Discussion points

1. Latest developments in optimal structuring of Inbound Investments including FDI, NRI Investments – FEMA and Taxation issues CA N.C. HEGDE5 July 2015

2. Discussion points Key decision metrics for inbound investments in India Forms of entity and funding alternatives Overview of Indian Exchange control and Tax regulations Recent developments impacting NR investments in India Parting thoughts

3. Structuring of Inbound investments in IndiaKey decision matrix INDIA INBOUND Growth rationale & Mode Ease of exit Preferred Industry & Investment cap Investment Horizon, funding & returns Entity forms and & Investment holding These decisions are primarily functions of extant tax and regulatory laws in India besides India’s political and overall socio-economic landscape – Global tax initiatives like BEPS do also have bearing

4. Broad Tax & Regulatory framework impacting inbound investments in India EXCHANGE CONTROL LAWS (FEMA, FDI Policy) EMPLOYMENT LAWS (PF Act / Wages Act) INDUSTRIAL LAWS (Industrial Disputes Act, Factories Act) INDIA BUSINESS TAX LAWS (Income Tax Act, Customs Act) COMPANY LAW (Companies Act, SICA) COMPETITION LAW (COMPETITION ACT) SECURITIES LAWS SCRA, SEBI, ICDR IMMIGRATION LAWS (VISA Regulations/ Passport Act) Businesses in India require understanding of the interplay between various applicable commercial laws –understanding of the civil and criminal laws become pertinent on specific situations

5. Principal Forms of Business entities • Liaison Office (‘LO’) • Acts as channel of communication • Can’t undertake commercial activities LO • Limited Liability Partnerships (‘LLP’) • Any activity under automatic route subject to specific approval LLP BO • Branch Office (‘BO’) • Export / import of goods • Professional service • Representing parent • Research activities • No manufacturing Forms of entities PO / SO UJV (AOP) • Unincorporated Joint Venture (‘UJV’) • Any activity subject • to specific approval WOS / IJV • Project Office (‘PO’) / • Site Office (‘SO’) • Execute specific projects • Wholly Owned Subsidiary (‘WOS’) / Incorporated Joint Venture (‘IJV’) • Any activity subject to FDI policy

6. CCPS/ OCPS DEBT EQUITY & QUASI EQUITY CAPITAL QUASI EQUITY HYBRID DEBENTURES DEPOSITORY RECEIPTS FUNDING OPTIONS DEBT LOANS DEBT EQUITY IDR ADR EQUITY FCCB CCD/ OCD GDR Quasi equity + Equity Non Convertible Debentures Debt + Equity Treatment will vary between capital / debt Negotiable foreign currency instruments with underlying equity / debt Funds may comprise of equity / debt / hybrid / depository instruments Treated as own capital. Returns by way of dividends / consideration on transfer Deposits, Promissory notes issued Domestic loans / ECB Equity Shares Treated as borrowed capital Own funds Debt + Equity Instruments with Global depository Preference shares Instruments issued by Indian Depository With differential voting rights Borrowed funds Instruments with American depository General funding alternatives • Indian Companies can issue capital / debt / hybrid instruments besides ADR /GDR / IDR subject to pricing guidelines / valuation norms and reporting requirements • Issue other types of preference shares such as non-convertible, optionally convertible or partially convertible, which have to be in accordance with the External Commercial Borrowings (ECB) guidelines Price/Conversion formula of convertible capital instruments to be determined upfront at the time of issue of the instruments

7. Profit repatriation alternatives Options Capital Restructuring Buyback of shares Dividend Royalty / FTS Interest Cost sharing arrangements Overseas investments Jurisdiction analysis Commercials Tax considerations (local & overseas) Withholding tax obligations Tax compliances Regulatory implications Transfer pricing

8. Gains from sale of CCDs in Joint Venture Company by foreign partner to Indian partner amounted to capital gains and not “interest” u/s 2(28A) -  Zaheer Mauritius – Delhi High Court

9. Zaheer Mauritius vs. DIT(IT) (Delhi – HC) (1/3) • Facts of the case: Assessee(engaged in construction and development business in India) Mauritius • Entered into a Securities Subscription Agreement (SSA) and a Shareholder's Agreement (SHA) with Vatika and the JV Co. India Vatika(Engaged in the business of developing and dealing in real estate) JV Co.(100% subsidiary of Vatika) Transferred interest in the land to the JV Co for development of the land

10. Zaheer Mauritius vs. DIT(IT) (Delhi – HC) (2/3) Facts • As per the SSA, the assessee agreed to acquire 35 per cent ownership interest in the JV Co by subscribing to equity shares and Compulsorily Convertible Debentures (‘CCD’) of JV Co • SHA provided for a call option given to Vatika- by the assessee;to acquire all the aforementioned securities during the call period; and • Likewise, a put option given by Vatika to the assessee to sell to Vatika all the securities during the determined period • Vatika partly exercised the call option and purchased a part of equity shares and CCDs from the assessee • The assessee filed an application before AAR seeking ruling on question of taxability of amount received on sale of equity shares and CCDs • The AAR held that the gains arising on the sale of CCDs being interest within the meaning of Section 2(28A) of the Act and Article 11 of the DTAA, was taxable as such • Assessee filed a writ

11. Zaheer Mauritius vs. DIT(IT) (Delhi – HC) (3/3) Issues: • The principal dispute between the assessee and the revenue was whether the gains arising in the hands of the assessee from transfer of its investments in the JV Co was 'interest' or 'capital gains‘ • Further, that the transaction between the assessee and Vatika is a sham transaction and is essentially a transaction of loan to Vatika (camouflaged as an investment in shares and CCDs of the JV Co) Held that • The terms of the arrangements between Vatika and the assessee revealed that the JV was a genuine commercial venture, in which both partners had management rights • The call and put options were defined commercial options capable of being elected by the parties • There was no reason to ignore the legal nature of the instrument of a CCD or to lift the corporate veil to treat the JV company and Vatika as a single entity • In view of the above, the writ petition was allowed and the impugned ruling was set aside

12. Overview of exchange control regulations in India • Consolidated Foreign Direct Investment (FDI) Policy • FDI policy is formulated by the Department of Industrial Policy and Promotion (‘DIPP’), Ministry of Commerce & Industry • The DIPP regulates FDI through Press Notes (PNs) and now consolidated under the Consolidated FDI policy which includes definitions • FEMA Notification and RBI Circulars • The FEMA 1999 and FEMA Notification No. 20 is statutory framework / legal edifice which enacts PNs • RBI’s Master Circular (issued 1 July and updated from time to time), FAQs and Regular Circulars • Portfolio Investment Schemes under FEMA ( Notification No. 20) • Portfolio Scheme is for NRIs, FIIs, QFIs, FVCI is distinct though they can also invest under FDI Scheme For FIIs, QFIs FVCIs and investments into listed companies IVCUs in India, provisions of relevant SEBI regulations would additionally need to be adhered to

13. Foreign Investments in India – Schematic Representation Foreign Investments Investments on non-repatriablebasis Foreign Venture Capital Investments Other Investments (G-Sec, NCDs etc.) Foreign Portfolio Investments Foreign Direct Investments Investments in LLP Investments made by QFI NRI, PIO SEBI regd. FVCIs Automatic Route Govt. Route NRI, PIO RFPI FIIs FII Persons Resident outside India NRI, PIO QFIs AIF (VCF), IVCUs RFPI The E-BIZ Platform recently launched by the DIPP is a step towards ease of doing business in India. Information technology coupled with the intent of simplification of existing rules and approval process led to the integration of 14 services by Government ministries on the E- BIZ (Government 2 Business) portal

14. The transaction of routing FDI through the newly interposed company is a colourable device not permitted under the FDI Policy and FEMA regulations – IDBI Trusteeship Services Ltd vs. Hubtown Limited - Bombay High Court

15. IDBI Trusteeship Services Ltd vs. Hubtown Limited Facts NederlandseFinancierings- MaatschappijiVoorOntwikkelingslandeo N.V. (FMO), a Netherlands corporation held 10% of the shareholding + 3 Compulsorily Convertible Debentures (CCDs) in Vinca Developers Private Limited (Vinca or Hold Co). The CCDs were convertible within a period of 60 months and upon conversion FMO would hold 99% of Vinca’s equity.). The Hubtown Ltd. (Defendant) and individual promoters held the balance 90% shareholding in Vinca which was to be diluted upon conversion of the CCDs.Taxoffice valued each equity share at Rs. 53,775 as against the aforesaid valuation done under the Capital Issues (Control) Act, 1947 Vinca was involved in the construction development sector and had an FDI eligible township project. Vinca had contractually agreed that the investment by FMO would be used to purchase Optionally Convertible Debentures (OCDs) issued by Amazia Developers Private Limited (Amazia) and Rubix Trading Private Limited (Rubix), wholly owned subsidiaries (WOS) of Vinca. Accordingly, the amounts invested by FMO were infused into Amazia and Rubix The IDBI Trusteeship services Ltd. (Plaintiff) was Debenture Trustee in regard to OCDs.  The Articles of Association (AoA) of Vinca were amended such that FMO Nominee Directors on Vinca’s Board of Directors would alone be entitled to take all decisions regarding the OCDs and the Debenture Trustee. The Defendant provided a guarantee in favour of Vinca for the performance of the obligations by the Subsidiaries with respect to the OCDs.  Upon failure by the Subsidiaries to make the payments on the OCDs, the guarantee provided by Hubtown was invoked. Subsequently, upon its failure to make the payments pursuant to the invocation of the guarantee, the Debenture Trustee filed a petition for winding up Hubtown and also a summary suit for recovery of the dues which was sought to be defended by Hubtown. 10% Equity + 3 CCDs (convertible into 90% equity NV FMO Outside India India 90% Equity + Performance Guarantee to Vinca VINCA HUBTOWN OCDS 100% 100% RUBIX AMAZIA Debenture Trustee for OCDs issued by Amazia/ Rubix IDBI TRUSTEESHIP SERVICES

16. IDBI Trusteeship Services Ltd vs. Hubtown Limited Issue Where an Indian Company receives FDI and the proceeds are invested in OCDs of companies operating in the construction development sector, such downstream investment by the FDI recipient company violates the FDI Policy and FEMA regulations. Ruling Vincawas only a nominal recipient of investment from the foreign investor and the FDI amount was routed by Vinca to Amazia & Rubix against issue by them of OCDs bearing a return of 14.5% per annum. The downstream investment by Vinca in its subsidiaries was contractually predetermined. Since the foreign investor could convert its CCDs into 99% shareholding in Vinca, in effect, the foreign investor would receive an assured return on its investment, which was not permitted under the FDI regulations. The FDI regulations only permit FDI by way of equity or compulsorily convertible instruments (CCDs) in Indian companies. Accordingly, while the foreign investor could have directly invested in CCDs bearing interest of Amazia and Rubix the amounts invested would be compulsorily required to be converted into equity shares of Amazia and Rubix and the foreign investor could not have required Amazia or Rubix to repay the amounts invested.  The Court, relying on the 2012 decision of the Supreme Court of India in Vodafone International Holdings BV v. Union of India, held that whilst ascertaining the legal nature of the transaction it is the task of the court to look at the entire transaction as a whole and not to adopt a dissecting approach. Further, a device which was colourable in nature has to be ignored. In the present case, on facts, prima facie, the structure was devised to circumvent the restrictions imposed by the FDI regulations. While the ‘look at’ test was adopted by the Bombay High Court, the judgment reflects that under such approach the courts are willing to scrutinize the transaction and its various elements to ascertain if the structure is in spirit compliant with the FDI Policy & FEMA Regulations.

17. NRI Investments in India and Recent changes 9th January every year is celebrated as NRI day Repatriation basis Non repatriation basis Amendment vide press note no. 7 (2015 Series) dated: 3-6-2015– NRI investments on non repatriable basis in Schedule 4 deemed to be domestic investment at par with investment made by Indian residents

18. NRI meaning & non-repatriable investments better aligned for attracting more FDI Amendment in FDI Policy

19. Forms of NRI Investments in India PORTFOLIO INVESTMENT SCHEME INDIAN FIRM / PROPRIETORY CONCERNS PURCHASE / SALE OF SHARES OR CONVERTIBLE / NON CONVERTIBLE DEBENTURES GOVERNMENT SECURITIES/PSU BONDS / IDRs Investment on repatriation basis subject to prior Government of India / RBI approval Investment on non-repatriation basis possible by way of capital contribution if i. amount invested via inward remittance through normal banking channels or NRE/NRO/FCNR (B) account debit ii. Firm not engaged in agricultural / real-estate activity • No limit on purchase on repatriation basis Government securities, treasury bills, PSU bonds, Domestic mutual funds, PSE shares in accordance with disinvestment scheme conditions • IDRs issued in accordance with the Companies Deposit Rules / SEBI ICDR regulations, can be subscribed by NRIs • Application to AD banker for investment in Indian listed shares / convertible debentures on repatriable / not repatriable basis • Post one time permission by AD bank, NRI may have permissible credits and debits in his NRE/NRO/FCNR(B) accounts • NRI investment ceiling in listed equity shares • NRI investments under PIS cannot be gifted to relatives / cannot be pledged for loan to third party (without prior RBI approval) • No limit on purchase on non-repatriation basis through inward remittance of funds from normal banking channels or NRE/NR/FCNR(B) accounts • Sale proceeds of shares / convertible debentures to be credited to NRO account • NRIs can invest in NCDs both on repatriation / non-repatriation basis NRIs can pledge Indian company’s shares in favour of Indian AD banks / overseas banks in order to secure credit facilities to the investee company / itself subject to prescribed conditions

20. Indian transfer pricing caution areas Capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business; INTERNATIONAL TRANSACTIONS ALSO LEADING TO TRANSFER PRICING DISPUTES CURRENTLY Transaction of business restructuring or reorganization, entered into by an enterprise with an associated enterprise, irrespective of the fact that it has bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date; Share capital issuance / business reorganization transactions increasingly come under Indian tax authorities scanner for demonstration of arms length principle - valuation critical for such transactions for abundant caution against transfer pricing disputes

21. Amount received towards share premium from non resident holding company does not give rise to any income from an admitted International Transaction - Vodafone India Services (P.) Ltd – Bombay High Court

22. Vodafone India Services (P.) Ltd Facts The assessee was a wholly owned subsidiary of a non-resident company, Vodafone Tele-services (India) Holdings Ltd. (the holding company). During relevant assessment year, the assessee issued shares of the face value of Rs. 10 each on a premium of Rs. 8,509 per share to its holding company. The fair market value of the issue of equity shares at Rs. 8,519 per share Tax office valued each equity share at Rs. 53,775 as against the aforesaid valuation done under the Capital Issues (Control) Act, 1947 The learned AO & TPO applied Chapter X and held that said amount of Rs. 1308.91 crores was income. As a result ,amount in question was required to be treated as deemed loan given by the assessee to its holding company and periodical interest thereon was to be charged to tax as interest income. DRP upheld the AO order. Assessee also filed the writ petition before the Bombay High Court challenging the ‘jurisdiction’ of the Union of India, TPO, AO and DRP (‘Respondents)’ to tax the issue of shares under Chapter X of the Act Issue Whether issue of shares at a premium by assessee to its non-resident holding company does give rise to any income as per transfer pricing provisions?

23. Vodafone India Services (P.) Ltd High Court Ruling ‘Income arising from international transaction’ is condition precedent for application of Chapter X Capital receipts not ‘taxable’ unless specifically included u/s 2(24) – e.g. capital gains Share premium is taxable u/s 56(2)(viib) of the Act as is an income u/s 2(24)(xvi) – This is not applicable in the instant case as it relates to issue of shares to “residents” only Neither capital receipts received by Vodafone India on issue of equity shares to its holding company nor alleged shortfall can be considered as income under the Act By disclosing the transaction in 3CEB Vodafone India only ‘informed’ the tax authorities about the transaction out of abundant caution to avoid penal consequences The transaction of capital financing or business restructuring would be applicable to the extent it impacts the income by under reporting of income and over reporting of expenses On section 92(2) interpretation – Reading a provision by omitting words is not workable and not a permitted mode of interpretation Chapter X of the Act is a ‘machinery provision’ to arrive at ALP of an international transaction. Charging provisions are section 4, 5, 15 (salaries), 22 (income from house property), 28 (Profits and losses from business & profession, 45 (capital gain) and 56 (income from other sources) Income arising from international transaction must fulfil the test of chargeability “For all the above reasons, we find that in the present facts issue of shares at a premium by the Petitioner to its non resident holding company does not give rise to any income from an admitted International Transaction. Thus, no occasion to apply Chapter X of the Act can arise in such case”

24. Key Holding Company Jurisdictions for India investment- Treaty override is currently permissible. GAAR provisions proposed from 01.04.2017 restrict treaty override in case of impermissible tax avoidance arrangements Cyprus is notified jurisdictional area for the purpose of Act – All transacting parties deemed to be associated parties, transactions deemed to be international transactions, payments to Cyprus subject to withholding tax @ higher of 30% / rates in force / applicable rates as per provisions India Mauritius DTAA under renegotiation primarily on LOB provision – Foreign investors bearish on Mauritius route to India

25. BEPS Project – set to revolutionize international taxation Base Erosion & Profit Shifting (BEPS) refers to transaction maneuvering taking advantage of tax rules difference leading to double non-taxation or erosion of profit base in the place of economic activity Addressing BEPS critical to taxpayers and governments across the globe to achieve tax fairness and prevent national under-funding. The purpose of the Action Plan is to prevent double non-taxation, as well as cases of no or low taxation associated with practices that artificially segregate taxable income from activities that generate it. The BEPS project enlists 15 action points which are targeted to be achieved by end of 2015 The focus areas include hybrid instruments and entity forms, treaty abuse provisions, digital economy taxation, transfer pricing implications etc. through various modes of reporting and automatic information exchange In India GAAR provisions deferred for better alignment with BEPS provisions as may be accepted globally Indian Government has laid considerable emphasis on automatic information exchange to curb tax evasion and hence tracking key developments around the BEPS project assumes significance – BEPS & GAAR provisions to compliment each other

26. Recent developments impacting Non Resident investments

27. New Government’s scorecard against Tax terrorism SEBI easing delisting & M&A norms (Buyback of shares) for ease of doing business in India Share issuance & transfer pricing implications Increased reporting obligation for foreign remittances Beneficial ownership test material for treaty benefits Look through and look at approach Controversy around concessional Long term capital gains tax rate for unlisted securities Deputation Arrangements in India ICDS – a move towards simplification or complication? Recent developments impacting NR investments GST roadmap All these aspects and many more which incessantly emerge pose opportunities and challenges for business in India

28. Parting thoughts

29. Indian regulatory & tax landscape barometer Inclination of regulators and government authorities towards E-connectivity paves way for better integration and casts onerous responsibility of true disclosures by business – teething troubles continue

30. Parting thoughts

31. Parting thoughts

32. Questions?

33. Thank You The information contained in this document is intended to provide general information on a particular subject or subjects and are not exhaustive treatment of such subject(s). The contents of this document are for general information and the presenter by means of this document is not rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This document is not a substitute for such professional advice or services, nor should it be used  as a basis for any decision or action that may affect your finances or your business. Before making any decision or taking any action that may affect your finances or business, you should consult a qualified professional advisor. The presenter shall not be responsible for any loss whatsoever sustained by any person who relies on this document.