What is Liberalised Remittance Scheme? (for CS Executive - Economic, Business and Commercial Laws)

Q. What is Liberalised Remittance Scheme:

As the name suggests Liberalised Remittance Scheme is a scheme introduced by RBI as liberalisation measure to facilitate Resident Individuals (RI) to freely remit funds upto USD 2,50,000/- outside India in a financial year (April to March) for any permissible current or capital account transaction or a combination of both. This scheme allows Resident Individuals to freely remit funds outside India. It started in 2004. Initially the remittance limit was US$ 25,000.

Q. Which provisions of FEMA Act allows Resident Individuals to remit funds outside India?
Section 5. Section 5 of the FEMA, persons resident in India 1 are free to buy or sell foreign exchange for any current account transaction except for those transactions for which drawal of foreign exchange has been prohibited by Central Government, such as remittance out of lottery winnings; remittance of income from racing/riding, etc., or any other hobby; remittance for purchase of lottery tickets, banned / proscribed magazines, football pools, sweepstakes, etc.; remittance of dividend by any company to which the requirement of dividend balancing is applicable; payment of commission on exports under Rupee State Credit Route except commission up to 10% of invoice value of exports of tea and tobacco; payment of commission on exports made towards equity investment in Joint Ventures / Wholly Owned Subsidiaries abroad of Indian companies; remittance of interest income on funds held in Non-Resident Special Rupee (Account) Scheme and payment related to “call back services” of telephones.

Q. What are Current or Capital Account Transactions?
The legal framework for administration of foreign exchange transactions in India is provided by the Foreign Exchange Management Act, 1999. Under the Foreign Exchange Management Act, 1999 (FEMA), which came into force with effect from June 1, 2000, all transactions involving foreign exchange have been classified either as capital or current account transactions.

All transactions undertaken by a resident that do not alter his / her assets or liabilities, including contingent liabilities, outside India are current account transactions.

Q. Why Liberalised Remittance Scheme?

It is to make remittance more liberalised. It is allowed to remit money in any freely convertible currency. 

FAQs of RBI for more understanding:

https://m.rbi.org.in/scripts/FAQView.aspx?Id=115#:~:text=Under%20the%20Liberalised%20Remittance%20Scheme,or%20a%20combination%20of%20both.

What are the exemptions which are applicable to a wholly owned subsidary?

1. As per Chapter 11 Rule 4 and Section 177(1) read with Chapter 12, Rule 6: WOS are not required to appoint independent director, audit committee and nomination and remuneration committee. 

2. Chapter 3, Rule 9A: It is not required to take ISIN no to facilitate demat of securities.

3. Section 186(3): Provided that where a loan or guarantee is given or where a security has been provided by a company to its wholly owned subsidiary company or a joint venture company, or acquisition is made by a holding company, by way of subscription, purchase or otherwise of, the securities of its wholly owned subsidiary company, the requirement of this sub-section shall not apply:

Provided further that the company shall disclose the details of such loans or guarantee or security or acquisition in the financial statement as provided under sub-section (4)]

4. Chapter 12, Rule 15(3): While entering into related party transactions In case of wholly owned subsidiary, the resolution is passed by the holding company shall be sufficient for the purpose of entering into the transaction between the wholly owned subsidiary and the holding company. It is not necessary to take members approval as prescribed under Rule 15(2).

5. Section 100(1): Wholly Owned Subsidiaries incorporated outside India can conduct EGM outside India. 

6. Third proviso to Section 177(4)(iv): Transactions entered into by holding company with wholly owned subsidiary are exempt from provisions of Section 177(4)(iv). So it is not required to take omnibus approval, prior approval of audit committee for transactions exceeding Rs 1 crore, no ratification required even if transaction exceeding 1 crore is entered.   

It is hereby clarified that if transactions are entered into by Holding company with wholly owned subsidiary for transaction specified under section 188 then provisions of section 177(4)(iv) will apply.

7. Section 185(3)(c): Loans given holding company to wholly owned subsidiary are exempted from section 185(1) and section 185(2). WOS shall use the money given as loan by holding company for its principal business activity only.  Even guarantee or security given by holding company to WOS is also exempt.

8. Fourth proviso to Section 188(1)(g): Transactions entered into by holding company with WOS whose accounts are consolidated and placed before shareholders at the annual general meeting for approval shall not be required to take members approval. 

9. As per Companies (Restriction on number of layers) Rules 2017 WOS are exempted from being considered as layer of subsidiary. This exemption is available only if WOS is formed as first layer subsidiary.  

Is whats app forwarded as received message UPSI? SAT holds no not UPSI

In a recent order Hon'able SAT held that forwarded as received what's app message is not an UPSI. Last year in May 2020 SEBI had penalized various individuals from various fields viz. research analyst, employees working with research analyst, etc. holding that they were part of chain of leakage of UPSI as they forwarded what's app message having financial results of few listed companies.  

this case pertain to 2017. In 2017 there was a news item published stating that results of few of listed companies were roaming on what's as messages. SEBI investigated the matter and found that these results were leaked in case of few listed bluechip companies. In this regard SEBI further investigated and confiscated mobile devices of some market participants, questioned a few of participants and also investigated other data. On investigation SEBI found that as these messages were forwarded through what's app messages there were constraints in identifying the source of message and recipients of messages in their chain.  

It was argued before SEBI and SAT these messages are estimates of companies financials and as a general market practice estimates are always released. Further it was argued that many companies provide guidance in respect of their financials and these guidance generally match with actual results. Also it was stated that estimates are released by many companies or research analysts. Some of it matches with actual results while some don't match. it does not mean they are UPSI. SEBI had taken out various what's app messages of financial results of many companies. Out of which only six companies financial results and what's app message matched. in respect of others there was no matching. So it cannot be presumed that it was leak of UPSI. Further on extensive investigation by SEBI it did not find any instance of leakage of UPSI from any insider of any listed company. Further there is no case of trading on the basis of UPSI.  

SEBI argued before SAT that estimates cannot be forwarded as what's app message. Estimates are generally in a specified format. Further SEBI argued that guidance on financial results given by companies are before the results are finalized. but in these cases the what's app messages were forwarded on the day of results. SEBI also stated that the persons who are involved in what's app message were in the habit of forwarding such messages.  

SAT finally held that as SEBI has not found any instance of leakage of UPSI it cannot be held that what's app message with respect to financial results being forwarded is UPSI. As insider trading is a civil offence it requires strong probability to prove any violation. In this case even if SEBI has build up a case of leak of UPSI but in first instance the what's app forwarded message cannot be considered as UPSI as there is no proof of leak of UPSI. Also to consider any instance as leak of UPSI the person receiving it must know that it is UPSI. In this case it has been seen that persons receiving it did not knew it was UPSI. 

So it is held that the persons are not liable for leak of UPSI.   

       

Are all disclosures made under REgualtion 30 UPSI? (40,000 crore group acquires Rs 4 crore company SAT holds it as UPSI)

In a recent order dt: 25th March 2021 in the matter of B. Renganathan ('Appellant') vs Securities and Exchange Board of India ('SEBI') Hon'able Securities Appellate Tribunal ('SAT') has held that 100% acquisition of a company by a wholly owned subsidiary of a listed company is a material event as per SEBI (Listing Obligations and Disclosure Requirements), Regulations 2015 ('LODR'). SAT further held that Trading Window needs to be closed for such acquisitions. Now let us delve into the ratio of the case.

Ecap Equities Ltd a wholly owned subsidiary of Edelweiss Financial Services Ltd acquired a fintech company by name Alternative Investment Market Advisors Private Limited („AIMIN‟ for short) by acquiring 100% of the latter‟s equity capital. A disclosure to this effect was made to the stock exchanges by Edelweiss on April 5, 2017. However, a Term Sheet in respect of the said transaction was signed between Ecap and AIMIN on January 25, 2017. Though Edelweiss made a disclosure to the stock exchanges regarding the acquisition of AIMIN on April 5, 2017 consequent to the signing of the Share Purchase Agreement (SPA) under Regulation 30 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 („LODR Regulations‟ for short), the company did not close the trading window at any point in time.

Appellant argued that to fall under the definition of UPSI materiality is test that is needed to be passed. Further in this case there was no impact on price of shares of edelweiss after the disclosure was made. Appellant further argued that acquisition was of Rs 4 crores only which was a miniscule amount as against the networth of edelweiss group which is 40,000 crore. Appellant further contended that a disclosure under Regulation 30 of LODR Regulations was made since under this regulation disclosures have to be made without consideration of materiality. Such a disclosure made under the LODR Regulations, which is obligatory on the part of a listed entity, it was contended by the learned counsel, cannot be imported to enforce a violation under the PIT Regulations relating to UPSI where it has to muster the additional test of materiality.

In this regard SEBI stated that under Regulation 30 even 5% acquisition is liable to be disclosed to stock exchange. In this case acquisition was 100%. Further even if reference to Regulation 30 has been removed from Regulation 2(1)(n) of PIT Regulations there is still term 'acquisition' mentioned under Regulation 2(1)(n). It means any acquisition done by the company is material event and UPSI. One cannot apply the principle of materiality to acquisitions of events that are listed specifically in definition of UPSI. Further this event was disclosed by the company under Regulation 30 without giving the details of financial magnitudes and business volumes and stating that the acquisition though 100% of company is only an addition to fintech having no impact on the business volumes etc.  

In this case it is also held that actual price sensitiveness is irrelevant. What is relevant is whether the event in question is likely to have a material effect irrespective of whether it actually impact or not. What is relevant is whether the event in question is likely to have a material effect irrespective of whether it actually impact or not.

Companies while making disclosure under Regulation 30 of LODR shall keep in mind that disclosure has to be given as per format given under SEBI Circular dt: September 9, 2015. In this case as it did not disclose in specified format it was eventually held that disclosure impacted the business in a positive manner.