Units must regularly furnish information relating to their operations to the Authority. This information is to be provided in the manner and form specified by the Authority, ensuring consistency and comprehensiveness in reporting. The aim is to ensure that the Authority has up-to-date and accurate data on the operations of Banking Units.

Reports must be submitted in US Dollars unless otherwise specified by the Authority. This standardization facilitates uniformity and ease of analysis for the Authority.

22. Maintenance of Books of Account, Records, and Documents

Regulation 16 mandates that Banking Units maintain their books of account, records, and documents in the foreign currencies specified at the time of their application. This requirement ensures that financial statements are coherent and comparable across different jurisdictions, facilitating international business and regulatory compliance.

23. Deposits of a Banking Unit: Insurance Coverage under the Deposit Insurance and Credit Guarantee Corporation Act, 1961

The deposits held by banking units can be insured under certain conditions as stipulated by the Deposit Insurance and Credit Guarantee Corporation Act, 1961, and its associated rules and regulations. This Act aims to safeguard depositors by ensuring a level of protection for their deposits in the event of bank failure. The following sections will provide a detailed analysis of the relevant provisions, eligibility criteria, and extent of deposit insurance coverage.

24. Exchange of Margins for Non-Centrally Cleared Over-the-counter Derivative Contracts

In the context of derivative trading, banking units may exchange margins with counterparties to mitigate counterparty credit risk for non-centrally cleared over-the-counter (OTC) derivatives. This practice involves using specified foreign currencies, permissible listed debt securities, and sovereigns. The arrangement aims to reflect the mark-to-market exposure under legally enforceable netting agreements as specified by the regulatory authority. This document provides a detailed analysis of the applicable provisions and requirements.

25. Way forward – New opportunities for Banking Units in IFSC

In the growing landscape of International Financial Services Centres (IFSC), banking units have numerous opportunities to expand their services and offerings. The unique regulatory environment of IFSCs allows banks to operate with greater flexibility and offer a wider range of financial products. Here are some key opportunities for banking units in IFSCs to take advantage of:

• Allowance for Indian Rupee External Commercial Borrowings (INR ECBs)
• Authorization to conduct Foreign Portfolio Investment (FPI) activities
• Acceptance of deposits from Qualified Resident and Non-resident Individuals
• Exemption from Cash Reserve Ratio (CRR) requirements on deposits, excluding those from Qualified Institutions (QI) and Qualified Resident Individuals (QRI)
• Provision of Non-deliverable Currency Contracts
• Issuance of Commitments and Guarantees
• Offering of Credit Enhancement and Insurance Services
• Availability of Post-Shipment Export Credit
• Permission to invest on your own account and on behalf of clients

26. Conclusion

Establishing IFSC banking units (IBUs) and companies (IBCs) in India provides significant opportunities for both Indian and foreign banks to engage in a wide range of financial activities. These units operate under stringent regulatory frameworks to ensure financial stability and compliance with international standards. Licensing requirements include a robust application process, minimum capital requirements, and compliance with home and host country regulations. The prudential norms encompass liquidity ratios, leverage ratios, exposure ceilings, and currency regulations. These measures ensure that IFSC banking units maintain financial discipline, manage risks effectively, and contribute to the growth of India’s financial sector.

[1] Section 3(g) of IFSCA Act, 2019

[2] Banks must adhere to the IFSCA (Anti Money Laundering, Counter-Terrorist Financing and Know Your Customer) Guidelines, 2022

The post [Analysis] IFSC Banking | Regulatory Framework and Strategic Opportunities appeared first on Taxmann Blog.

Case Details: Bajaj Constructions v. State of Maharashtra - [2024] 163 taxmann.com 675 (HC - Bombay)

Judiciary and Counsel Details

• N.J. Jamadar, j.
• Niranjan Mundargi, Manisha Prajapati & Dhiren Shah for the Petitioner.
• Prashant Jadhav, APP & Sayaji Nangre for the Respondent.

Facts of the Case

In the instant case, the complainant company was engaged in the business of internal and external painting of buildings, plumbing and reconstruction work. The accused also deals in the business of building construction and real estate development.

One of the buildings, namely the Vandana Building, which was then developed by the accused, was incomplete. At the instance of the accused, the complainant carried out balanced civil work of the said building. The accused had agreed to pay consideration of Rs.1.70 crore. The accused issued a cheque towards the discharge of the said liability.

Upon presentation, the cheque was returned unencashed. Thereafter, a demand notice was issued. Despite service of the demand notice, the accused committed default in payment of the amount covered by the cheque. Hence, a complaint under section 138 of the Negotiable Instruments Act, 1881, was filed.

Upon being served with the summons, the accused appeared. The complainant moved an application under section 143A of the Act, seeking a direction against the accused to pay 20% of the cheque amount as interim compensation. The accused resisted the application by filing a reply contending, inter alia, that a substantial portion of the amount covered by the subject cheques was, in fact, paid to the complainant in cash and through banking channels.

It was contended that the complainant had misused custody of the subject cheque and suppressed the fact that a substantial portion of the amount had already been repaid. Consequently, the presentment of a cheque without acknowledging part payment having already been received was illegal, and, therefore, cheques could not be said to have been drawn in the discharge of a legally enforceable debt or liability.

Thus, the Metropolitan Magistrate was persuaded to reject the section 143A application. The Additional Sessions Judge, however, allowed the revision application and directed the accused to deposit 20% of the amount covered by cheque by way of interim compensation.

Being aggrieved, the accused had filed an instant writ. It was noted that prima facie, the finding of the Metropolitan Magistrate did not appear to be based on any material. Further, copies of vouchers and extracts of bank accounts, allegedly evidencing payment by the accused to the complainant, were tendered along with a reply filed by the accused.

High Court Held

The High Court noted that the order passed by the Metropolitan Magistrate did not suffer from such legal infirmity as to warrant interference in exercising revisional jurisdiction.

Further, since the order passed by the Metropolitan Magistrate was discretionary in nature, it was not open to the revisional Court to lightly interfere with the exercise of discretion by the Magistrate unless it appeared that discretion was exercised in an arbitrary manner by either ignoring relevant material or taking into account irrelevant material.

The High Court held that revisional jurisdiction could not have been exercised only because a different view was possible on the same set of facts. Therefore, the impugned order passed by the Session Judge was to be set aside, and the order passed by the Metropolitan Magistrate was to be restored.

The post Magistrate Denied Interim Compensation for Cheque Bounce as Bank Extracts and Vouchers Clearly Evidenced Partial Payment appeared first on Taxmann Blog.

Case Details: Harpreet Sahni v. ShriChand Hemnani - [2024] 163 taxmann.com 676 (HC - Delhi)

Judiciary and Counsel Details

• Navin Chawla, j.
• Sanjay Madan, Adv. for the Petitioner.
• Neeraj Gupta & Kamal Gupta, Advs. for the Respondent.

Facts of the Case

In the instant case, the respondent extended a loan to trust ‘P’. ‘P’ defaulted in repayment of the loan, and when the respondent deposited cheques issued by ‘P’ for the said repayment, the same were dishonoured with remark funds insufficient.

The Respondent issued legal notices to ‘P’ to repay the cheque amount. However, the same was not paid. Thereafter, the Respondent filed a complaint against ‘P’ and its trustees, including the petitioner, under section 138 of the Negotiable Instruments Act, 1881.

The Trial Court passed the impugned order and issued a summons to ‘P’ and its trustees, as accused in the complaint. The petitioner filed instant petitions, being aggrieved by the impugned order, and submitted that the said notice was not addressed to him in his capacity. Therefore, the complaint against the petitioner was not maintainable, and the petitioner could not be summoned in it.

It was noted that the petitioner, in their capacity as trustees of said trust, was an officer in charge of the trust. Further, for a complaint for an offence under section 138 of the Act to be maintainable, the holder of the cheque should demand repayment by giving a notice in writing to the drawer of the cheque.

High Court Held

The High Court noted that the cheques were drawn by said trust, i.e., the drawer of cheques, and legal notice was issued to the trust, which was addressed to be served on trust through its trustees.

The High Court held that since there was no requirement for separate notice to be issued to each of the trustees of the said trust to make them vicariously liable and to be proceeded against in terms of section 138 read with section 141, all trustees were deemed to be duly served with a legal notice, thereby meeting the requirement of proviso (b) to section 138 and, thus, the instant petition was to be dismissed.

The post Trustees Are Liable for Cheques Dishonored by Trust | No Need for Separate Notice to Establish Vicarious Liability appeared first on Taxmann Blog.

Case Details: Shailesh V Shah v. Directorate of Enforcement - [2024] 163 taxmann.com 648 (SAFEMA-New Delhi)

Judiciary and Counsel Details

• • Munishwar Nath Bhandari, Chairman & Balesh Kumar, Member
  • T. Sundar Ramanathan & Ms Sukanya Viswanathan, Advocates for the Appellant.
  • Mahip Datta Parashar & Surender Kumar, Advocates for the Respondent.

Facts of the Case

HC quashes Sec. 138 complaint against CS as complainant failed to prove her involvement in cheque dishonoring
Rashmi Goyal v. Mahalaxmi Fabrics – [2024] 163 taxmann.com 647 (HC – Delhi)

In the instant case, the Respondent company/complainant, engaged in the business of manufacturing Men’s jeans, supplied the said goods to the accused from time to time and raised bills, which were duly received and acknowledged by the accused.

Subsequently, the accused issued certain cheques of varied amounts (subject cheques) to discharge their liability under the bills raised. Upon presentation, the subject cheques were dishonoured, and consequently, criminal complaints under section 138 were filed.

In the said complaints, the petitioner (i.e., the Company Secretary) of the accused company sought to be made vicariously liable for the offence owing to assurances advanced by her regarding the payment of bills raised and the encashment of the subject cheques.

It was noted that nowhere in the complaint, the complainant averred that the petitioner was in charge of, and responsible for the conduct of the business of the accused company.

Further, the phrase ‘in charge of a business’ had been interpreted to mean a person having overall control of the day-to-day business of the company. In the ordinary course of business, it could not be said that the petitioner, who was acting as a Company Secretary, would be in charge of the day-to-day affairs of the accused company, as required in terms of Section 141(1) of the Negotiable Instruments Act, 1881. Thus, the petitioner cannot be vicariously liable under Section 141(1) of the Act.

The High Court held that neither was there any averment that the offence had been committed with consent or connivance of or was attributable to any neglect on the part of the petitioner, which could potentially make her liable under section 141(2) of the Act.

Therefore, the continuation of proceedings against the petitioner would be nothing but an abuse of the process of law. Consequently, the criminal complaint under section 138 of the Act was to be quashed qua the petitioner.

Appellate Tribunal reduced penalty for under-invoicing imports under FERA as abetment charges lacked evidence
Shailesh V Shah v. Directorate of Enforcement – [2024] 163 taxmann.com 648 (SAFEMA – New Delhi)

In the instant case, the ED conducted a search and seizure in the office premises of the appellant’s company, and some documents were recovered. It was observed that the appellant had underinvoiced imported consignments of medicine, and it instructed bank ‘N’ to issue a demand draft in favour of a foreign company from the NRE account of his cousin settled abroad in contravention of section 9 of FERA.

Show cause notices were issued charging the appellant in contraventions of sections 8 and 9 of the FERA for under-invoicing imports of many companies and acquisition of US $ 48,060 for making payment to a company abroad without general or special exemption of the RBI. Also, it was alleged that the appellant abetted banks for the import of certain currency.

The Adjudicating Authority passed the impugned orders against the appellant, holding that charges against the appellant were established. Hence, a penalty of 50 lakhs was imposed, and an amount from the said bank was confiscated.

On an appeal, the appellant submitted that there was no evidence on record to show alleged contraventions as there was nothing on record which brings out that the appellant otherwise received or remitted foreign exchange and he was related to imports of company ‘C’ only.

It was noted that there were evidences on record with respect to under-invoicing of import of consignments handled by the appellant to save customs duty, however, abetment charges were not proved against the appellant as there was no evidence on record to establish that he assisted ‘N’ to indulge in said contraventions.

Further, in view of documents received from ‘N’, charges invoked against the appellant under section 9 of the FERA stood established and, hence, confiscation was not to be intervened with.

Appellate Tribunal Held

The Appellate Tribunal held that since some charges were established to the extent of US $ 1,14,150 only, the amount of penalty imposed was not justified and, thus, the consolidated penalty amount was to be reduced to Rs. 10 lakhs.

Therefore, the impugned order was to be set aside with respect to the appellant in so far as unestablished charges invoked against him and the amount of pre-deposit of penalty was to be refunded. Thus, the instant appeal was to be partly allowed.

The post Appellate Tribunal Reduced Penalty for Under-invoicing Imports Under FERA as Abetment Charges Lacked Evidence appeared first on Taxmann Blog.

Case Details: Rashmi Goyal v. Mahalaxmi Fabrics - [2024] 163 taxmann.com 647 (HC-Delhi)

Judiciary and Counsel Details

• • Manoj Kumar Ohri, J.
  • Ms Shilpa Sharma, Adv. for the Petitioner.
  • Vishwendra Verma & Ms Shivali for the Respondent.

Facts of the Case

In the instant case, the Respondent company/complainant, engaged in the business of manufacturing Men’s jeans, supplied the said goods to the accused from time to time and raised bills, which were duly received and acknowledged by the accused.

Subsequently, the accused issued certain cheques of varied amounts (subject cheques) to discharge their liability under the bills raised. Upon presentation, the subject cheques were dishonoured, and consequently, criminal complaints under section 138 were filed.

In the said complaints, the petitioner (i.e., the Company Secretary) of the accused company sought to be made vicariously liable for the offence owing to assurances advanced by her regarding the payment of bills raised and the encashment of the subject cheques.

It was noted that nowhere in the complaint, the complainant averred that the petitioner was in charge of, and responsible for the conduct of the business of the accused company.

Further, the phrase ‘in charge of a business’ had been interpreted to mean a person having overall control of the day-to-day business of the company. In the ordinary course of business, it could not be said that the petitioner, who was acting as a Company Secretary, would be in charge of the day-to-day affairs of the accused company, as required in terms of Section 141(1) of the Negotiable Instruments Act, 1881. Thus, the petitioner cannot be vicariously liable under Section 141(1) of the Act.

High Court Held

The High Court held that neither was there any averment that the offence had been committed with consent or connivance of or was attributable to any neglect on the part of the petitioner, which could potentially make her liable under section 141(2) of the Act.

Therefore, the continuation of proceedings against the petitioner would be nothing but an abuse of the process of law. Consequently, the criminal complaint under section 138 of the Act was to be quashed qua the petitioner.

The post HC Quashes Sec. 138 Complaint Against CS as Complainant Failed to Prove Her Involvement in Cheque Dishonoring appeared first on Taxmann Blog.

Case Details: Sk. Rustam v. T. K. Datta - [2024] 163 taxmann.com 460 (HC - Calcutta)

Judiciary and Counsel Details

• Ananya Bandyopadhyay, J.
• Dipanjan Dutta, Karan Dudhwewala & Surajit Saha for the Petitioner.
• Ms Debjani Roy & Ms Sohini Dey for the Respondent.

Facts of the Case

In the instant case, the Enforcement Directorate (ED) issued a memorandum in 1996 requiring the petitioner/exporter company to show cause for contravening sections 18(2) and 18(3) of the Foreign Exchange Regulation Act, 1973 (FERA) for not realizing export proceeds from its foreign purchasers and for not furnishing a declaration in the prescribed form for exporting goods. Accordingly, a penalty of Rs.1.5 lacs was imposed upon the petitioner.

A complaint for the petitioner’s failure to pay the penalty was filed before the Metropolitan Magistrate, which issued a summons to the petitioner. An order was passed in 2001 convicting him of 6 months imprisonment and a fine of Rs.5000.

The petitioner preferred a revision against the said order. However, the Additional Sessions Judge vide the impugned order dismissed the appeal. The petitioner filed the instant revision petition against the impugned order and submitted that the FERA Act was repealed in 1998 and replaced by FEMA, 1999 wherein all contraventions related to foreign exchange were made civil offences, and no imprisonment would be imposed in case of any violation of provisions of FEMA.

It was noted that FEMA operated from 01.06.2000; the memorandum was issued against the petitioner in 1996, which was prior to the promulgation of FEMA. In accordance with sections 49(3) and 49(4) of FEMA, the provisions of FERA would be applicable in the instant case.

High Court Held

The High Court held that since the process instituted against the petitioner was justified and not harassive in nature and the petitioner was legally incumbent and liable for a contravention of section 18 of FERA, which was proved, the petitioner’s conviction was to be upheld, and the sentence was to be modified to a fine of Rs.3 lacs. Thus, the instant revision petition was to be dismissed.

Further, the High Court held that actions taken by the competent authorities against the offences committed under the repealed Act, i.e. FERA, would continue to be effective and valid for a period of two years from the date of commencement of the FEMA.

The post HC Upholds FERA Conviction in 2001 Despite FEMA Enactment, as FERA Stands Effective for 2 Years Post-FEMA appeared first on Taxmann Blog.

Acquisition and transfer of immovable property in India by non-residents and foreign entities are regulated under the Foreign Exchange Management Act (FEMA) and related regulations. Under FEMA regulations, non-residents acquire and transfer immovable property in India, which involves specific guidelines, restrictions, and compliance requirements. NRIs and OCIs enjoy relatively more freedom in property transactions compared to foreign citizens of non-Indian origin and foreign entities. Compliance with FEMA regulations is crucial to ensure legal property transactions and avoid penalties.

By CA. Niki Shah – Partner | SN & Co.

Table of Contents

1. In the News!
2. NRI – Definition Under FEMA
3. Immovable Property in India
4. Immovable Property Outside India
5. Case Studies

1. In the News!

Synopsis:

• Navigating property purchases in Dubai can be a regulatory maze for Indians due to foreign exchange laws.
• Deals offering easy payment plans with instalments over years may violate FEMA.
• However, transactions involving ‘instalments’ create obligations in foreign exchange, potentially breaching FEMA rules.

The transaction involving purchase of immovable property on deferred payment basis is not permitted without prior approval of RBI as it creates obligation in foreign exchange.

2. NRI – Definition Under FEMA

NRI means

“a person resident outside India who is a citizen of India”

“an individual resident outside India who is a citizen of India”

• FEM (Borrowing & Lending) Regulations, 2018
• FEM (Deposit) Regulations, 2016
• FEM (Remittance of Assets) Regulations, 2016
• FEM (Permissible Capital Account Transactions) Regulations, 2000
• FEM (NDI) Rules, 2019
• FEM (Debt Instruments) Regulations, 2019

3. Immovable Property in India

3.1 Acquisition and Transfer Rights of NRI and OCI

• Purchase by providing consideration ( IP other than agricultural land or farmhouse or plantation property
• Transfer any I.P in India to Resident
• Transfer any I.P other than agricultural land or farmhouse or plantation property to NRI or OCI
• Acquire any I.P through inheritance from either PROI or Resident
• Acquire as Gift from Resident or NRI or OCI [1]

[1] Who in any case is a relative as defined under section 2(77) of Companies Act

3.2 Purchase of Immovable Property by NRI

Points to be noted:

1. Gift can only be received from relative as defined in section 2(77) of Cos Act 2013
2. Purchase of IP is not allowed by way of Traveller’s Cheque or Foreign Currency notes or by any other mode other than permitted

3.3 Gift of Immovable Property to NRI

Case: Gifting to NRI

• Resident Purchases flat worth ₹ 10 Crore
• Wants to gift flat to NRI son
• Whether LRS limits will apply or only NDI rules

3.4 Inheritance of Immovable Property by NRI/OCI

NRI/OCIs can hold agricultural land received from inheritance or acquired when they were resident but cannot undertake agricultural activities on the same

3.5 Sale/Gift of Immovable Property by NRI/OCI

(1) Gift can only be received from relative as defined in section 2(77) of Cos Act 2013

3.6 How an NRI & OCI Acquire Immovable Property in India

*other than agricultural land/farmhouse/plantation

3.7 Joint Acquisition by the Spouse of a NRI or OCI

• Spouse of NRI/OCI who is PROI and not NRI/OCI can acquire only one IP (other than agricultural land, farm house or plantation property)
• Jointly with her NRI/OCI spouse
• Acquisition formalities remain the same as for NRIs/OCIs
• Marriage should be registered and should have subsisted for at least 2 years prior to date of acquisition
• The non-resident spouse must not be otherwise prohibited from such acquisition

3.8 Immovable Property in India for Permitted Activity

Permitted Activity

• PROI who has branch office, project office or other place of business in India can acquire IP in India.
• The IP can be used only for, or incidental to, carrying on of permitted activity.
• Liaison Office cannot buy IP Liaison office can take property only on lease (up to 5 years or up to the RBI approval date)
• Form IPI to be filed with RBI within 90 days of acquisition
• PROI can transfer such property by way of mortgage to an AD as a security for any borrowing

3.9 Payment/Repatriation

Payment for Acquisition

• Out of funds received in India through normal banking channels by way of inward remittance from any place outside India or
• By debit to his NRE/FCNR (B)/NRO account
• Payments cannot be made by traveller’s cheque or by foreign currency notes or by other mode except those specifically mentioned above

Repatriation of Sale Proceeds

• Property acquired by way of Sec 6(5) or his successor cannot repatriate outside India the sale proceeds of such immovable property without the prior permission of the RBI
• Sale of IP (other than agricultural land/farm house/plantation property) in India by a NRI/OCI provided:

1. 1. IP acquired by the seller in accordance with FEMA
   2. Amount for acquisition of IP has been paid in foreign exchange through normal banking channels or funds held in NRE Account or FCNR Account
   3. In the case of residential property, the repatriation of sale proceeds is restricted to not more than two such properties

NRI/OCIs have life time limit of repatriation from sale of two residential properties

Section 6(5) of FEMA states that a person resident outside India may hold, own, transfer or invest in any immovable property situated in India if such property was acquired, held or owned by such person when he was resident in India or inherited from a person who was resident in India

3.10 Case 1 – Buying Agricultural Land by NRI

Facts of the case

• Mr X, NRI wants to purchase agricultural land on outskirts of Sanand
• Mr X’s father as well as grand father are all farmers holding agricultural land in Sanand
• Mr X has transferred funds from US to his NRE A/c for purchasing above agricultural land

Questions

• Whether it is permissible for Mr X to purchase agricultural land from NRE A/c?
• Would answer be different if NRO A/c is utilised to purchase agricultural land?
• What to do incase wrongly purchased?

3.11 Case 2 – Acquisition of an Agricultural Land for Cultivation Purpose in India by a Foreign Nationals Without the Prior RBI Approval

Facts of the case

• Applicants: British citizens and UK residents.
• Joint acquisition of immovable property in Goa, India of Rs. 10,00,000.
• Property: Residential house and coconut cultivation.
• No prior RBI approval obtained at the time of acquisition.

Questions

• What will be the course of action and Compliance required to be done?
• Power of RBI to compound offence committed at the time of FERA?

3.12 Case 3 – Self Valuation or RBI Valuation

Facts of the case

• Non-resident French citizens acquired a plot in Kerala without RBI permission on 16th May 2005; land cost: Rs. 15,00,000; construction cost: Rs. 85,00,000.
• Built a residential building on the plot.
• Advised by RBI to sell the property to a PRI within 6 months; sold on 19th April 2017 for Rs. 75,00,000 to an Indian company.
• Applicants’ valuation report: Rs. 84,91,000; RBI’s valuation report: Rs. 1,28,75,000.
• RBI calculated undue gains as Rs. 28,75,000 (RBI valuation minus purchase and construction cost).

Questions

• What will be the course of action and Compliance required to be done?

4. Immovable Property Outside India

4.1 Investment in Immovable Property Outside India

Issues

1. Investment in foreign entities involved in Real Estate Business is prohibited Notification No. 120- Regulation 5(2).
2. Whether ODI in an entity which is engaged only in leasing of a property abroad permissible?

(1) Investment in Real Estate sector not allowed

4.2 Case Study 1 – Investment in Immovable Property Abroad under LRS

Facts

• Ambani family intends to purchase immovable property in UAE.
• Property investment is of $1 Million

Queries

• Can multiple family members invest together?

Answer

• Ambani Family can jointly purchase property – 4 family members can remit funds of USD 250,000 to invest 1M USD
• Property has to be in joint name
• Ownership needs to be in proportion to investment made
• Family Members covered No definition for family members

Facts

• Ambani family intends to purchase immovable property in UAE
• Property investment is of $1 Million

Queries

• Can property be purchased on instalment basis?
• Can property be purchased under EMI or mortgage loan?

Answer

• Installments

1. 1. LRS does not envisage extension of fund and non-fund based facilities by the AD banks to their resident individual customers to facilitate remittances for capital account transactions under LRS.
   2. However, AD banks may extend fund and non-fund based facilities to resident individuals to facilitate current account remittances under the Scheme.

• Loans

1. 1. Individuals cannot enter into a loan agreement overseas.
   2. (Refer Compounding Order dated 19.07.19 in case of Mr Dharmpal Agarwal).

4.3 Case Study 2 – Investment in Immovable Property Abroad under LRS through Company

Facts

• Mr A, Mr B and Mr C incorporate a Co. in UAE through LRS
• ABC Co. purchases immovable property in UAE

Queries

• Can property be purchased through company under LRS?

Answer

• This type of transaction is out of the purview of Rule 21, therefore not allowed without prior RBI approval

4.4 Case Study 3 – Investment in Immovable Property Abroad through Overseas Office of Indian Entity

Facts

• ABC Pvt Ltd incorporated in India has an overseas office in UAE.
• Can that overseas office purchases immovable property in UAE?

Queries

• Can property be purchased through the branch office?

Answer

• Overseas branches of an Indian company can acquire IP for its business including residence of its staff within the limits for initial & recurring expenses as follows:

1. 1. Upto 15% of average annual sales/turnover of the Indian party during last two financial years or
   2. Up to 25% of the net worth, whichever is higher for initial set up
   3. Up to 10% of the average annual sales/income or turnover during last two financial years towards recurring expenses

4.5 Immovable Property Outside India – Returning Indian

Section 6(4) Definition:

A person resident in India (person covered) may hold, own, transfer or invest in (transaction permitted) foreign currency, foreign security or any immovable property situated outside India (assets specified)

if such currency, security or property was:

1. acquired, held or owned by such person when he was resident outside India or
2. inherited from a person who was resident outside India

Common Doubts

• Is he needed to bring funds back to India on sale of such IP?
• Can he retain incomes earned on such property outside India? Can Returning Indian convert such IP to another asset?

Current Scenario

• Retain funds abroad on sale of assets
• Retain income earned on such assets abroad
• Reinvest the sale proceeds into new assets abroad

5. Case Studies

5.1 Whether Immovable Property Can be Acquired on Installment Basis?

Facts of the case

• Joint acquisition of a residential property in Singapore by the applicant and others, all resident individuals.
• Total cost of the property: SG$ 3,032,320.
• Part of the cost met through remittances under LRS.
• Remaining amount paid by a loan from OCBC Bank, Singapore in 2015.
• Loan and interest repayments (EMIs) made from lease rental proceeds.
• No gains made from overseas loans for property acquisition.

Questions

• What will be the course of action and Compliance required to be done?
• Whether immovable property can be acquired abroad on an installment basis?

The post Acquisition & Transfer of Immovable Property under FEMA Regulations – Guidelines | Practical Strategies | Case Studies appeared first on Taxmann Blog.

Circular No. RBI/2024-2025/43 FED Circular No. 11, Dated 11.06.2024

Earlier, RBI, vide circular dated 17.11.2023, permitted AD Category-I banks maintaining a Special Rupee Vostro Account on International Trade Settlement in Indian Rupees (INR) to open an additional special current account for their constituents exclusively for settlement of export transactions. Now, the facility of opening an additional special current account can be extended to settle their export and import transactions.

Click Here To Read The Full Circular

The post AD Cat-I Banks May Open Additional Special Current Accounts for Its Constituents to Settle Export & Import Transactions appeared first on Taxmann Blog.

The RBI proposals include revising bulk deposit limits for SCBs and SFBs to Rs 3 crore and setting the limit for Local Area Banks at Rs 1 crore, simplifying export and import guidelines to streamline operational procedures, and creating a Digital Payments Intelligence Platform to enhance security and reduce fraud. Additionally, the RBI plans to expand the e-mandate framework to include non-fixed periodicity payments like Fastag and NCMC top-ups, introduce automatic replenishment, and exempt these payments from pre-debit notification requirements. The UPI Lite wallet will also have an auto-replenishment facility when balances fall below a specified threshold. Lastly, the RBI will launch the global hackathon HaRBInger 2024, focusing on 'Zero Financial Frauds' and 'Being Divyang Friendly' to promote innovation.

Table of Contents

1. Introduction
2. Revised Bulk Deposits Limit
3. Simplifying Export and Import Guidelines
4. Digital Payments Intelligence Platform to Mitigate Payment Fraud Risks
5. Expansion of e-Mandate Framework for Recurring Payments
6. UPI Lite Wallet Auto-Replenishment Facility
7. Launching of RBI’s Global Hackathon – HaRBInger 2024
8. Conclusion

1. Introduction

On June 7, 2024, the Reserve Bank of India (RBI) unveiled a series of developmental and regulatory policy proposals to enhance India’s financial ecosystem’s security, efficiency, and inclusivity. This initiative, detailed in Press Release no. 2024-2025/454, focuses on two main areas: Regulations and Payment Systems and FinTech. The proposals include revising bulk deposit limits, rationalizing export and import guidelines, and setting up a Digital Payments Intelligence Platform to combat payment fraud. Here, we break down these key proposals and their potential impact.

2. Revised Bulk Deposits Limit

To streamline financial operations, the RBI plans to revise the definition of bulk deposits for Scheduled Commercial Banks (SCBs) and Small Finance Banks (SFBs). The current threshold for bulk deposits is set at single rupee term deposits of Rs 2 crore and above. The proposed revision will raise this limit to Rs 3 crore for SCBs and SFBs. Additionally, for local area banks, the bulk deposit limit will be set at Rs 1 crore, which will be aligned with the limit for regional rural banks (RRBs).

3. Simplifying Export and Import Guidelines

The RBI aims to rationalize existing guidelines for exporting and importing goods and services to keep up with the evolving dynamics of global trade. This simplification is expected to streamline operational procedures, promoting ease of doing business for all stakeholders involved in cross-border transactions. The draft regulations and directions will be available on the RBI’s website by the end of June 2024 for public feedback before finalization.

4. Digital Payments Intelligence Platform to Mitigate Payment Fraud Risks

To strengthen the security of digital payments and reduce fraud, the RBI has proposed creating a Digital Payments Intelligence Platform. This platform will leverage advanced technologies to provide network-level intelligence and real-time data sharing across payment systems. A committee has been established to explore the various aspects of this initiative, with recommendations expected within two months.

5. Expansion of e-Mandate Framework for Recurring Payments

The RBI’s framework for processing e-Mandates for recurring transactions, issued on January 10, 2020, currently enables recurring payments with fixed periodicity, such as daily, weekly, and monthly. The following enhancements are proposed:

5.1 Inclusion of Recurring Payments Without Fixed Periodicity

Payments such as Fastag and National Common Mobility Card (NCMC) top-ups, which recur without a fixed schedule, will be included in the e-mandate framework.

5.2 Introduction of Automatic Replenishment Facility

Under the e-mandate framework, it is proposed that an automatic replenishment facility for such payments be introduced. Automatic replenishment will be triggered when the balance in Fastag or NCMC falls below the threshold set by the customer.

5.3 Exemption from Pre-Debit Notification Requirement

The current e-mandate framework requires a pre-debit notification at least 24 hours before the actual debit from the customer’s account. It is now proposed that this requirement for automatic replenishment payments be exempted under the e-mandate framework.

6. UPI Lite Wallet Auto-Replenishment Facility

Currently, the UPI Lite facility allows a customer to load his UPI Lite wallet up to Rs. 2000/- and make payments up to Rs 500/- from the wallet. The UPI Lite facility will automatically load the wallet when the balance falls below a specified threshold, removing the need for additional authentication or pre-debit notifications. This aims to enhance user convenience and streamline digital payments.

7. Launching of RBI’s Global Hackathon – HaRBInger 2024

The RBI has continuously worked towards ensuring trust, safety, security, and inclusivity in the financial system, focusing on inclusive access and minimizing fraud. Technology has opened up effective possibilities for identifying and preventing financial fraud and widening the reach of financial services, thereby ensuring equitable access to financial products and services.

The Bank has encouraged innovation in identified focus areas through its annual Hackathons. The third edition of the global hackathon, “HaRBInger 2024, an Innovation for Transformation,” will be launched with two overarching themes: ‘Zero Financial Frauds’ and ‘Being Divyang Friendly.’

8. Conclusion

RBI’s new proposals aim to enhance security, streamline operations, and promote inclusivity in India’s financial services. The RBI addresses current challenges and fosters a safer financial environment by revising bulk deposit limits, simplifying export and import guidelines, and setting up a Digital Payments Intelligence Platform. The enhancements to the e-mandate framework and the introduction of auto-replenishment for UPI Lite wallets aim to improve the digital payment experience. At the same time, the global hackathon promotes innovation and inclusivity.

The post [Analysis] RBI’s New Proposals – Boosting Financial Security | Efficiency | Innovation appeared first on Taxmann Blog.

Circular No. RBI/2024-25/41 A.P. (DIR Series) Circular No. 09, Dated: 07.06.2024

The RBI has notified amendment in Paragraph 1(ix)(e) and Paragraph 24(1) of Foreign Exchange Management (Overseas Investment) Directions, 2022. As per the amended norms, the definition of Overseas Portfolio Investment (OPI) will also include investments in any other instruments (by whatever name called) issued by an investment fund overseas. Earlier, investment was only limited to ‘units’.

Click Here To Read The Full Circular

The post RBI Expands Scope of Overseas Portfolio Investments to Include All Instruments Issued by Overseas Investment Funds appeared first on Taxmann Blog.