ECONOMIC & COMMERCIAL LAW

Transcription

1 ECONOMIC & COMMERCIAL LAW FLYSTONE PUBLICATION

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3 ECONOMIC & COMMERCIAL LAW CS Pawan Kumar Baid FLYSTONE PUBLICATION

4 Flystone Publications No. 212, avirbhav soc, opp chikuwadi, pandesra, surat. First Published by Flystone Publications, Contact Number : Co-Published by : Notion Press Copyright CS Pawan Kumar Baid 2013 All Right Reserved. ISBN: All information, comments and views of this material are merely for guidance and reference and must not be taken as having the authority of, or being binding in any way on the author, editors, publishers and seller, who do not owe any responsibility whatsoever for any loss, damage or distress to any person, whether or not a purchaser of this publication, on account of any action taken or not taken on the basis of this publication. All care is taken to avoid any type of error, omission or mistake while making this material, still if any such error is brought to notice, publisher will make endeavour to correct the same in next issue. All disputes are subject to Surat jurisdiction. All rights reserved. No part of the material can be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, nor exported, without the written permission of the copyright owner.

5 Preface This Book is written in such a way that student can grasp the syllabus by having just a single look. Language is kept simple and lengthy description is avoided. Students are advised to describe the matter in their own language after reading from this Book. Sufficient care is taken to cover each matter from the syllabus in such a way that every thing is covered, nothing is left, but still portion remain short. Questions Asked in Earlier Exams: To make the book result oriented, question asked in last years exams (as per old syllabus) has been referred not only at suitable places in text, but also given at the end of each study lesson. Further extra questions including multiple choice, fill-in blank, true/false have also been added to ensure more result. Mind Chart for Quick Learning: Mind-chart technique is used to explain the whole chapter in a single view in such a way that whole syllabus can be revised in just one hour. List of important Sections has also been given at the end of each study lesson. Ask Exam Oriented Queries: To add value, I offer my personalized service to each student who has bought this book. You can ask your query regarding exams of this subject to me at cpcsurat@yahoo.in and I will revert with answer within 10 days, even within few hours if exams are near. Kindly take care that you should not change your mail id, because I will attach one code to only one mail id, however you can ask as many questions as you wish within one year of your purchase.

6 vi Preface Free Subscription for Academic Guidance: I have added further value to every buyer of this book to subscribe for an academic guidance which is issued by me quarterly. I offer this subscription free from any charge for one year. To subscribe, mail me your detail, namely, your name, contact number, mail id and registration number of CS at my given mail id,. Acknowledgement: I am thankful to all of my family members, friends, students and well-wishers because of whose wishes, I completed this book. C.S. Pawan Kumar Baid cpcsurat@yahoo.in

7 Compare This Book with Other Material Available in Market Comparative Point Book of Other Publications Text / note /explanation to every chapter Yes Yes Question asked in last exams* Yes Yes* Extra Question which were not asked in exams Yes Yes Extra MCQ, fill-in, True / False No Yes Separate List of Sections No Yes Explanation with Mind Chart No Yes Personalized query solution No Yes Free Subscription to academic guidance No Yes Guideline about How to write in exams No Yes * In this Book answer of only few questions are given This Book

8 TOTAL QUESTIONS IN THIS BOOK Chapter MCQ Fill-in True /False Distinguish Short Note Case Law Other Total * Total

9 SYLLABUS & INDEX PART A ECONOMIC LAWS (70 MARKS) STUDY PAGE 1. Foreign Exchange Management Act, Foreign Trade Policy The Competition Act, Management of Intellectual Property Rights Arbitration and Conciliation Transfer of Property Act, The Indian Stamp Act, The Indian Contract Act, Prevention of Money Laundering Act, PART B COMMERCIAL LAWS (30 MARKS) 10. Essential Commodities Act, Societies Registration Act, Indian Trusts Act, Industries (Development And Regulation) Act, Pollution Control And Environment Protection The Registration Act, References/Bibliography 383

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11 PART A ECONOMIC LAWS

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13 STUDY 1 - FOREIGN EXCHANGE MANAGEMENT ACT, 1999 Passed in Parliament on 29-Dec-1999 Contains total 49 Sections Applies to Whole of India and also offices outside India if owned by Indian resident Controlling authority is RBI Average marks questions are asked from this Chapter This Act was enacted by repealing the earlier Act called Foreign Exchange Regulation Act, 1973 (FERA). The new Act (called FEMA) was enacted to facilitate foreign trade and foreign receipts/payments and to develop foreign exchange market in India. Important Definitions Authorized Person Sec 2(c) Current Account Transaction Sec 2(j) Means an authorized dealer, money changer, offshore banking unit or person authorized to deal in foreign exchange or foreign securities. (Asked in Jun 2007, Jun 2012)Means transaction other than capital account transaction but includes payment due in foreign trade, interest on loan, remittance for living expenses, foreign travel expenses etc.

14 2 Classic Professional Series Capital Account Transaction Sec 2(e) Foreign Exchange Sec 2(n) Foreign Security Sec 2(o) Person Resident of India Sec 2(v) Means a transaction which alters the assets or liabilities, outside India of persons resident in India or assets or liabilities in India of person resident outside India. Means foreign currency, and includes deposit, credit, draft, LC, BoE, or any draft/lc/boe drawn by bank/person outside India but payable in Indian currency. (Asked in Jun 2007)Means any security, share, stock, bond, debenture expressed in foreign currency, even though interest/dividend is payable in Indian currency. Who is residing in India for more than 182 days in preceding Financial Year. However person gone outside India for employment/business for uncertain period and person who comes to India (otherwise than for employment/ business for uncertain period) are not person resident in India. Some Special Word/ Terms used in this Chapter LC FII ECB ADR RFC DGFT BoE FCCB GDR Letter of Credit Foreign Institutional Investors External Commercial Borrowing American Depository Receipt Resident (Foreign Currency) A/c Director General of Foreign Trade Bill of Exchange Foreign Currency Convertible Bond Global Depository Receipt

15 Economic and Commercial Law 3 Swap KYC FDI Sectoral Cap SEBI (SAST) Regulation Merchant Banker PIO Offshore Banking Unit Chit Fund Nidhi Company Asset Reconstruction Company Benami Transaction Exchange Know Your Client/Customer Foreign Direct Investment Maximum Ceiling of investment which can be made by FII or through FDI in a particular sector say telecom sector, cement sector etc SEBI (Substantial Acquisition of Share and Takeover) Regulation, 2011 An intermediary through whom all the work relating to issue of share is made Person of Indian Origin, who himself any time has held Indian passport or whose either of parents or grandparents were citizen of undivided India A bank which is located in Special Economic Zone (SEZ) by permission of RBI under Banking Regulation Act A fund in which many person given periodic contribution and after completion of certain period, every contributor is entitled to a prize. A company which accepts deposit from its member or public and doing business of lending money and registered as NBFC. A company which is usually formed to takeover non-performing assets of any bank. Transaction entered by any person not in his own name, but in the name of any fictitious person

16 4 Classic Professional Series Concept of FEMA Concisely the whole Act covers all transactions between only two types of person only viz., Person Resident in India and Person resident outside India. It is depicted in following diagram: Sec 3 says that following tasks are not allowed to be performed by any person except by permission of RBI: 1. Dealing in foreign exchange (however authorized dealer can deal in foreign exchange) 2. Make/receive any payment to/from person resident outside India 3. Enter into any financial transaction regarding any assets outside India. Current Account Transaction (Sec 5) 1. Any person can sell/draw foreign exchange to or from an authorized person as current account transaction by complying with FEM (Current Account Transactions) Rules, Drawl of foreign exchange for travel to Nepal/Bhutan, or for transaction with Nepal/Bhutan or for transaction specified in

17 Economic and Commercial Law 7 Schedule-I are prohibited. Schedule-I contains transaction like remittance of lottery winning, racing, riding, lottery ticket, commission on export etc. 3. Prior approval of Government is required for transaction specified in Schedule-II, which is given in point no 4 infra. 4. Prior approval of RBI is required for following purpose: a. Release of exchange exceeding US$ 10,000 in one calendar year for private visit to any country except Nepal and Bhutan. b. Gift/Donation exceeding US$ 5000 per remitter/ donor per annum. c. Remittance for maintenance of close relative abroad exceeding net salary or US$ 1 lakh. d. Release of foreign exchange exceeding US$ 25,000 for business travel/conference. e. Release of foreign exchange exceeding US$ 5000 for person going abroad for employment or for emigration f. Release of foreign exchange exceeding US$ 1 lakh for medical treatment abroad or for studies abroad or for pre-incorporation expenses. Capital Account Transactions (Sec 6) 1. RBI may specify permissible capital account transactions. It may prohibit or restrict: a. Transfer or issue of foreign security, b. Borrowing or lending in foreign exchange, c. Acquisition or transfer of immovable property etc.

18 8 Classic Professional Series 2. Person resident in India is allowed to hold, own or transfer foreign currency, foreign security or immovable property outside India, if such currency/security/property was acquired by him when he was resident outside India or inherited from person resident outside India. 3. Similarly person resident outside India can hold, transfer Indian currency/security or immovable property in India, if acquired by him when he was resident in India or inherited from person resident in India. 4. Following are permissible capital account transaction for person resident in India: a. Investment in foreign security, b. Foreign currency loan, c. Transfer of immovable property outside India, d. Maintenance of foreign currency accounts, e. Sale/purchase of foreign currency derivatives. However, he can draw foreign exchange from authorized person not exceeding US$ 25,000 per calendar year for above purpose. 1. Following are permissible capital account transaction for person resident outside India: a. Investment in India in security of Indian company or contribution to capital of Indian firm, b. Acquisition and transfer of immovable property in India c. Foreign currency account in India

19 Economic and Commercial Law 9 d. Remittance outside India of capital assets in India However, above transaction shall be within permissible limits. Further person resident outside India cannot invest in India in chit fund, Nidhi Company, agricultural or plantation, or real estate business. Foreign Direct Investment (FDI) in India FDI can be made either under automatic route or approval route. Following are basic provisions: 1. Prohibition: FDI is prohibited in a company engaged in business of chit fund, Nidhi company, agriculture/plantation activities or real estate. However, Real estate here does not include development of township, road etc, hence investment in these sectors is allowed. Further FDI is also prohibited in retain trading (except single brand retail), atomic energy, lottery and gambling. 2. Eligibility: A person resident outside India, other than citizen of Pakistan and Bangladesh can invest in India subject to FDI policy. Indian companies can freely issue equity shares, convertible instruments subject to prescribed valuation norms. 3. Investment in Various Sectors: Investment in SSI is allowed if the unit is not engaged in prohibited list of business and subject to maximum limit of 24% of paid-up capital. If SSI issues more than 24% it has to give-up SSI status and thereupon, it cannot engaged itself in manufacturing of item reserved for SSI and it has to comply with prescribed sectoral cap. However, SSI unit which is EOU or operating in FTZ/ EPZ etc, can issue share exceeding 24% of paid-up capital.

20 10 Classic Professional Series Person resident outside India, other than Foreign Institutional Investor (FII) can invest in equity capital of Assets Reconstruction Company (ARC) upto 49% of paid-up capital. FII can invest in Security Receipt issued by ARC. Foreign investment is permitted in stock exchange, depository etc upto 49% of paidup capital with prior approval of Foreign Investment Promotion Board (FIPB). Investment from Nepal and Bhutan is permissible if it is made via inward remittance in free foreign exchange through normal banking channel or Non Resident (External) Account (NRE)/ Foreign Currency (Non-Resident) Account (FCNR). Indian companies can make right/bonus issue subject to sectoral cap and by following SEBI (ICDR) Guidelines at a price which is not lower than price of share offered to residents. In case of merger/amalgamation, shareholding of person resident outside India shall not exceed sectoral cap, and new company should not be engaged in prohibited list. Listed Indian companies can issue shares under ESOS/ ESPS to person resident outside India subject to approval of SEBI and with condition that face value of share issued under ESOS/ ESPS shall not exceed 5% of paid-up capital. 4. Reporting of FDI: Indian company receiving investment shall report to RBI the name of investor, name of authorized dealer, date of receipt and Government approval within 30 days from date of receipt. Company shall file prescribed form FC-GPR within 30 days from issue of share/convertible security. Part A of this form is signed by authorized dealer, along with certificate that all requirements of Companies Act and conditions of Government

21 Economic and Commercial Law 11 approval have been complied with and Company is eligible to issue share. Part B is filed annually. Share should be issued within 180 days of receipt of inward remittance; otherwise whole amount has to be refunded. Transfer of Share/Convertible Security There is general permission to non-resident and NRI to acquire shares. Person outside India other than NRI can transfer share to any person outside India. However, if the transferee has previous venture or tie-up in India in the same field, he has to obtain prior permission of SIA/FIPB. Person resident outside India can gift any security to person resident in India. He is also permitted to sell the securities on stock exchange in India. Person resident in India can transfer shares of Indian company (which is not engaged in finance sector) to person resident outside India. Similarly person resident outside India can transfer to person resident in India any securities subject to guidelines issued by RBI. Prior Permission of RBI: Person resident in India, making gift of securities to person outside India has to obtain prior permission from RBI. Before granting permission, RBI considers sectoral cap, relationship of donor and donee, value of security. Such gift shall not exceed US$ 25,000 or 5% of paid-up capital of the company whichever is higher. Transfer of share, bond etc of Indian company engaged in financial sector and transactions which attract SEBI (SAST) Regulation require RBI approval if such transfer is from resident to non-resident. Further if the company is engaged in sector falling

22 12 Classic Professional Series under Approval Route, or sectoral cap is breached, Government s approval is also required. Conversion of ECB/Royalty into Equity: Indian companies can covert ECB/Royalties/lump sum payment of know-how etc into equity subject to condition that activities of company is under automatic route for FDI, sectoral cap is adhered, pricing and other requirements of SEBI is followed. Details of issue of shares shall be reported to RBI in prescribed format. Issue of Shares by Indian Companies under ADR/GDR: a. Indian companies can issue ADR/GDR abroad in accordance with Scheme for Issue of FCCB and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993, provided it is eligible under FDI scheme. b. Unlisted company has to get itself listed either prior to such ADR/GDR issue or simultaneously. c. Issue proceed has to be kept abroad till actually required in India. Till that time, the company can invest the fund in rated deposits or treasury bills. d. There is no end use restriction except that, investment in real estate or stock exchange is not allowed. e. Pricing should be not less than high of (i) average of weekly high low price during last six months or (ii) average of weekly high low price during last two weeks. Direct Investment Outside India Direct investment by resident in Joint Venture (JV) and Wholly Owned Subsidiary (WOS) is allowed subject to certain conditions;

23 Economic and Commercial Law 13 a. There is prohibition on investment in foreign entity engaged in real estate or banking business. b. Acquisition and sale of share purchased out of funds in RFC account or as bonus is permitted. c. Indian party can invest in foreign JV/WOS not exceeding 400% of its net worth of Indian company. This ceiling is not applicable if investment is made out of Exchange Earners Foreign currency (EEFC) account or out of funds raised via ADR/GDR. d. Indian party can give loan/guarantee only to such foreign entity in which it has equity participation, and subject to cap of 400 percent subject to condition that guarantee should not be open-ended. e. Where investment exceeds US$ 5million, valuation shall be done by Category I Merchant Banker. f. Indian party is also permitted to acquire shares of foreign entity in exchange of ADR/GDR subject to condition that ADR/ GDR are listed and backed by underlying equity and it does not exceed sectoral cap. g. Investment in Nepal is permitted in Indian Rupee only. h. Indian party making investment abroad in entity engaged in financial sector will be permitted if it is registered in India and has net profit in last three years and also fulfilled prudential norms of RBI. Method of Funding: Investment in overseas JV/WOS can be funded from; a. Drawl of foreign exchange from Authorized Dealer in India

24 14 Classic Professional Series b. Capitalization of export. However export proceeds beyond six months requires RBI approval. c. Swap of Shares d. Utilization of Proceeds of ECB/FCCB e. In exchange of ADR/GDR f. Balance in EEFC account. Approval of RBI: In all other cases of investment abroad, approval of RBI is required. Before granting approval, RBI considers viability of project, financial position of both parties, expertise and benefit to India regarding export. Overseas Investment by Partnership / Proprietorship Proprietor and unregistered partners can set-up their JV/WOS outside India with prior approval of RBI, subject to condition that: a. Firm is DGFT recognized Star Export House of which export is Rs 20 crore or more b. AD bank satisfies the exporter as KYC compliant c. Exporter has proven track record and not came under adverse notice of Government. d. Maximum investment allowed is 10% of average of three years export realization or 200% of its net owned fund whichever is less.

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